On January 20, 2007, an amendment to the German Securities Trading Act (Wertpapierhandelsgesetz) came into effect implementing the European Transparency Directive. It entails some significant alterations to German Security Trading law, particularly with regard to notification of changes in share ownership. This memo summarizes the most important changes.
Shareholders of a stock corporation listed on an official German stock exchange are required to notify the Federal Securities Supervisory Authority (Bundesaufsicht für Finanzdienstleistungen or BaFin) and the corporation in question when their position exceeds or falls below specified percentages of voting rights Notification obligations can be triggered not only through direct shareholdings but also, via a complicated system of attribution of voting rights, through indirect interests such as voting rights of subsidiaries or connected third parties. Prior to the January 20 amendments, the relevant thresholds were 5%, 10%, 25%, 50% and 75% of the voting rights.
Notifications had to be made within seven calendar days after meeting or falling below any applicable threshold. Shareholders failing to meet these notification rules lost their voting rights and dividends for these shares. In addition to that, a fine could be imposed on delinquent shareholders.
The new notification rules
These general rules still apply after January 20, 2007. However certain modifications have been made, in particular the following:
Most obviously, new thresholds in addition to the existing ones have been introduced. From January 20, 2007, shareholders will be required to notify BaFin and the company issuing the shares if they exceed or fall below 3%, 5%, 10%, 15%, 20%, 25%, 30%, 50% or 75% of the company’s voting rights.
Furthermore, the time limit to comply with shareholder notification has been shortened to four trading days (meaning calendar days other than Saturdays, Sundays and holidays listed on the BaFin website (www.bafin.de)).
Additionally, the corporation in question has to publish the information in a medium accessible throughout Europe. Such publication must be made within three trading days after shareholder notice is received. The company must also notify BaFin of the publication and must send the information to the new electronic companies’ register (Unternehmensregister) immediately after publication.
Certain exemptions to these notification rules apply, e.g. if the shares are not held for more than three trading days and only for the purpose of settlement of accounts and transactions such as with banking institutions.
The introduction of the new notification thresholds is subject to detailed transition rules. If voting rights from a shareholder’s existing portfolio exceed or fall below a threshold of 15%, 20% or 30% as of January 20, 2007, the concerned corporation has to be informed by March 20, 2007. However, this obligation only applies if the shareholder did not inform the company in question in an equivalent way before January 20, 2007, i.e. did not mention exact percentages in prior notifications.
Surprisingly, there is no obligation to notify about voting rights in excess of the new 3% threshold as of January 20, 2007.
Notifications received under the transition rules must be sent by the corporation to BaFin by April 20, 2007 and, at the same time, must be submitted to the electronic companies’ register. These transition rules apply only to notification required because an existing interest exceeds one of the new thresholds (e.g., a shareholder with a 17% interest would have had to notify that it held over 10% and now must also notify that it holds over 15%). If shareholders’ interests exceed or fall below any threshold, including the new thresholds, as a result of transactions occurring after January 20, 2007, the new notification rules apply in full.
The new shareholder notification rules considerably increase the transparency of voting control of German stock corporations. Even the acquisition of a relatively small (3%) voting position now has to be notified and will be noticed by the market participants. However, it must be noted that the amendment will cause an enormous administrative workload for BaFin and stock corporations, even potentially for investors. It remains to be seen how these challenges will be met.