Public takeovers in Germany

Throughout Europe, takeovers of publicly listed companies are governed by  the European Takeover Directive (2004/24/EC). Germany had passed specific  legislation on takeovers prior to the Takeover Directive, following the Vodafone/  Mannesmann takeover. The German Securities Acquisition and Takeover Act  (Takeover Act, or Wertpapiererwerbs- und Übernahmegesetz, WpÜG), which  entered into force on 1 January 2002, is applicable to public offers for German  target companies whose shares are listed in Germany. Parts of the Takeover  Act will also apply to public offers for German Companies whose shares are listed  on the Stock exchange of another member state of the European Union or the  European Economic Area (which includes Norway, Iceland and Liechtenstein  in addition to the member states of the European Union, but not Switzerland).  Specific rules of the Takeover Act are also applicable on offers for non-German  target companies which are listed in Germany. Note, however, that the Takeover  Act only applies to offers for targets which are listed on a regulated market, and  in Germany these would include in particular the Prime and General Standard  of the Frankfurt Stock Exchange. Takeovers of targets whose shares are traded  on unregulated markets, such as the Entry Standard or the Open Market of the  Frankfurt Stock Exchange, are not governed by the European Takeover Directive  or the German Takeover Act, and are therefore simpler to implement.  Takeovers are conducted under the surveillance of the German Financial Services  Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin).  In Germany, takeovers are typically friendly and supported by the target. In  hostile takeover bid situations, the target companies often come to support the  offer. Only in a few cases competing bids were launched by competing bidders  and prices increased in the course of the offer.  How to Implement a Takeover in Germany PreParaTion Information on the target A takeover requires thorough preparation. Some information on the target is  publicly available. In particular, financial statements and mandatory publications,  such as ad hoc disclosures on important developments, can be obtained from  the target’s homepage. Targets which are listed on the Prime Standard of the  Frankfurt Stock Exchange must publish this information in English; targets  which are listed on the General Standard market segment need, however, only  publish in German.  Information on the target’s shareholder structure Typically, German stock corporations issue bearer shares so that holders are not  known to the company. Some companies issue registered shares and must keep a  share register with the names of the shareholders. However, the share register is  not public and even shareholders are only entitled to receive information on the  data registered in respect of themselves.  However, the German Securities Trading Act (Wertpapierhandelsgesetz, WpHG)  contains notification obligations for holders of major stakes of voting rights in  publicly listed companies. Any person whose voting interest (either directly or  2   Public Takeovers in Germany Dr. Ulrike Binder Partner, Frankfurt T +49 69 7941 1297 [email protected] Sören Pruß  Associate, Frankfurt T +49 69 7941 2641 [email protected] a y e r   b r o w n       3 by way of attribution, for example due to an acting in concert with other shareholders) reaches, exceeds or falls below 3 percent, 5 percent, 10 percent, 15 percent,  20 percent, 25 percent, 30 percent, 50 percent or 75 percent of the voting rights  must inform the company and BaFin of the exact number of voting rights that  shareholder holds, and of the details regarding how these voting rights are held  (directly or by attribution). The company must publish the notification.  Notification obligations also exist for financial instruments which entitle their  holders to acquire shares with voting rights in the future. These notification obligations cover call options and agreements which are subject to conditions which  the holder of the instrument can control. As of 1 February 2012, the notification  obligations are extended to all instruments which result in the possibility to  acquire shares with voting rights. Not only put options and all contingent agreements but also cash settled swaps must be notified. These notification obligations  begin at a threshold of 5 percent. Shares with voting rights which the holder of  the instrument holds, are taken into account in the calculation.  Any shareholder whose voting rights exceed the threshold of 10 percent must  additionally notify the company of the goals which it pursues in respect of the  company, and of the source of the funds used for the acquisition. The company  must also publish this notification.  Additionally, the members of the management board and the supervisory board  of a listed company must inform the company and BaFin of any direct or indirect  dealings in company shares or derivates exceeding a value of EUR 5,000 within  one calendar year. The directors’ dealings notifications also have to be published  by the company.  