A German Federal Supreme Court decision on acting in concert has provided legal certainty for shareholders in a German-listed stock corporation. Under the Securities Acquisition and Takeover Act (Wertpapiererwerbs-und Übernahmegesetz or WpÜG), if individual shareholders in a German-listed stock corporation co-ordinate their voting conduct to gain control of the company, they are considered to be “acting in concert”. It is one of the most controversial features of German takeover law.
According to the WpÜG, a person or entity gaining control of a listed target company must make a mandatory offer to the remaining shareholders. In general, control is obtained as soon as a shareholder holds 30 per cent or more of the voting rights in the target company. However, Section 30(2) of the WpÜG, which is the German regulation on acting in concert, makes a further stipulation. A mandatory offer must also be made when shareholders co-ordinate their voting conduct, thereby gaining comparable influence, even if no single shareholder holds 30 per cent of the voting rights. However, the regulation also states that agreement on the exercise of voting rights in individual cases is exempt.
The potential reach of the wording of Section 30(2) is considerable. It applies not only to explicit agreements between shareholders, but also to the co-ordination of voting conduct in less explicit ways.
Supervisory Board Elections as “Acting in Concert”?
A Federal Supreme Court (BGH or Bundesgerichtshof) decision in September 2006 involved a case in which three investors held voting rights totalling 51 per cent of a listed company, WMF Württembergische Metallwarenfabrik AG. These shareholders co-ordinated their interests in the election of the supervisory board chairman by the supervisory board. The plaintiff, also a shareholder of the target company, argued that this co-ordination gave the three investors control over the company. In its ruling in 2005, the Higher Regional Court (Oberlandesgericht) of Munich agreed with the plaintiff that the co-ordinated voting conduct in the election of the chairman was a result of acting in concert.
In September 2006 however, the BGH repealed the ruling of the Oberlandesgericht Munich. The judges held that acting in concert is limited to a co-ordination of voting rights in the shareholders’ meeting—elections conducted under the supervisory board are therefore not examples of acting in concert. The judges argued that supervisory board members serve the interests of the company and are neither representatives of the shareholders nor subject to any instructions from them.
In addition, the BGH argued that, in this case, the shareholders only exercised their voting rights in an individual case, which is exempted from the provisions regarding acting in concert. An individual case—according to the BGH’s ruling—exists if the coordination of voting rights only refers to just one individual case and does not include an additional agreement regarding a future business undertaking of the company.
More Legal Certainty for Major Shareholders
The BGH decision clarifies and restricts the scope of Section 30 (2) in favour of legal certainty. In general, a “substantial influence” comparable to the holding of 30 per cent of the voting rights requires that the coordination of voting rights puts a single shareholder or several shareholders in a position in which they can exercise continuous control over the company. Against this background, the ruling of the BGH is convincing. However, given the financial consequences of a mandatory tender offer, shareholders in German-listed companies must remain cognizant of the potential risks of co-ordinating their voting rights. For further information on acting in concert, please refer to “Risks in the Acquisition of Distressed Debt in Germany”; International News; Issue 2, 2006.