Stock Corporation Act
Securities Trading Act
European Directive on Takeover Bids
Voluntary Takeover Bid
Conditions to Offer
Amendments to Offer
Pre-Acquisition Defensive Measures
Defensive Measures During an Acquisition
Squeeze-Out of Minority Shareholders
De-Listing of Target’s Securities
Corporate Governance Measures
Jones Day Germany
Exhibit A—Certain Resolutions before a Shareholders’ Assembly
The acquisition of publicly traded companies in Germany is principally governed by the recently adopted Securities Acquisition and Corporate Takeover Act ( Wertpapiererwerbs- und Übernahmegesetz ( WpÜG); the "Takeover Act") and the regulations promulgated thereunder. The Takeover Act provides the principal construct under which acquirors may offer to purchase the securities of a German publicly traded company. It regulates the conduct of the acquiror prior to, during and after a tender offer. It also provides for the rights of shareholders in connection with tender offers and the duties of the target company and its management during the acquisition period.
In addition to the Takeover Act, the more traditional German corporate and securities laws also regulate the rights and obligations of acquirors, shareholders, target companies and their management in connection with the acquisition of publicly traded companies. Of those, the Stock Corporation Act ( Aktiengesetz ( AktG)) and the Securities Trading Act ( Wertpapierhandelsgesetz ( WpHG)), are the two most important statutes.
Because in many circumstances the issues facing acquirors of German publicly traded companies prior to, during and after the acquisition differ from those under other legal regimes, it is important that non- German acquirors be familiar with such issues and the various solutions that are available under German law. In most circumstances, the issues and the ultimate solutions have a direct or indirect impact on the value of the target company to the acquiror and, consequently, the price it is willing to offer for its securities.
This article will, therefore, outline the legal framework pursuant to which German publicly traded companies are acquired, both in the context of voluntary takeover bids as well as mandatory offers. It will also summarize certain defensive measures available to target companies and their management in connection with hostile takeover bids and identify certain legal issues facing acquirors following the acquisition of publicly traded companies.
The Takeover Act and the regulations promulgated thereunder provide the principal guidelines for acquiring German publicly traded companies. The objective of the Takeover Act was to provide for a fair and orderly process pursuant to which acquirors can offer to purchase the securities of publicly traded companies in Germany. Prior to its adoption, the acquisition of publicly traded companies in Germany was regulated only by a voluntary takeover code that was not consistently followed, especially in transactions involving foreign acquirors. Despite its shortcomings, the Takeover Act has significantly improved the legal and market conditions concerning the acquisition of publicly traded companies in Germany by increasing certainty as to the legal obligations of the parties in such a transaction and the ultimate outcome thereof. The cornerstones of the recently adopted law include the requirement to treat the target company’s shareholders equally, access to greater information about the transaction and the acquiror, greater security concerning the financing of the offer, and the obligation to launch a tender offer for all of the outstanding shares of a publicly traded company once an acquiror is deemed to own 30% or more of the voting shares of such company.
By expanding the disclosure obligations of the offeror and the target company beyond the minimalist approach of the voluntary takeover code and by outlining a more definitive set of procedures for conducting a tender offer both in the context of a friendly as well as a hostile takeover, the Takeover Act follows patterns very similar to those set out in Sections 13 and 14(d) of the U.S. Securities Trading Act of 1934 and Regulations 13D-G and 14D promulgated thereunder. However, there are also fundamental differences between the requirements of the Takeover Act and those of its counter- parts in other jurisdictions, the most notable of which is the mandatory offer requirement.
Since its effectiveness on January 1, 2002, over 100 tender offers have been launched pursuant to the Takeover Act, providing participants in such transactions, including acquirors, targets, selling shareholders, and the regulatory authorities greater certainty and guidance in future transactions.
Application. The Takeover Act applies to all public tender offers by natural or legal persons for the purchase of securities of a target company listed on an organized stock market in the Federal Republic of Germany ( amtlicher Markt and geregelter Markt) or in the European Economic Area ( i.e., the Member States of the European Union as well as Norway, Iceland and Liechtenstein). Securities, for purposes of the Takeover Act, are limited to shares of capital stock of stock corporations ( Aktiengesellschaft or AG) and stock issuing limited partnerships ( Kommanditgesellschaft auf Aktien or KGaA) domiciled in the Federal Republic of Germany, and securities convertible or exchangeable into such shares.