Due diligence  If a bidder wants to obtain non public information from the target or any of its  shareholders, it must enter into negotiations with them. The management board  of a target company can allow a due diligence without breaching its confidentiality  obligations, if a bidder is seriously interested in an acquisition, the acquisition  is in the best interest of the company, and the bidder agrees to keep the information  obtained in the due diligence confidential. Therefore, target companies normally  require bidders to enter into a confidentiality agreement and, additionally, a letter  of intent, in order to be able to demonstrate that the bidder is seriously interested  in the acquisition, before due diligence starts.  Agreements with shareholders and the target  In order to increase a takeover’s chances of success, it is advisable for bidders to  enter into agreements with major shareholders in advance. In such agreements,  major shareholders can either directly sell their shares to the bidder (possibly  subject to certain conditions, such as a minimum acceptance rate in the offer,  though major shareholders often refuse to accept such conditions), or major  shareholders can obligate themselves to accept the offer for their shares (so called  irrevocable undertaking). An irrevocable undertaking can trigger notification obligations for financial  and other instruments because it results in the possibility to acquire shares in  the future. Therefore, such undertaking should be entered into only when the  takeover is made public (see below under “Offer Phase”).  German law also allows target companies to enter into agreements with bidders  and to agree to support the offer, provided that the offer is in the best interest  of the company (for example because the new shareholder would bring new  financing or help to develop new businesses). However, the conclusion of such  agreements is not common practice in Germany.  STake BuildinG Bidders can build stakes in the target by stock exchange or off-stock exchange  acquisitions in advance of the bid. They must comply with the above mentioned  notifications rules, i.e. inform the target and BaFin as soon as they acquire a stake  of 3 per cent of the voting rights in the target. Due to the extended notification  obligations for financial and other instruments, which cover also cash settled  swaps, hidden stake building has become more difficult. In calculating the 5 percent minimum threshold which triggers notification obligations for such instruments, shares with voting rights held by the holder of the instruments must be  taken into account. Therefore, if an investor holds 2 percent of the shares in a  company and additionally acquires cash settled swaps for further 3 percent, a  notification must be made. Voting rights notifications can alert investors of the  fact that someone invests in the target, and can increase speculation and stock  exchange prices.  Additionally, bidders must observe insider trading rules. These rules prohibit  the acquisition (and disposal) of shares by using inside information. Inside  information is any non public information which can materially influence the  stock exchange price if it becomes publicly known. This is the case if a sensible  investor would take the information into account when he makes his investment  or divestment decision.  The intention of the bidder to buy shares in the target is not deemed to be  inside information for the bidder himself. However, the fact that a subsequent  public tender offer at a higher price will follow could be inside information. Also,  the bidder can obtain inside information within the due diligence. Therefore,  the stake building should be thoroughly prepared in order to avoid any legal  risks. Insider trading is a criminal offence which can be punished by fines or  imprisonment.  The bidder can also make alongside purchases during the offer. Such alongside  purchases are included in the regular reporting of the bidder which is obligatory  during the offer phase.  offer PhaSe  Publications by the bidder, procedure and timeline  The offer phase begins with the publication of the intention of the bidder to  launch an offer. The bidder must make this publication as soon as it decides to  make an offer. The decision is, however, only made once all internal approvals are  4   Public Takeovers in Germanyobtained (such as board approval). Once this decision is passed, the publication  must be made without undue delay via an electronic system for the systematic  distribution of information (such as Reuters or Bloomberg). There exist service  providers in Germany who organize proper distribution of such publications  (for a certain, but limited, fee). The bidder must subsequently inform the  management board of the target company of its intentions, and the target in  turn informs its employees and employee representatives.  Once the publication is made, the bidder must implement the offer. It is generally  not possible to withdraw the offer at this stage. Within a period of four weeks  from the publication of the intention to make an offer, the bidder must submit the  so called offer document to BaFin. The offer document describes the offer in detail.  