Shareholder activist strategies

Strategies

What common strategies do activist shareholders use to pursue their objectives?

It is becoming increasingly common that activist shareholders apply pressure and vigorously pursue change in their respective ‘target’ company. When doing so, activist shareholders regularly seek to gain mainstream investor support.

Strategies based on minority shareholder rights

Most activist strategies are based on statutory minority shareholder rights, which, to some extent, depend on a minimum amount of capital stock held by the respective activists.

Basic minority rights are granted to each shareholder, regardless of the number of shares he or she owns. All shareholders are entitled to, for example:

  • attend and speak at a shareholders’ meeting;
  • make counterproposals before or at a shareholders’ meeting (section 126, AktG);
  • request information at a shareholders’ meeting. Every shareholder is entitled to ask questions in the shareholders’ meeting (section 131(1), AktG) and request information that has been disclosed to other shareholders (section 131(4), AktG);
  • use the shareholders’ forum in the Federal Gazette (section 127a, AktG);
  • commence litigation against shareholders’ resolutions (section 245 Nos. 1-3, AktG);
  • pursue damages claims against controlling shareholders or against management or supervisory board members (section 309(4) and sections 317(4) and 318(4), AktG); and
  • request the appointment of a supervisory board member by the court to fill a vacancy (section 104(1), AktG).

Other minority rights depend on the amount of capital stock the shareholders are holding. For example, shareholders holding:

  • 1 per cent of the capital stock or €0.1 million nominal share value may:
    • request a special audit by a court-appointed auditor (section 142(2), AktG); or
    • request the permission of the court to pursue liability claims against members of the management or supervisory board (section 148, AktG);
  • 5 per cent of the capital stock or €0.5 million nominal share value may:
    • request amendments to the agenda of a shareholders’ meeting (section 122(2) No. 1, AktG). For example, a resolution to change the corporate charter, remove supervisory board members or pursue liability claims against the management or supervisory board members; or
    • request the permission of the court to make amendments to the agenda public (section 122(2), (3), AktG);
  • 5 per cent of the capital stock may:
    • request the company to call a shareholders’ meeting (section 122(1) No. 1 AktG); or
    • request the permission of the court to call a shareholders’ meeting (section 122(2), (3) AktG);
  • more than 5 per cent of the capital stock may block a squeeze-out of minority shareholders (section 327a, AktG);
  • 10 per cent of the capital stock or €1 million nominal share value may:
    • request an individual vote on dismissal of management or supervisory board members (section 120(1), AktG); or
    • request a court-appointed representative to pursue liability claims against members of the management or supervisory board (section 147(2), AktG);
  • 10 per cent of the capital stock (or less if capital stock is not fully represented in the shareholders’ meeting) may nominate members of the supervisory board in a privileged way (section 137 AktG);
  • more than 10 per cent of the capital stock may block a merger-related squeeze-out of minority shareholders (section 62(5), UmwG); and
  • more than 25 per cent of the capital stock (or less if capital stock is not fully represented in the shareholders’ meeting) may block amendments of the corporate charter and other major shareholder resolutions - for example, capital increases, corporate agreements, or transfer of substantially all of the company’s assets (sections 179(2) and 179a(1) AktG).

Strategies based on majority shareholder rights

Those who hold majority shareholder rights may:

  • initiate a vote of no confidence with respect to management board members (a simple majority at the shareholders’ meeting; section 84(2), (3), AktG); or
  • remove members of the supervisory board (a three-quarters majority at the shareholders’ meeting; section 103(1), AktG).

Informal strategies

Informal activism is less common, although there are various informal strategies that activists may use to pursue their objectives. For example:

  • a letter to the management or supervisory board;
  • a request to meet the management or members of the supervisory board, in particular its chairman;
  • public campaigns to encourage shareholders to vote in a certain way;
  • publishing white papers or research reports;
  • proxy solicitation;
  • utilising proxy advisers who provide research, advice and recommendations on how to vote in shareholders’ meetings;
  • fast or hidden stakebuilding; and
  • short-selling, sometimes after having published critical reports on the target company.
Processes and guidelines

What are the general processes and guidelines for shareholders’ proposals?