Equal Treatment. All shareholders of a target company must be treated equally in connection with tender offers under the Takeover Act, and must be provided with sufficient time and information to make an informed decision in respect thereof. The management board ( Vorstand) and supervisory board ( Aufsichtsrat) of the target company are required to act in accordance with the interest of the target company.
Governmental Authority. The German Federal Financial Supervisory Authority ( Bundesanstalt für Finanzdienstleistungsaufsicht or BaFin) is the principal governmental authority responsible for promulgating regulation thereunder, and reviewing and approving tender offers and related disclosure documents. The Takeover Act prescribes the establishment by BaFin of a Takeover Advisory Commission ( Beirat) designed to assist BaFin in the promulgation of regulations thereunder.
Public Offers. The Takeover Act governs all public offers for the purchase of securities ( i.e., tender offers). Specifically, the Takeover Act governs offers to purchase securities independent of control, offers to purchase securities in an attempt to gain control of the target company ( i.e., takeover bids), as well as offers required by the Takeover Act of anyone who directly or indirectly obtains control of the target company for the remaining shares of capital stock of the target company ( i.e., a mandatory offer).
Beneficial Ownership. In determining beneficial ownership, securities held by subsidiaries of a security holder, securities held by third parties on behalf of such holder, securities transferred by third parties as guaranty (unless the third party is entitled to use the voting rights independently from the holder and intends to do so), securities held by third parties encumbered with a usufructuary right in favor of such holder, securities that such holder can acquire by declaration of intent, and securities that such holder holds in trust and of which he may make use at its sole discretion unless otherwise advised, will be imputed to such holder. Securities held by subsidiaries of such holder or third parties with which such holder has entered into a voting agreement or otherwise acts in concert in such ways as described in the foregoing sentence are also imputed to such holder.
In determining whether a security holder is the beneficial owner of at least 30% of the voting rights of a target company, BaFin is obliged, upon written request by such holder, to ignore that portion of voting rights that are attributable to securities held by such holder if such holder obtained the securities by inheritance, gift from a spouse, co-habitant, direct descendant or ancestor up to the third grade or by divorce or separation from a partner, change in legal form or corporate restructuring. In addition, BaFin may, upon written request by such holder, ignore that portion of voting rights that are attributable to securities held by such holder in its own discretion or otherwise release such holder from the mandatory offer obligation, in certain constellations stipulated in (but not limited to) a catalogue pursuant to the regulations promulgated under the Takeover Act.
Consideration. In a takeover bid or mandatory offer issued pursuant to the Takeover Act, the offeror may offer consideration in the form of cash, securities listed on an organized markets or a combination thereof. However, the offeror is required to offer the target company’s remaining shareholders a cash consideration if the offeror has purchased for cash consideration (i) at least 5% of the target company’s outstanding shares or voting securities within three months preceding the publication of the intent to issue a tender offer, or (ii) at least 1% of the target company’s outstanding shares or voting securities for cash consideration between the date of publication of the intent to issue a tender offer and the end of the acceptance period of such tender offer.
Under the Takeover Act, the amount of the consideration for each class of shares must be "adequate" ( angemessen). In determining the adequacy of a proposed consideration, the weighted average share price of the target company‘s capital stock during the three-month period immediately preceding the publication of the tender offer and the direct and indirect purchase of such shares by the offeror prior to, during and after the tender offer are material factors the Takeover Act prescribes.
In the event the offeror or one of its affiliates acquires in a transaction outside the stock exchange, following the commencement of the tender offer, securities that are the subject of the tender offer at a price higher in value than the consideration provided in the tender offer, the amount of the consideration to all shareholders who have accepted the offer prior to such purchase will automatically increase accordingly. This rule applies for a period of one year following the expiration of the acceptance period.