BaFin has a period of ten business days to review the offer document. It can  extend this period by up to five business days. Once BaFin has approved the offer  document, it must be published without undue delay on the internet. The offer  must be open for acceptance for a period of four to ten weeks. Generally, a longer  acceptance period does not increase the acceptance rate. In particular, financial  investors tend to make their decisions during the last days of the acceptance  period only. Therefore, an offer phase of four to six weeks is advisable.  After termination of the offer phase, the offer is settled, i.e. the shares which were  tendered by shareholders are transferred to the bidder for payment of the offer  price.  Publications by the target  The fact that an offer is upcoming can substantially affect the target’s share price.  It is therefore inside information, as soon as it becomes sufficiently likely. Listed  companies are obligated to disclose inside information which directly concerns  them by way of an ad hoc disclosure. Therefore, the target company is generally  obligated to make the fact that an offer will be made public. However, the company may be allowed to delay such disclosure if the delay is required to protect its  interests, if there is no risk of markets being misled and if the target can ensure  confidentiality. These rules generally allow a delay of the ad hoc disclosure until  the bidder announces the offer in accordance with the above mentioned rules.  The management board members and the supervisory board members of the  target are obligated to publish a reasoned statement regarding the offer. In this  statement, they must report and comment on the adequacy of the offer price, the  consequences of the offer for the target and its employees, the goals of the bidder,  and their intention to accept the offer for shares they own. Usually, the statement  contains a recommendation of the board members to accept or not to accept the  offer. It is common practice and good corporate governance for board members  to obtain a fairness opinion from a third party on the adequacy of the offer price  and to refer to it in the statement.  The statement is generally published within a period of up to two weeks after  publication of the offer document.  m a y e r   b r o w n       5Offer document  The offer document contains all information which is necessary in order to enable  shareholders to decide about the acceptance of the offer. In particular, it contains  information on • the offer (offer price, including explanation of the adequacy of the offer price,  offer period, details on how to accept the offer and payment of the offer price  by the bidder), • prior purchases of target shares made by the bidder or a person acting jointly  with the bidder during the last six months prior to the publication of the  intention to make the bid or the publication of the offer document, including  information on purchase prices,  • offer conditions, • financing of the offer and consequences of the offer on balance sheet and profit  and loss situation of the bidder and the bidder group, • details on the bidder and the target, • plans of the bidder regarding the target, its business, its seat, major business  operations, employees, employee representation, the assets of the target, and  its future liabilities, • plans for the composition of management and supervisory board, and benefits  to board members in connection with the offer, • consequences of the offer for target shareholders who do not accept the offer.  The size of the offer document depends on the size of the bidder and the target  and on the complexity of the transaction. Generally, such documents have a  volume of approximately 40 to 50 pages.  The offer document is signed by the legal representatives of the bidder on behalf  of the bidder. The bidder is liable for the completeness and accuracy of the offer  document.  offer STrucTureS Voluntary and mandatory offers If a bidder wants to acquire control over a German publicly listed company, it  can either acquire no or only smaller portions of shares in advance and make a  voluntary offer, or it can acquire 30 percent or more in the target in advance  and thereby trigger the obligation to make a mandatory takeover offer to all  outstanding shareholders. The voluntary offer structure is more flexible and  therefore often preferable from the bidder’s perspective. However, in most  respects, voluntary and mandatory offer are governed by the same rules and the  best suitable structure should be developed based on a case by case assessment.  6   Public Takeovers in Germanym a y e r   b r o w n       7 In a voluntary offer structure, the conclusion of irrevocable undertakings with  major shareholders is advisable. In this case, the bidder would publish its intention  to make an offer on the day on which the irrevocable undertakings are concluded.  If the bidder enters into a share purchase agreement (SPA) with major shareholders which is subject to conditions (such as anti-trust clearance), it is advisable  for the bidder to announce a voluntary offer on the same day. The voluntary offer  replaces a subsequent mandatory offer which would have to be made once all  conditions are met. Note, however, that in this case, the SPA can only be subject to  conditions which would also qualify as admissible offer conditions (see below).  