On 19 August 2008 the Risk Limitation Act (Risikobegrenzungsgesetz) came into force. Most parts of the law are effective immediately and some rules will come into force in spring 2009. In particular the law includes amendments regarding ‘acting in concert’, extended notification obligations on the establishment of shareholdings, a toughening of sanctions for the infringement of notification duties and increased disclosure duties for registered shareholders. In the future the economic committee (or work council) must be informed of company takeovers. The second part of the law, which was issued for the protection of real estate borrowers, is not dealt with here.
With the German law on the limitation of risks connected with financial investments (Risk Limitation Act or Risikobegrenzungsgesetz), the German Federal government intended to improve the general conditions for transparency on the financial markets and at the same time to mitigate the risks that arise from financial investments. The law was passed on 27 June 2008 by the Deutscher Bundestag, was approved by the Bundesrat on 4 July 2008 and came into force on 19 August 2008. The efficiency of financial and company transactions shall not be hindered by the amendments to the law. In particular the law includes amendments to the Securities Trading Act (WpHG), the Securities Acquisitions and Takeover Act (WpÜG) and the Stock Corporation Act (AktG).
Amendments to the Securities Trading Act and the Securities Acquisitions and Takeover Act
To increase the transparency of the acquisition of shareholdings, the Risk Limitation Act provides for the following amendments.
Acting in concert
The definition of acting in concert (section 22 paragraph 2 WpHG/section 30 paragraph 2 WpÜG) has been worded more precisely and extended in contrast with the current legal situation. Alongside co-operations on the voting right behaviour, acting in concert will in future include certain other co-ordinations of shareholders’ interests outside of the shareholders’ meeting. Thus, the legislator has refrained from the original far-reaching proposals in the governmental draft, but maintained the expansion of the attribution of voting rights to the co-ordination of interests of shareholders outside of the shareholders’ meeting. The legislator has now clarified on what terms a co-ordination of shareholders’ interest will be qualified as acting in concert. This is the case if the shareholders co-ordinate their voting behaviour or if they join forces on the basis of a longterm planned strategy for the joint pursuit of a change of entrepreneurial goals. Agreements in individual cases thus do not lead to further attribution of voting rights. Accordingly, for example, the co-operation of the shareholders on their voting behaviour regarding resolutions in a shareholders’ meeting, such as the nomination of members of the supervisory board or an individual structuring measure, does not lead to an allocation of voting rights. Even the co-ordinated parallel acquisition of shares, standstill agreements or option contracts cannot cause the duty to launch a mandatory offer and do not lead to an attribution of voting rights.
Extended notification duties relating to holdings in financial instruments
Section 25 WpHG was introduced by the law on the implementation of the transparency directive from 5 January 2007. Previously, according to section 25, the obligation for the notification of shares held and attributed voting rights attached to shares was independent from the notification requirements regarding holdings in financial instruments, such as option rights or claims for the delivery of shares. The definition of a ‘financial instrument’ according to the Securities Trading Act remains unchanged. In the future, an aggregation of voting rights attached to shares and financial instruments shall take place in the context of notification requirements related to holdings in financial instruments. If shares and relevant other financial instruments are held, then these are totalled to all voting rights attributed to the shares of the company. If the sum reaches 5 per cent, the duty of notification according to section 25 WpHG would be activated. The exception for trading portfolios continues to apply. The new notification requirements regarding holdings in financial instruments according to section 25 WpHG will come into force on the first day of the seventh month following the promulgation of the law, ie half a year after the other sections of the Risk Limitation Act.
Transitional regulations on the law’s coming into force
By means of appropriate transitional regulations in the Risk Limitation Act, the submission of mandatory offers or notification requirements as a result of the Risk Limitation Act coming into force are avoided. If a notification of voting rights is only required due to the extension of notification requirements relating to holdings in certain financial instruments, the notification must only be submitted if again one of the thresholds that apply under section 25 WpHG (at least 5 per cent), is reached, exceeded or fallen short of.
The same applies if, on the coming into force of the Risk Limitation Act, only the legal definition of acting in concert would lead to a duty of notification. Again, in this case, a corresponding notification must be submitted only if the applicable thresholds of section 21 WpHG are reached, exceeded or fallen short of. An obligation to submit a mandatory offer on the coming into force of the law also does not exist if the acquisition of control over the target company only occurs on the basis of the new legal definition of acting in concert.
Disclosure duties for significant shareholders
Effective from 31 May 2009, according to the new provision of section 27a WpHG, owners of significant shareholdings (more than 10 per cent of the voting rights) will have to disclose their reasons for the acquisition of the voting rights and the source of funds used for the acquisition. The disclosure requirements are listed in detail in the new regulations.
The notifying party must state whether:
- the investment serves strategic goals or the realisation of trade profits;
- it intends to obtain further voting rights either by acquisition or by other means in the next 12 months;
- it strives towards exerting influence over administrative, management and supervisory boards of the issuer; and
- it strives towards considerable changes in the capital structure of the company, in particular regarding the ratio of internal and external financing and the dividend policy.
The statements made by the notifying party are not binding upon them; however, any change of their reasons for the acquisition of the voting rights has to be notified within 20 trading days.
In contrast to the governmental draft, the legal provision introduces disclosure requirements that are independent from the issuer’s demands. However, issuers can exclude these disclosure requirements by means of a corresponding regulation in the company’s articles of association. The obligation to disclose the intention to gain control originally provided for in the governmental draft was abandoned. Investment companies are excluded from the new disclosure requirements. The new provision is also not applicable if the relevant threshold is achieved or exceeded because of an offer in accordance with the WpÜG.
Tightened sanction on the infringement of notification duties
The infringement of notification duties according to section 21 et seq WpHG shall in the future be more tightly sanctioned. In the case of an intentional or grossly negligent infringement of the notification duty regarding the amount of voting rights held, in principle the period for which the loss of rights is imposed on the shareholder shall be extended by six months according to the amendment of the WpHG by the Risk Limitation Act. In the case of only minor deviations of less than 10 per cent of the actual voting rights and if the thresholds of section 21 WpHG were observed, the tightened legal consequences shall not apply.
It will, therefore, in the future no longer be possible to avoid the loss of rights in any case by means of either a follow-up or corrective notification shortly before a shareholders’ meeting.
Amendments to the legal framework for registered shareholders
The significance of the share register, which is regulated by the AktG, shall be increased through the implementation of the stockholders’ obligation to provide the company with the necessary data for the share register. In the future, the registered shareholder must inform the company upon demand whether he himself owns the shares or, if applicable, who he holds the shares for.
According to the new section 67, paragraph 1 sentence 3 AktG the company’s articles of association can determine on what terms the entry as proxy holder (entry in its own name for shares it does not own) is admissible. If the thresholds determined in the articles of association are exceeded, or duties of disclosure or a request for information from the company are not fulfilled within the set deadline, the voting rights can no longer be exercised; furthermore, this infringement of the AktG will be dealt with as a regulatory offence. Exceptions are still applicable for financial institutions that are only temporarily registered in the share register, as well as for investment funds.
Tightened information duties according to the Works Constitution Act
To improve employees’ protection in companies not listed on the stock exchange, a duty to inform the economic committee or, if such a committee does not exist, the works’ council, on company takeovers is provided for, as far as this information does not endanger business secrets of the target company. The content of the information consists in particular of details of the potential acquirer and its intentions regarding the future business activities of the company, as well as the subsequent effects on the employees. This also applies if a competitive tender offer takes place.