Germany: 234. Germany Prepares Corporate Takeover Law

Spurred by what many regarded as an unseemly tussle in connection with the ultimately successful bid of Vodafone AirTouch for Mannesmann in 1999/2000, Germany appointed a commission of experts in February 2000 to make recommendations for a law regulating corporate takeovers. The commission, whose members included Germany's Chancellor Gerhard Schröder and management consultant Roland Berger, published recommendations in May 2000, which were followed by draft legislation (the so-called "discussion draft") issued by the Federal Ministry of Finance on 29 June 2000.

The German discussion draft came just a few days after the Common Standpoint adopted by the EU Council of Ministers on 19 June 2000 (resolution 8129/00) and was modelled to some extent after the British City Code on Takeovers and Mergers.

In March 2001, the discussion draft was superseded by a new draft Law Regulating Public Securities Acquisition Offers and Business Takeovers (Gesetz zur Regelung von öffentlichen Angeboten zum Erwerb von Wertpapieren und von Unternehmensübernahmen or WÜG for short – so-called "reporter's draft" or Referentenentwurf).

The latest draft can be downloaded from the website of the Federal Ministry of Finance at the following location: http://www.bundesfinanzministerium.de/steuersei.htm → Fachabteilungen/Infos → Geld und Kredit. A German language summary of the differences between the March 2001 reporter's draft and the June 2000 discussion draft can also be downloaded from the same location.

The new corporate takeover law is intended to create a legal framework in which corporate takeovers can occur in a fair and transparent manner, but not to promote or to impede corporate takeovers as such. Hence, the German Federal Securities Supervisory Office (Bundesaufsichtsamt für den Wertpapierhandel), which is given oversight authority respecting the new legislation, may prohibit takeovers only in limited circumstances where the bidder fails to meet formal disclosure and publication requirements (§ 15 WÜG-RefE).

A "takeover" is defined for purposes of the draft legislation as the acquisition of shares representing 30 % or more of the voting rights in the target entity (§ 29 WÜG-RefE). The latest draft extends the scope of the law beyond takeovers and takeover offers to include all public offers to acquire shares in a German stock corporation (AG) or partnership limited by shares (KGaA) if the shares of the target company are traded on an organised market (§ 1, 2 WÜG-RefE). An organised market is defined to include trading on any regulated market in the European Economic Area (§ 2 no. 7 WÜG-RefE). Public offers to purchase securities carrying the entitlement to acquire stock (convertible bonds, option bonds) are also regulated (§ 2 no. 2 WÜG-RefE).

Furthermore, § 33 of the draft legislation imposes a so-called "neutrality obligation" on the management of target corporations, prohibiting them from taking action to block the takeover once the decision to tender a takeover offer has been published. On the other hand, certain exceptions are also created to the neutrality rule. In particular, management may seek a competing offer from a third party (so-called "white knight") and in addition take any defensive action voted by the shareholders at a meeting held after publication of the takeover offer (§ 33 WÜG-RefE).

In his speech before the 17th German Banking Conference in Berlin on 4 April 2001, Federal Chancellor Schröder stressed the need for steps to further strengthen Germany's attractiveness as an international financial centre. In this connection, he discussed, among other measures, Germany's intention to enact a law regulating corporate takeovers even if the European Union failed to adopt a guideline in this area. Chancellor Schröder contended that, together with the recently enacted tax exemption for capital gains realised by a corporation on the sale of shares in another corporation, the contemplated corporate takeover legislation was a prerequisite for an efficient realignment of German holding structures that would promote economic growth. Chancellor Schröder stated that the new legislation would ensure fair and transparent takeover procedures, which he plainly believed would aid Germany in competing with other world financial centres.

A less sanguine picture of the draft takeover law is, however, painted by Schneider and Burgard in their German-language article published in early May 2001 (DB 2001, 963). These authors argue that takeovers of a domestic group by a foreign group generally serve the interests neither of the target corporation's shareholders nor of its so-called stakeholders – employees, suppliers, customers, bankers, domestic stock exchanges, domestic economy, domestic treasury (tax revenue), and recipients of corporate donations. Schneider/Burgard criticise the concept of a "market for corporate control" in which the control of large corporations can ostensibly be purchased by those best able to manage them. The authors contend that the information available instead indicates that takeovers weaken the target entities economically and run contrary to the principles of good corporate governance, which dictate long-term enhancement of corporate value, a strong equity base, and hence as a rule long-term retention of corporate earnings. The authors state that such policies are likely to increase a corporation's desirability as a takeover target, hence that the result of corporate takeovers may be to oust the most successful management teams, not the those that are least successful.

Schneider/Burgard note legal and economic factors which make German corporations far more vulnerable to takeovers than corporations organised in any of the world's other major trading nations. They regard this takeover vulnerability as a prime liability of Germany in competition with other nations as the home jurisdiction of international corporations and state that the draft takeover law will cement rather than remedy this deficit. They conclude their article by proposing amendments to the draft legislation to enable the management and shareholders of potential target corporations to defend against hostile takeovers both preventively (e.g. in the articles of incorporation) and repressively (to repel a specific takeover attempt).

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