Shareholders’ proposals concerning items of the agenda of a shareholders’ meeting (counter proposals)

At shareholders’ meetings, every shareholder is entitled to speak, to ask questions (section 131, AktG) and to make proposals directed against proposals of the management or the supervisory board under specific items of the agenda (section 126, AktG). Shareholders are not required to notify the company in advance of such proposals, but if the company receives such a proposal including the shareholder’s name and the reasons for the proposal in writing at least 14 days before the relevant meeting, the proposal (including shareholder’s name and reasons) must be made accessible to other shareholders as well as to certain institutions and persons mentioned in section 125(1)-(3), AktG. This usually means that such proposals are published on the company website. For listed companies, publication on the company website is mandatory (section 126(1), AktG). The company does not have to make proposals accessible only in exceptional circumstances (such as section 126(2), AktG). If several shareholders present proposals in respect of the same subject, the management board may combine such proposals and respective statements of the reasons (section 126(3), AktG), without curtailing or corrupting the proposals.

Shareholders’ proposals concerning other subjects

Shareholders’ proposals concerning subjects other than items on the agenda are only admissible if the agenda is amended accordingly. Only shareholders individually or collectively holding shares representing at least 5 per cent or €0.5 million nominal share value (or less if stated in the corporate charter) of the company’s capital stock may request that additional items be placed on the agenda of a shareholders’ meeting (section 122(2), AktG). Requests, including the reasons or a draft resolution, must be addressed to the company’s management board in writing and must be received by the company at least 24 days (in case of non-listed companies) or 30 days (in case of listed companies) prior to the shareholders’ meeting. Requesting shareholders must prove that they have held the sufficient number of shares (quorum) for the legally required minimum period of ownership of 90 days, which has to be calculated from the date of receipt by the company.

As long as shareholders comply with the formal requirements, there are very few reasons why a company may reject such request; for example, if the request is directed at a resolution that would be unlawful, or if the request constitutes an abuse of shareholder rights or conflicts with the shareholder’s duty of loyalty.

Amendments to the agenda of non-listed companies must be made public in the Federal Gazette (or by registered mail to all shareholders if they are known to the company and the corporate charter does not stipulate differently; section 121(4) AktG), either upon calling the meeting or immediately following receipt of the request. Listed companies must publish amendments to the agenda on their website (section 124a, AktG) and, if the company has issued bearer shares, forward the information to the media (section 121(4a), AktG).

If the company does not comply with such request, relevant shareholders may apply to the competent court (ie, the local court at the registered seat of the company) for authorisation to amend the agenda and to publish such amendment accordingly at the company’s cost (sections 122(3) and (4), AktG).

Common shareholders’ proposals

Naturally, the type of shareholders’ proposals depends on the company involved and the individual situation at hand, but common subjects are:

  • counterproposals regarding profit distribution;
  • proposals of supervisory board candidates;
  • the appointment of special auditors (sections 119(1) No. 7 and 142, AktG);
  • the enforcement of certain compensation claims against board members or other persons; and
  • the appointment of special representatives to enforce these claims (section 147, AktG).

Mandatory voting rights

The shareholders’ meeting is competent only as far as expressly provided for by corporate law or by the corporate charter. The following examples are particularly relevant:

  • amendments of the corporate charter (sections 119(1) No. 5 and 179(1), AktG);
  • appointment and removal of members of the supervisory board, as far as they are not appointed under the co-determination regime (sections 119(1) No. 1 and 103(1), AktG);
  • allocation of distributable profits (section 119(1) No. 2, AktG);
  • approval of the actions of the members of the management and supervisory board (section 119(1) No. 3, AktG);
  • appointment of the company auditor (section 119(1) No. 4 AktG);
  • capital increase or reduction (section 119(1) No. 6, AktG);
  • management matters put before the shareholders’ meeting by the management (section 119(2), AktG);
  • decisions of major importance for the company such as major divestments or drop-downs (based on (controversial) case law known as the Holzmüller-Gelatine doctrine);
  • appointment of special auditors (sections 119(1) No. 7 and 142, AktG);
  • enforcement of certain compensation claims against board members or other persons (section 147(1) AktG) and appointment of special representatives to enforce these claims (section 147(2), AktG);
  • liquidation of the company (sections 119 (1) No. 8 and 262 No. 2, AktG) as well as the continuation of a liquidated company (section 274, AktG);
  • transfer of substantially all of the company’s assets (section 179a(1), AktG);
  • issuing convertible, warrant or dividend bonds as well as participation rights (section 221 AktG);
  • affiliation agreements (section 293(1),(2) AktG);
  • integration of one stock corporation into another (section 319 AktG);
  • squeeze-out (section 327a AktG); and
  • restructuring measures (changes of the legal form, mergers, demergers under the Merger and Reorganisation Act (UmwG)).

