Germany: The New German Takeover and Squeeze-Out Rules

On January 1, 2002, the new German Takeover Act (Wertpapiererwerbs- und übernahmegesetz) came into force only five months after the project of a European Regulation for Takeovers failed because of a non-approval of the European Parliament. The new Takeover Act also substitutes the former Takeover Code of 1995 which set up certain takeover rules on a merely voluntary basis.

Under the new takeover rules, each shareholder who acquires at least 30% of the voting rights in a publicly listed stock corporation (whether by a voluntary public offer or by acquisition of shares from any shareholder) is now obligated to make a (mandatory) takeover offer for the shares of all other shareholders. In the event of a hostile takeover bid, the board of the target may, despite its obligation to act in the best interests of the shareholders and the company as a whole, provide for "measures of defence" to the extent these are approved by the supervisory board. It has to be expected that this highly controversial stipulation will make hostile takeovers of German stock corporations more difficult in the event both the management board and the supervisory board reject a takeover offer.

The Takeover Act applies to public tender offers for the acquisition of stocks or derivates of stocks of German stock corporations (Aktiengesellschaften) or partnerships limited by shares (Kommanditgesellschaften auf Aktien) listed in Germany or on a stock exchange in the European Economic Area. The Takeover Act distinguishes between offers (Angebote), takeover offers (Übernahmeangebote), and mandatory offers (Pflichtangebote). The distinction between the three types is based on the concept of control, which is defined as per 30% of the voting rights in the target. The new threshold of 30% constitutes a substantial extension of the application of the takeover rules in comparison to the legal regime under the (voluntary) Takeover Code under which an assumption of control of a stock corporation was only given upon acquisition of the majority of the voting rights (i.e. more than 50%). "Offers" are voluntary public tender offers without the intention to acquire control (i.e., with the intention to acquire less than 30% of the voting rights in the target). "Takeover offers" are voluntary public tender offers with the intention to acquire control in the context of a takeover offer. Partial offers for shares of the target are not permitted. Anyone who directly or indirectly acquires control over a target has to make a "mandatory offer" to all outstanding shareholders unless control was obtained by way of a takeover offer, or unless the Takeover Act exempts from such requirement under exceptional circumstances.

In the event of offers made to overseas shareholders, potential conflicts for the bidder may arise, as he would be obliged to comply with domestic and foreign legislation. As a result, the Takeover Act allows the bidder to exclude certain shareholders located outside the European Economic Area (e.g. USA, Canada or Japan) from the offer in order to avoid these conflicts, provided however that the Federal Supervisory Office for Securities Trading (Bundesaufsichtsamt für den Wertpapierhandel, "BAWe") grants approval thereto.

As a general rule, the bidder must offer the target shareholders either cash payable in Euros or – subject to certain exceptions - voting shares admitted to trading on a German or an European Economic Area stock exchange and for which a liquid market exists. The offer price must be at least equal to the highest price promised or agreed for the target shares by the bidder or a related party during a period of three months prior to the publication of the offer or achievement of control. However, the offer price shall not be below the weighted stock exchange price during the three months prior to the publication of the bidder’s decision to make an offer or the publication that control has been achieved and a mandatory offer will therefore have to be made. If the bidder acquires shares in the target at a price which is higher than the consideration offered in the offer, this higher price must also be offered to all other target shareholders whether or not they have accepted the offer. The same applies if the bidder acquires shares in the target other than on the stock exchange within a period of one year after closing of a (successful) offer at a price or on terms higher than those offered in the course of the offer.

Following the publication of an intention to make a public offer and until publication of the results of the offer, the management board of the target must not take any measures which may prejudice the outcome of the offer, in particular so-called "defence measures". There are, however, four important exceptions to this rule:

• Search for a competing bidder;
• Diligent acts by the management board;
• Acts approved by the supervisory board;
• Authorisation of general meeting.

The exception regarding "acts approved by the supervisory board" was inserted into the Takeover Act at a very late stage and is one of the most controversial stipulations of the whole Act and may in some cases conflict with the management board’s general corporate duty of care and responsibility to act in the best interests of the shareholders and the company as a whole. The defensive measures the management board can take, provided that approval by the supervisory board is granted, include the following:

• Increase of capital;
• Repurchase or shares (up to a maximum of 10% of the share capital);
• Sale of important assets (only under exceptional circumstances);
• Agreements with workers’ council (restricting, e.g. termination of employees for a certain period of time).

The authorisation of a general meeting regarding defensive measures may be granted by way of a preventive shareholders’ resolution on an ad-hoc shareholders’ meeting. An authorization based on a preventive shareholders’ resolution can be granted for a maximum period of 18 months only and, thus, in practice must be renewed annually.

As soon as the bidder has decided to make a takeover offer, he has to notify the board of management of the stock exchanges where shares and derivatives of shares of the target are traded, and the BAWe of his decision and publish his intention to make a takeover offer without undue delay. With regard to mandatory offers, the announcement of the intention to make the bid is replaced by the achievement of control.