This structure ensures better control over the minimum offer price and would  allow the purchase price in the SPA to be lower than the offer price.  A mandatory offer must be made if a bidder acquires 30 percent or more of the  voting rights in the target, either directly or by way of attribution of voting rights.  However, financial and other instruments (cash settled swaps, contingent call  options, put option) which may have to be notified are irrelevant in calculating  the 30 percent threshold which triggers the mandatory offer. A mandatory offer  would only have to be made, once these instruments are exercised, resulting in  a shareholding of at least 30 percent. Thus, if shares are acquired from major  shareholders and the acquisition is not subject to conditions (such as anti-trust  clearance), a mandatory offer must be made. The mandatory offer must be  unconditional. Once a bidder acquires 30 percent or more of the target’s voting  rights, it must publish this fact without undue delay (in the same way as the  intention to make an offer is published, see above) and submit an offer document  to BaFin within four weeks from the publication. After BaFin approval, the offer  document must be published. The content of the offer document is identical for  mandatory and voluntary offers.  Cash and share offer  In Germany, takeover offers are mostly cash offers because they are easier to  implement than share offers. Share offers are admissible, provided that the shares  offered in exchange are listed on a regulated market of a member state of the  European Economic Area. Thus, shares of a NASDAQ listed company can only  be offered besides cash (i.e. shareholders can choose between cash and NASDAQ  listed shares). It should be noted that the London AIM market is not a regulated  stock market pursuant to European law. Therefore, AIM listed shares do not  qualify as admissible consideration, unless offered as an alternative to cash.  If shares are offered as consideration, the offer document must contain detailed  information on these shares and the issuer of the shares. The offer document  therefore includes a securities prospectus on the offered shares, prepared in  accordance with the European Prospectus Regulation (No.809/2004/EC). This  makes the preparation of the offer document time-consuming, unless the bidder  has a recent prospectus available which can be used.  Minimum price rules  The Takeover Act contains rules on minimum prices which must be paid in the  offer. These minimum prices depend on both, (a) the average stock exchange  price of the target shares before the offer, and (b) purchase prices which the  bidder paid before the offer. The consideration to be paid by the bidder must at  least be the higher of:• the average weighted stock exchange price of the shares of the target company  during the three months prior to the publication  • of the decision to issue a voluntary takeover offer (not the publication     of the detailed offer document itself), or • in case of a mandatory takeover offer, of the acquisition of control     (30 percent of the voting rights), and • the highest consideration paid or agreed upon by the bidder, or any entity  related to the bidder or acting jointly with the bidder for the acquisition of  shares of the target company, during the six months prior to the publication  of the offer document. If shares are offered as consideration, the value of the offered shares must also  comply with these rules.  Offer conditions  Voluntary offers can be made subject to conditions provided that the fulfillment  of these conditions is outside the influence of the bidder. It is therefore possible to  make an offer subject to the conditions that a minimum acceptance rate is achieved  (for example, 75 percent of all outstanding shares). Thereby, a bidder can ensure  that the offer is only implemented if it results in a majority which enables the  bidder to implement planned restructuring measures at the target level.  It is also possible to make an offer subject to material adverse changes (MAC),  provided that the MAC event is defined by objective criteria which cannot be  controlled by the bidder.  Mandatory offers can generally not be made subject to conditions.  Financing of the offer  The bidder must pay the purchase price for the tendered shares after termination  of the offer period. In the offer document, the bidder must describe how it finances  the offer, i.e. from its own cash reserves, by a bank financing, or by any other  means. The offer document must set out which effects the financing and the  acquisition of the target has on the balance sheet and the profit and loss statement  of the bidder and the bidder group (if it prepares group financial statements). Additionally, the bidder must provide a bank confirmation which says that the  bidder has taken all measures required to ensure that it can pay the purchase  price under the offer when it becomes due. This bank confirmation must cover the  purchase price for the acquisition of all outstanding shares which the bidder does  not yet own when the offer is made. This includes shares for which shareholders  have declared that they are not willing to accept the offer, shares which are subject  to an irrevocable undertaking, and shares which the bidder will purchase outside  the offer during the offer phase. Thus, in a voluntary offer situation, where the  bidder did not make any purchases in advance, the bank confirmation would have  to cover 100 percent of the outstanding shares.  