“Acting in concert,” a situation in which in which investors work together to attain the same investment goal, is one of the most controversial issues in German takeover law. According to the the Securities Acquisition and Takeover Act (Wertpapiererwerbs-und Übernahmegesetz, WpÜG), the majority owner of a stock-listed company must make a mandatory tender offer to the shareholders of a stock-listed target company when gaining control of the company. In general, control is obtained as soon as an individual shareholder holds 30 percent or more of the voting rights. Section 30 paragraph 2 WpÜG, the German regulation on acting in concert, stipulates that the above rules also apply when a group of shareholders coordinate their voting conduct to gain comparable influence without any single shareholder actually holding 30 percent of the voting rights.
Section 30 Paragraph 2
The activities that constitute acting in concert are not particularly clear. Agreements on the exercise of voting rights in individual cases are exempt from the law, but explicit agreements between shareholders and any other coordination of voting conduct are not. Therefore, the question regarding the scope of Section 30 para. 2 WpÜG is of central interest.
What defines “acting in concert”?
While the stated primary aim of Section 30 para. 2 is to protect minority shareholders, recent Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) decisions suggest protection of “30 percent” group shareholders’ rights as well. “Acting in concert” has recently been discussed in connection with Deutsche Börse AG. In this case investment funds coordinated their interests to cause a personnel change in the management structure. The subsequent BaFin investigation concluded that because the evidence did not show the involved investment funds influenced the management of Deutsche Börse AG, they did not act in concert.
In the case of WMF Württembergische Metallwarenfabrik AG, the discussion of Section 30 para. 2 WpÜG focused on the question of when agreements concerning supervisory board elections constitutes acting in concert. The September 18, 2006, decision of the Federal Supreme Court (Bundesgerichtshof, BGH) ruled on a situation in which three investors held a total of 51 percent of the voting rights in WMF and were parties to a stand-alone agreement regarding the disposal of their shares. These shareholders coordinated their interests regarding the supervisory board’s election of its chairman. The plaintiff, also a shareholder of the target company, argued that these investors acted in concert to gain control over the company and requested the publishing of a mandatory takeover offer and interest payments on the compensation in the offer.
On April 27, 2005, the Higher Regional Court (Oberlandesgericht, OLG) in Munich had decided the coordinated voting conduct in the board election resulted in a relevant acting in concert and ruled in favor of the plaintiff. The BGH, however, repealed the OLG’s ruling and decided that the three shareholders were not obliged to launch a mandatory tender offer. It then held that acting in concert is limited to a coordination of voting rights in the shareholders’ meeting, and elections conducted in the supervisory board are not subject to Section 30 para. 2. The judges argued that supervisory board members are obliged to the serve the interests of the company and are neither “representatives” of the shareholders nor subject to any instructions by them.
In addition, the BGH argued that the shareholders only exercised their voting rights in an “individual” case, which is exempt from the provisions regarding acting in concert. A case is “individual” when—according to the BGH—the coordination of voting rights only refers to one unique case and does not include an additional agreement regarding a future business concept of the company. This “business concept” must include extensive and precisely phrased business intentions, intentions to which the relevant shareholders in this case obviously did not agree.
Definition Remains Unclear
The decision of the BGH restricts the scope of Section 30 para. 2 WpÜG in favor of legal certainty, but the decision is questionable as minority shareholder protection is supposedly the pre-eminent aim of this provision. In cases of de facto control of a company when a single shareholder or several shareholders pool their interests, the minority shareholders should be given the opportunity of opting out. However, the 30 percent shareholders (whether a single investor or a group of investors) are in a position in which they can exercise continuous control over the company. Such control cannot be established through an isolated coordination of voting rights or through proceedings in the supervisory board, a body independent of the stock corporation.
The BGH’s decisions seems to suggest the “individual” case exclusion trumps the minority shareholder opt-out. However, shareholders in German stock-listed companies should still be aware of the potential risks of coordinating voting rights with other shareholders and acting in concert.