Procedures and Disclosure Obligations. The offeror must publish in German in a nationwide authorized journal for the publication of stock exchange announcements or in an authorized electronic information system without delay its decision to issue a tender offer. The publication requirement exists regardless of whether the offer needs prior approval of its shareholders for such transaction. The minimum information required in such publication includes the securities that are the subject of the tender offer and the intention to purchase such securities. Information regarding the amount and form of consideration offered for the securities of the target company is not required at such time. In addition, the offeror must inform BaFin, the target company and the regional exchanges on which the target’s shares are listed its decision to issue a tender offer.
Within four weeks following the publication of the decision to make a tender offer, the offeror must file with BaFin a disclosure package containing the complete and accurate set of information necessary to enable the shareholders at whom the tender offer is directed to make an informed decision with respect thereto. No later than ten business days following the filing of the disclosure package with BaFin (in the absence of any comments from BaFin as to its compliance with applicable laws and regulations) or upon revision of the disclosure package to reflect comments from BaFin as to its compliance with applicable laws and regulations, the offeror is required to publish the disclosure package.
Subsequently, the offeror is required to deliver the disclosure package to the management board of the target company. The management board of the target company must then distribute the disclosure package to the target company’s works council ( Betriebsrat) or, in case a works council does not exist, directly to its employees.
In addition, at equal intervals during and upon expiration of the acceptance period, the offeror is required to publish the number of shares tendered pursuant to the tender offer.
Duties of Target’s Management. As soon as possible following the delivery of offeror’s disclosure package, the management board of the target company is required to publish an information statement containing the management board’s reasoned opinion in respect of the offer. Specifically, the target company’s information statement must state (i) the management board’s opinion as to the appropriateness and adequacy of the consideration offered, (ii) how the target company and the employees and their employment conditions will be affected by the tender offer, (iii) the management board’s opinion as to the offeror’s intention in connection with the tender offer, and (iv) whether the members of the management board intend to accept the offer, to the extent such members are holders of any securities of the target company that are the subject of the offer.
The Takeover Act reiterates the management board’s duty to the target company’s shareholders to preserve and to protect their interests in connection with the tender offer. Specifically, the Takeover Act forbids the management board from interfering with the success of the tender offer during the period from receipt of the disclosure document from the offeror until the results of the tender offer have been made public.
The foregoing limitations on the conduct of the management board, however, neither apply to any measures that the supervisory board of the target company has approved, n o r d o t h e y a p p l y t o a ny me a s u re s re l a t i n g t o t h e ongoing operation of business to the extent such measures are deemed materially necessary to the conduct of such business and are independent of the tender offer. In addition, the management board is permitted to seek and pursue competing tender offers ( e.g., white knights).
In addition, the shareholder’s meeting may in advance of any tender offer authorize the management board to take certain defensive measures and interfere with the success of a tender offer to the extent such authorization is sufficiently substantiated. The authorizing resolution requires a 75%-majority of the company’s capital stock represented at such shareholders’ meeting, and expires after 18 months. Very few companies have thus far made use of such measure, principally due to the potentially adverse effect it may have on the company’s share price.
The management board may, prior to the expiration of the acceptance period and subject to a two-week term, call a meeting of the target company’s shareholders to decide whether to approve the tender offer.
Competing Offer. In the event a competing offer is issued for the same securities, the acceptance period for the original offer is automatically extended until the expiration of the acceptance period of the competing offer. Shareholders who have accepted the original offer prior to the publication of the competing offer may withdraw their acceptance up to the expiration of the acceptance period. Persons whose securities have been imputed to the offeror for purposes of determining beneficial ownership of such securities may not issue competing offers for the same securities.
Stock Corporation Act
The Stock Corporation Act governs the capital structure and corporate governance of a stock corporation, the most common form of publicly traded companies in Germany. It regulates the duties of the stock corporation’s management and the rights of its shareholders. As a result of recent amendments to the Stock Corporation Act, it also provides for the first time in Germany for the regulation of squeeze out of minority shareholders in specific circumstances.
