An extract from The Corporate Governance Review, 10th Edition


i Shareholder rights and powers

As a general rule, all shares in a German stock corporation provide for equal rights, including equal voting rights, rights to receive dividends and information rights.

Voting rights are usually exercised per share or in proportion to the par value of the shares. The Stock Corporation Act prohibits the creation of shares with multiple voting rights. With the approval of the general meeting, a stock corporation may issue non-voting preferred shares in a nominal amount of up to half of its registered share capital.

The shareholders of a stock corporation, unlike shareholders of German limited companies, have no direct influence on the management board. Their influence is limited to electing the members of the supervisory board, who in turn appoint and remove the members of the management board.

Since a shareholder representing a majority of the voting rights or the share capital of a corporation may de facto have a controlling influence on the stock corporation's management because of its ability to elect and dismiss the shareholder representatives on the corporation's supervisory board, a controlling shareholder must compensate any disadvantage suffered by the corporation as a result of any exercises by the controlling shareholder of its influence.

The controlling shareholder may 'legalise' its influence on the stock corporation by concluding a domination agreement with the stock corporation. Once a domination agreement has been concluded, the Stock Corporation Act recognises the shareholder's right to give instructions to the management board. In order to become effective, the domination agreement must be approved by the corporation's general meeting with a supermajority of at least 75 per cent of the share capital represented at the meeting. The controlling shareholder is obligated to compensate any loss incurred by the controlled company during the term of the domination agreement and to acquire, at a minority shareholder's request, that shareholder's shares against adequate compensation.

Certain decisions are reserved for the shareholders' meeting by statutory law: this includes the appointment of members of the supervisory board, the appropriation of distributable profits, the appointment of the auditor, the amendment of the articles of association, measures to increase or reduce the share capital or obligations to transfer significant assets of the company.

In addition, the shareholders' meeting must approve management decisions that could fundamentally affect the shareholders' rights and economic position, such as the sale or the hive-down of a business division into a subsidiary if the division contributes a significant portion of the corporation's revenue. Apart from these exceptional cases, the management board can make business decisions autonomously without the shareholders' consent. For example, the management board can decide to delist the company from the stock exchange without the consent of the general meeting (see Section II.v. for general meeting's votes on board compensation).

ii Shareholders' duties and responsibilities

All shareholders are subject to the duty of loyalty in relation to the company and other shareholders. In particular, shareholders are prohibited from causing harm to the company.

In principle, the duty of loyalty is defined by the articles of association and the company's purpose. However, in exceptional circumstances, a shareholder may even be obligated to exercise his or her voting rights in favour of a specific measure that is deemed to be necessary for the avoidance of the collapse of the company.

iii Shareholder activism

Germany has experienced several waves of shareholder activism. Owing to changes of the law and restrictive court decisions, the practice of 'greenmailing' companies through lawsuits by individual minority shareholders seeking to set aside shareholder resolutions or to delay corporate transactions is largely a thing of the past. Nowadays, activist shareholders are often hedge funds that seek to influence the strategy and the share price of a company even though they only hold a minority stake in the company. This is typically done through the exercise of minority rights. Often, these attempts are accompanied by aggressive publicity and media campaigns designed to pressure the company's management into adopting the measures proposed by the activist shareholder. Another means for activist minority shareholders to exercise a disproportionate influence on a company is through proxy fights. Foreign and institutional investors especially increasingly follow the voting recommendations of proxy advisers. If an activist shareholder succeeds in persuading a proxy adviser to favour the measures proposed by the activist shareholder, this will result in a significant increase in the activist shareholder's factual voting power.

iv Takeover defences

Once the bidder has published its decision to make a takeover offer, the management board may no longer take any actions that could prevent the success of the offer. There are, however, some statutory exceptions to this 'prohibition of frustrating action'. The management board remains entitled to solicit competing offers from third parties (white knights) and to take actions approved by the supervisory board. Moreover, the management board continues to be entitled to take all measures that are in the ordinary course of the company's business and not subject of the takeover offer or that are intended to implement a business strategy that the company has embarked on before the publication of the takeover offer.

The management board may also take defensive measures that are authorised by the general meeting before the takeover offer was announced and approved by the supervisory board. These include: (1) repurchasing shares equalling up to 10 per cent of the registered share capital; (2) establishing increased majority requirements for shareholder votes; (3) electing shareholder representatives in the supervisory board at different points in time to create a 'staggered board' and at the same time increasing the majority requirements for their dismissal; (4) selling important assets of the corporation; or (5) acquiring a direct competitor of the bidder.

v Contact with shareholders

Each shareholder may request the management board to provide information regarding the affairs of the company. The shareholders' information right may, however, only be exercised during a shareholders' meeting and is limited to information that is reasonably required by the shareholders to appropriately assess the topics on the agenda of the shareholders' meeting. The management board may refuse to provide the requested information only for a limited number of reasons enumerated in the Stock Corporation Act, in particular if providing the information would, in the assessment of a reasonable businessman, be harmful to the company. To the extent the management board proactively communicates with shareholders, it must observe the principle of equal treatment of shareholders as well as the rules regarding disclosure of inside information.

Corporations must identify their shareholders (know your shareholder). In particular, financial intermediaries must provide, at the request of the company, the information that is necessary to identify the shareholders, including names and contact details.

While fostering investor relations and communication with (potential) investors and other stakeholders of the company generally falls within the remit of the management board, the supervisory board and, particularly, its chairman may, within certain boundaries, also communicate with the company's stakeholders. The Corporate Governance Code suggests that the chair of the supervisory board should be available – within reasonable limits – to discuss supervisory board-related issues with investors. Especially the chair of the supervisory board may also exchange views with representatives of politics and the press.

However, investor communication by the (chair of the) supervisory board is limited to issues that fall within the remit of the supervisory board. These do, in particular, not include issues of corporate strategy and the management of the company, which are the sole responsibility of the management board.