8   Public Takeovers in Germanym a y e r   b r o w n       9 The bank confirmation must be submitted to BaFin together with the offer  document and must also be published as an annex to the offer document. The  bank would be liable to outstanding shareholders if the confirmation proved to  be incorrect. Therefore, banks must generally comply with standards for issuing  guarantees before issuing the confirmation. The timetable for a public takeover  should ensure that agreements with the bank that finances the offer and with  the bank that issues the confirmation (often, but not necessarily identical) are  in place when the offer is made public.  Exemptions from the obligation to make a takeover bid  Any person acquiring at least 30 percent of the voting rights in a German listed  company must make a mandatory offer (Pflichtangebot) to the other stockholders.  In specific cases, BaFin can exempt the acquirer from this obligation. The most  important exemption applies in restructuring cases. If the target company is in  need of restructuring, the purchaser presents a plausible restructuring concept  and contributes a substantial amount to the restructuring, BaFin can grant the  exemption. According to BaFin’s administrative practice, a company is in need of  restructuring if “existence threatening risks” exist. It is not necessary that insolvency  is immediately impending. The purchaser must present a restructuring concept to  BaFin together with an auditor’s opinion on the suitability of the concept. BaFin  neither requires proof that the restructuring will most probably be successful nor  the examination of alternative concepts. The contribution by the purchaser to the  restructuring can, for example, consist of a subscription of new shares in a capital  increase, the provision of loans, or a waiver of claims. The required amount and  form of the contribution depends on the situation of the target. It must be suitable  to restructure the target.  The application for exemption can and should be submitted to BaFin prior to the  acquisition of control. In order not to burden the purchaser with the risk of having  to implement a mandatory offer, it is advisable to execute the share purchase  agreement subject to the condition that BaFin issues the exemption.  Strategies after the Offer  conTrol and increaSe of ShareholdinG After a takeover offer, the bidder controls the target company. Depending on the  number of shares that were tendered or sold in connection with the offer, the  bidder controls resolutions of the general meeting which require a simple majority  or also a super majority of 75 percent of the votes cast. It should be noted that in  a German stock corporation, ordinary decisions, such as election of supervisory  board members, distribution of dividends, or election of auditors, are passed with  a simple majority of the votes cast, whereas corporate restructuring measures and  capital increases in which subscription rights of shareholders are excluded, or  capital decreases, generally require a majority of 75 percent of the votes cast, but  not of the existing votes. Since not all free float shares are represented at general  meetings (because the shareholders neither participate nor grant proxies), a  majority shareholder can normally control these decisions already before it owns  75 percent of the shares. If, for example, the majority shareholder owns 60 percent  of the shares, it would control decisions which require a majority of 75 percent of  the votes cast so long as no more than 80 percent of the shares are represented  at the general meeting.In order to increase its stake in the target, the bidder can acquire additional  shares and/or implement capital increases.  If the bidder acquired shares within one year following the expiration of the offer  period in an off-stock exchange transaction and for a price above the offer price,  it would be obligated to pay the difference between the offer price and this higher  purchase price to all shareholders that accepted the offer. In contrast, stock  exchange purchases do not trigger a subsequent increase of the offer price.  Capital increases only increase the bidder’s stake in the target if outstanding  shareholders do not participate pro-rata to their shareholding. Shareholders of a  German stock corporation are entitled to participate in capital increases pro-rata  to their shareholdings. These shareholders’ pre-emptive rights can be excluded for  a capital increase of up to 10 percent and in general for capital increases against  contribution in kind. However, even if a capital increase is implemented with  shareholders’ pre-emptive rights, minority shareholders often do not exercise  their pre-emptive rights. Thus, such a capital increase can be a means to increase  the stake of the majority shareholder.  