A concert now needs two verses. This is a new and for the first time clarifying Federal Court of Justice ruling, which is likely to undermine the existing BaFin practice.

In its September 25, 2018 judgement – II ZR 190/17, the Federal Court of Justice for the first time settled a question on the German Securities Trading Act and the Securities Acquisition and Takeover Act that is important for practice in capital market law, ruling that the “case-by-case derogation” relating to acting in concert is to be understood formally and not materially.

The background of acting in concert

In relation to a listed company, acting in concert means that, frequently on the basis of voting rights or pooling agreements, which in the meantime should also have been published in the transparency register, the voting rights from the shares held by all parties are assigned to each other in full (Section 34(2) Securities Trading Act and Section 30(2) Securities Acquisition and Takeover Act). This is relevant for the voting rights notification duties (Section 33 Securities Trading Act) and for the obligation to submit takeover bids (Sections 29 et seqq. Securities Acquisition and Takeover Act). It is a requirement for acting in concert to exist that the parties under reporting obligation and/or the bidders or their subsidiaries and third parties agree on the exercising of voting rights or otherwise cooperate with the objective of permanently and significantly changing the issuer’s business orientation. This does not apply to acting in concert in individual cases, however. It had previously not been unequivocally clarified under which specific conditions such case-by-case derogation exists.

In some cases, the existence of an individual case was assessed on the basis of whether acting in concert had a lasting impact on a company’s business orientation. Consequently, a case-by-case derogation was ruled out in cases where such individual, but concerted, action was of particular importance or where it was additionally associated with a far-reaching target agreement. This is the material point of view.

Under the contrary view, the individual case is exclusively governed by the frequency of the concerted action. Accordingly, all votes whose implementation only requires a single action, such as the removal and replacement of supervisory board members at a shareholders’ meeting, constitute an individual case. Such an individual vote consequently does not constitute acting in concert, even although it may have considerable or lasting consequences for corporate policy. This is the formal view.

For the first time, the Federal Court of Justice has now ruled in favor of the formal interpretation. In the grounds for its decision, the Federal Court of Justice rightly refers to the aspect of legal certainty and to the intent and purpose of the provisions in Sections 21 et seqq. Securities Trading Act old version. If the agreement on a single vote would already exclude case-by-case derogation in the aforementioned sense, provided that such vote only “has a sufficiently lasting effect in the future,” it would, as a consequence, not infrequently be unclear in advance whether or not any such vote would later qualify as acting in concert. This legal uncertainty would not be justified by the intent and purpose of the law, either. It is the objectives of the notification duties to create transparency about the key ownership structure of listed companies. The statutory provision is based on the idea to subject “not constantly changing majorities” to a requirement of attribution. Consequently, the Federal Court of Justice also expects that acting in concert is only attributed to action that is “geared towards a certain stability.”

New BaFin position?

Since the BaFin administrative practice has tended towards the material view to date, the agency will have to reconsider it now that the clearly different position of the Federal Court of Justice has been issued. It will be highly interesting to see how long it will take for BaFin to take a position on this issue.