May shareholders nominate directors for election to the board and use the company’s proxy or shareholder circular infrastructure, at the company’s expense, to do so?

All shareholders are entitled to make proposals for the election of supervisory board members. Proposals do not need to include reasons, but should contain name, occupation and domicile of the proposing person. If a proper proposal is received by the company in writing at least 14 days before the relevant meeting, it must be made available to other shareholders (or the public) on the company website (see question 7).

Shareholders cannot make proposals for members of the management board as they are appointed by the supervisory board, usually following a selection process conducted by the chairman of the supervisory board to find suitable candidates.

May shareholders call a special shareholders’ meeting? What are the requirements? May shareholders act by written consent in lieu of a meeting?

Request to call a shareholders’ meeting

Shareholders who together hold at least 5 per cent of the capital stock (or less if stated in the corporate charter) may require the company to call a shareholders’ meeting (section 122(1), AktG). The request should be addressed to the management board in writing and state the objective and reasons. Requesting shareholders must prove that they have held a sufficient number of shares (quorum) for the legally required minimum period of ownership of 90 days, such period being calculated from the date on which the company received the request.

Permission to call a shareholders’ meeting at the company’s expense

If the company fails to comply with a proper request to call a shareholders’ meeting, the requesting shareholders may apply to the competent court (ie, the local court at the registered seat of the company) for authorisation to call a shareholders’ meeting at the company’s expense (section 122(3), (4), AktG).

Exercise of voting rights

Shareholders are entitled to exercise their voting rights in shareholders’ meetings. They may not act by written consent without a meeting. However, there are various options for voting in a meeting:

  • proxy voting (sections 134(3) and 135, AktG); and
  • postal vote (section 118(2), AktG) or online participation (section 118(1), AktG), if the corporate charter provides for such way of voting.
Litigation

What are the main types of litigation shareholders in your jurisdiction may initiate against corporations and directors? May shareholders bring derivative actions on behalf of the corporation or class actions on behalf of all shareholders? Are there methods of obtaining access to company information?

Main types of litigation

Shareholders can initiate lawsuits relating to their membership rights, particularly the right to attend the general meeting (section 118(1), AktG), to request a general meeting or to request amendments to the agenda of a general meeting (section 122, AktG), to obtain information (section 131, AktG) or to receive dividends (sections 58(4), 60, AktG). Shareholders can also bring actions against the company to challenge shareholder resolutions adopted by the general meeting: In case of severe breaches listed in section 249, AktG, shareholders may bring an action for the declaration of nullity, or in other cases to set aside the resolution (section 246, AktG). If compensation is offered to shareholders with regard to certain structural measures such as squeeze-outs, mergers, profit and loss transfer agreements and so on, shareholders can request the adequacy of the compensation offered to be examined by the court in special proceedings regulated by the Appraisal Proceeding Act (SpruchG).

Individual shareholders are generally not entitled to assert claims against members of the board of management or the supervisory board that neglect their duties. In principle, such claims have to be raised by the supervisory board against members of the management board and vice versa (sections 93 and 116, AktG). They can in theory also be raised by shareholders but only in the name of the company after approval by the court (section 148, AktG) and to the effect that payment is to be made to the company.

Derivative actions

Shareholders who together hold at least 1 per cent of the capital stock or an amount of €0.1 million nominal share value may request that the court allows them to pursue liability claims on behalf of the company against members of the management or supervisory board (section 148, AktG).

Class actions

German law does not provide for class actions. However, depending on the subject matter, model case proceedings are available under the Capital Investors Model Proceedings Act and the General Model Proceedings Act.

Methods of obtaining access to company information

The Stock Corporation Act does not grant shareholders full access to company information - they do not have a right to review the company’s books and records. However, shareholders have a right to request information from the management board in the annual general meeting to the extent that such information is necessary for an appropriate evaluation of an agenda item (section 131(1), AktG). This includes information about the legal and business relationships between the company and an affiliate. The management board may refuse access to information in certain instances (section 131(3), AktG). If access to information is refused, shareholders may initiate court proceedings to enforce the right to information (section 132, AktG), challenge majorly shareholders’ resolutions (sections 241 et seq, AktG) or motion to appoint special auditors (section 142, AktG).