Capital Structure. The share capital ( Grundkapital) of a stock corporation is denominated in par value shares ( Nennbetragsaktien) or individual stock without par value ( Stückaktien). In either case, the share capital of a stock corporation must have a total nominal value of at least €50,000, which amount is stated in the stock corporation’s articles of association ( Satzung) and commercial register excerpt ( Handelsregisterauszug). The amount contributed by a subscriber of shares in a stock corporation may not be less than the nominal value of the such shares.
Shares in a stock corporation may be certificated in the form of bearer shares or registered shares. In addition, shares can be issued in multiple classes. The most common class of equity securities in a stock corporation is ordinary shares ( Stammaktien). Holders of ordinary shares in a stock corporation have the right to participate in and vote at its shareholders’ assembly, receive dividends and other profit distributions and exercise their subscription rights ( Bezugsrechte) during a capital increase (unless such rights are validly restricted ( See "– Subscription Rights")).
In addition to ordinary shares, a stock corporation may issue a host of preferred shares ( Vorzugsaktien) that typically grant the holders thereof priority over the holders of ordinary shares to the stock corporation’s dividends and other distributions. The most common form of preferred shares are those without voting rights ( stimmrechtslose Vorzugsaktien). The holders of such preferred shares form a class separate from the holders of ordinary shares and may only vote at a shareholders’ assembly in specific circumstances, typically involving their rights as a class. Such holders, however, can continue to attend shareholders’ assemblies, ask questions and legally challenge the validity of any resolutions adopted thereat.
Since 1998, however, stock corporations may not issue shares with limited or multiple voting rights. As a consequence of the corporate reforms that abolished such securities, German stock corporations are at a disadvantage to their other European counterparts that can issue shares with multiple voting rights, especially during hostile takeovers where such shares can act as an effective form of defensive measure.
Capital Increases. Following the incorporation of a stock corporation, the Stock Corporation Act provides for three forms of capital increases: the ordinary capital increase ( ordentliche Kapitalerhöhung), authorized capital ( genehmigtes Kapital) and contingent capital ( bedingtes Kapital). Shares may be issued in exchange for contributions in cash, contributions in kind or a combination of both.
An ordinary capital increase involves the adoption of a resolution authorizing such action at the shareholders’ assembly, usually with the approval of 75% of the shares represented at the assembly. Once authorized, the management board may offer the newly issued shares to subscribers, keeping in mind the pre-existing right of existing shareholders of the company to subscribe for the number of shares necessary for each to avoid nominal dilution of its equity stake in the company. The transaction may involve underwriters who act as intermediaries between the issuer and the ultimate subscribers of the new shares. Once the shares have been subscribed and at least one-quarter of their nominal value is paid to the issuer, the capital increase may be registered with the commercial register, at which point the new shares are deemed issued and the capital increased deemed effective.
Because an ordinary capital increase involves the time consuming process of calling and holding a shareholders’ assembly concurrently with the capital increase, the management can obtain the prior approval of the shareholders’ assembly for a capital increase in the form of authorized capital in order to be able to react to optimal market conditions more quickly. The resolution adopted at the shareholders’ assembly would authorize the management board to issue new shares representing no more than 50% of the stock corporation’s existing share capital within 5 years of such resolution. The management board will of course need the approval of the supervisory board for such issuance. The resolutions concerning the authorized capital may, subject to certain limitations, restrict the subscription rights of existing shareholders in connection with such authorized capital or expressly delegate such authority to the management board. See also "– Subscription Rights."
In addition to authorized capital, the shareholders’ assembly may approve the issuance of contingent capital. Unlike authorized capital, however, contingent capital may only be used in connection with a business combination, convertible bonds and employee benefit plans. Because the subscribers of newly issued shares under contingent capital (except for convertible bonds) are of a specific group, the requirements concerning restriction of subscription rights do not apply.
The foregoing regime concerning capital increases is of particular importance to acquirors in share-for-share transactions, since a capital increase involving a contribution in kind is the method by which such transaction is typically effected. It is also important to target companies since capital increases and restriction of subscription rights are two of the more common forms of defensive measures available in potential hostile takeovers in Germany. See also "Defensive Measures."