Following the publication of the announcement of his intention to make a bid, the bidder must provide the board of management of the stock exchanges and the BAWe with a copy thereof. Furthermore, the bidder must also communicate his decision to make an offer to the management board of the target, which, in turn, must inform the workers’ council or, if none exists, the employees directly.

The bidder must draw up and publish a German-language offer document which must contain all (correct and complete) information necessary for the target shareholders to make an informed decision about the takeover offer or a mandatory offer, i.e. information about the bidder, the target, the shares for which the offer is made, the type and amount of the consideration for the target shares, the conditions which the offer is subject to and detailed information about the carrying out of the takeover process. In the event shares are offered as consideration, information about the shares so offered and their issuance, as would be required to be made under the German Sales Prospectus Act (Wertpapier-Verkaufsprospektgesetz) in case of a public offer of such shares in Germany, would have to be given.

The offer document has to be filed with the BAWe within four weeks after the publication of the intention to make a bid (or assumption of control). The BAWe has ten working days upon receipt of the offer document to review it. The BAWe may prohibit the launch or carrying out of a takeover offer in the event that the bidder does not comply with his statutory obligations. In this event, a bidder is barred from issuing a further takeover offer for the same target for a period of one year.

The management board and the supervisory board of the target company must, after publication of the offer, issue a recent statement of any takeover offer document thereby making statements, in particular, about the type and amount of consideration offered by the bidder and the consequences in the event the offer is accepted. The acceptance period for the shareholders may not be less than four weeks and must not exceed ten weeks (each period beginning from the publication of the offer document). Target shareholders who have not accepted the takeover offer may still do so within a period of two weeks following the publication of the results of the offer. In the event of competing offers, the acceptance period for the first offer expires on the same date as the acceptance period for the competing offer. Prior to such date, shareholders of the target company who had previously accepted the first offer can withdraw their acceptance if the offer was accepted prior to publication of the competing offer document.

Contrary to the legal regime under the former Takeover Code, the BAWe has the competence not only to supervise public tender offers but also to issue orders and to impose fines on the parties involved. Furthermore, the issuer of an offer document and the persons and entities who have taken responsibility for the offer document (e.g. financial institutions advising the bidder) can be held jointly liable for any damages suffered by the target shareholders who have accepted the offer as result of the offer document in the event such document contained materially incorrect or incomplete information.

Simultaneously to the introduction of the Takeover Act, the German legislator also amended the German Stock Corporation Act (Aktiengesetz) in order to facilitate an exclusion ("squeeze-out") of minority shareholders by a dominating majority shareholder. Such amendment constitutes a further step in the adaptation of the German stock corporation rules towards the standards set by the international capital markets.

The new squeeze-out rules follow in their general structure to a large extent the stipulations already set forth for the integration of one German stock corporation into another (German) stock corporation (Eingliederung), but substantially extend the exclusion rights of a majority shareholder. Previously, only a German stock corporation with a stake of at least 95 % of the share capital could exclude the other minority shareholders under the restrictive rules of an integration, i.e., by assuming unrestricted liability for any obligation arising after the integration becomes effective. Under the new squeeze-out rules each shareholder representing 95% of the share capital of the target company (including also any foreign company, German limited liability companies or partnerships as well as natural persons) may provide for a shareholders' resolution in the general meeting by which an exclusion of the other minority shareholders is resolved. Such exclusion may be resolved irrespective of the fact whether the company affected is listed on the (German) stock exchange or not.

The exclusion of the minority shareholders becomes effective upon registration of the respective resolution with the commercial register. Upon such registration the dominating shareholder acquires all of the minority shareholders´ shares for which he has to pay an adequate compensation. The dominating shareholder is entitled to fix the adequate compensation for the excluded shareholders, which compensation must be secured, even before the calling of the general meeting, by submittance of a bank guarantee to the board of the target company.

The adequacy of the compensation offered shall be examined by an expert (in most cases auditors) which is appointed by the court upon application of the dominating shareholder. The compensation shall be based on the full value of the shares affected which will be determined by a valuation of the target company as a going concern as of the point of time when the shareholders´ resolution is made. As a general rule, the stock market price of shares of the target company constitutes the minimum compensation payable. Although the new rules do not contain any specific stipulations thereto, the stock market price will, according to existing legal precedents of the Federal Supreme Court, be calculated on the average price during the last three months before the decisive general meeting.

Furthermore, each minority shareholder may also apply for the examination of the adequacy of the offered compensation by a court (Spruchverfahren). However, minority shareholders have no possibility to challenge the validity of the respective shareholders' resolution with the argument that the compensation was not adequate. Thus, the squeeze-out rules will contribute to a restructuring of those German stock corporations in which an effective and cost-saving corporate governance by the majority shareholder is impeded by a comparatively small group of minority shareholders.