conTrol and ProfiT and loSS PoolinG aGreemenTS In order to increase its influence in the target, the bidder can enter into a so called  control agreement with the target. Additionally, it can conclude a profit and loss  pooling agreement with the target which allows it to receive all annual profits  from the target.  A majority shareholder can, pursuant to German law, not give binding instructions  to the target company or its management. It exercises its shareholder’s rights in  general meetings. The general meeting has, however, only limited competencies.  In particular, the general meeting does not decide about the day to day business of  the company. The majority shareholder can indirectly influence the management  board by electing, in general meetings, the supervisory board which controls,  elects, and removes the management board in the German two tier board system.  However, the supervisory board cannot issue binding instructions to the management board, and supervisory board members must act in the best interest of the  company rather than in the best interest of the majority shareholder.  A control agreement between majority shareholder and subsidiary allows the  majority shareholder to give binding instructions to the management board of  the target. The target’s management board must follow these instructions, even  if they are disadvantageous for the target company. A control agreement therefore  allows the integration of the target company into the bidder group before the  bidder owns 100 percent in the target.  A profit and loss pooling agreement has the effect that all annual profits are  directly transferred to the majority shareholder without profit participation of the  minority shareholders. Such an agreement has advantages from a tax perspective  if the majority shareholder is a German entity, because it allows the set-off of  profits and losses within a German group of companies.  10   Public Takeovers in Germanym a y e r   b r o w n       1 1 As control agreements and profit and loss pooling agreements result in disadvantages for the minority shareholders, minority shareholders must be compensated  for these disadvantages. The majority shareholder must (1) offer to buy the shares  of the minority shareholders at an adequate price, and (2) pay a fixed annual  dividend to those minority shareholders who stay in the target company for  the lifetime of the agreement. (3) Additionally, the majority shareholder must  compensate all annual losses of the target company.  The adequacy of the offer price and of the fixed annual dividend must be verified  by an independent, court appointed auditor. In accordance with jurisprudence of  German courts, the auditor applies a valuation method developed by the German  institute of accountants (so called IDW S1 standard) for the valuation of companies.  This valuation method aims at finding an “objective” company value and has some  features which deviate from discounted cash flow or multiple based valuation  methods. Therefore, the resulting price may exceed the price which was calculated  pursuant to valuation methods applied by the bidder in order to determine the  offer price in the takeover. Also, it should be noted that the three months average  stock exchange price of the target shares before the publication of the fact that  a control and/or profit and loss pooling agreement shall be concluded is the  minimum price to be offered.  Squeeze-ouT The bidder can conduct a squeeze-out of minority shareholders of the target  company once it has acquired 95 percent of the share capital of the target company. In the squeeze-out, minority shareholders are forced to sell their shares for  adequate compensation. The adequacy of the compensation which is offered by  the bidder must, again, be verified by an independent, court-appointed auditor.  The above mentioned rules for determining the adequacy of the price apply.  The squeeze-out requires a resolution of the general meeting of the target company  which is passed with the votes of the majority shareholder. It becomes effective  upon registration in the commercial register. Minority shareholders can delay  registration by filing actions against the squeeze-out resolution. Actions against  the adequacy of the compensation are, however, dealt with in separate proceedings  after registration and effectiveness of the squeeze-out.  If the squeeze-out is combined with a merger on the parent company, it can  already be implemented with a majority of 90 percent. However, the parent  company must in this case be a stock corporation.  Facilitated squeeze-out proceedings are available if the bidder holds 95 percent  of the share capital after the takeover offer and if the offer was accepted for at  least 90 percent of the shares that were subject to the offer. While shares which  were tendered in the offer due to an irrevocable undertaking would help to reach  the 90 percent threshold, shares sold under an SPA in connection with the offer  would not count in this respect. If the thresholds are met, the bidder can apply  to the court in order to resolve on the squeeze-out of minority shareholders for  payment of the compensation offered in the prior takeover offer. Past experience  demonstrates that it is difficult to reach these thresholds.