Subscription Rights. Unlike U.S. corporate law, German corporate law grants the holders of shares in a stock corporation certain subscription rights, the restriction of which is limited by scope and circumstances and strictly regulated. Consequently, shareholders in a German stock corporation have the right, unless validly restricted, to subscribe for new shares on a pro rata basis, in order to avoid nominal dilution ( i.e., dilution of percentage of shares and voting rights held in the company). Restricting subscription rights requires the approval of a resolution at the shareholders’ assembly by at least 75% of the shares present thereat. In addition, according to case law, the restriction of subscription rights must be proportionate and objectively justifiable. In other words, the interests of the company in so doing must outweigh the interest of the shareholders whose subscription rights are restricted. In addition, the restriction of subscription rights may not result in effective dilution ( i.e., result in an allocation of wealth from existing shareholders to new ones ( vermögensmäßige Verwässerung)). Consequently, any capital increase involving restriction of subscription rights must involve the issuance of new shares near fair market value. The Stock Corporation Act provides a safe harbor for issuance of new shares involving restriction of subscription rights that are below 10% of the company’s existing share capital and are priced not significantly below current market value.
Treasury Shares. The Stock Corporation Act prohibits a stock corporation from, directly or indirectly, subscribing for its own shares. A stock corporation may, however, repurchase its own shares under certain limited circumstances, including the authorization of the management board by resolution adopted at a shareholders’ assembly, which resolution must specify the total number of shares that can be repurchased and expires within 18 months after its registration with the commercial register. A stock corporation’s treasury shares must at all times be less than 10% of its existing share capital. Unless the treasury shares are acquired on the stock market, the company must offer every shareholder, on a pro rata basis, equal opportunity to sell shares to the company. BaFin has taken the position that such transactions would fall under the Takeover Act. The purchase of treasury shares may not vio- late capital maintenance rules under German corporate law. In other words, the funds used to purchase treasury shares may not exceed the funds otherwise available as distributable earnings ( i.e., capital surplus plus retained earnings).
Corporate Governance. German stock corporations are governed by three corporate bodies, the scope of authority of each of which is defined by German corporate law: the shareholders’ assembly ( Hauptversammlung), the supervisory board ( Aufsichtsrat) and the management board ( Vorstand). The relationship between the various governing bodies and the limitations imposed on the scope of authority of each is designed to allow shareholders only indirect control over the management of the stock corporation.
The members of the management board, the body solely responsible for the day-to-day management of the stock corporation, are afforded a great deal of independence. They are appointed not by the shareholders of the company but rather by the supervisory board, whose members are in turn appointed at the shareholders’ assembly. Furthermore, neither the shareholders nor the supervisory board may issue instructions to the management board as to the day-to-day management of the stock corporation. In fact, unless the shareholders’ assembly is granted specific authority by law, the management board must act independently. Consequently, unless the stock corporation is a party to a domination agreement, the management board must resist any instructions or recommendations from any individual shareholder, even if such shareholder has a controlling interest in the company. See also "– Corporate Group" and "Post-Acquisition Measures – Enterprise Agreements." These relatively unique principles in German corporate law tend to frustrate the intentions of many foreign acquirors in the context of a takeover who are unfamiliar with such principles.
In exercising its duties in connection with the day-to-day management of the stock corporation, the management board is authorized to represent the company vis-à-vis third parties. While internally the articles of association ( Satzung) and bylaws ( Geschäftsordnungen) of the company may provide that certain decisions of the management require the prior approval of the supervisory board, the failure to obtain such approval generally does not impact the relationship towards the outside world.
German corporate law imposes on the management board a duty of care and a duty of loyalty towards the stock corporation. These duties requires the management board to act in accordance with the articles of association of the company and in the interest of the shareholders as a class. While they prohibit the abuse of power or self-dealings contrary to the interest of the company, the management board is afforded the benefit of the doubt in the exercise of its business judgement. The duty of care and duty of loyalty, however, are not to any individual shareholder, and in the event a conflict exists between the interests of a shareholder and that of the stock corporation, the management board’s duties are clearly to the stock corporation.
The members of the management board are appointed by a simple majority of the supervisory board for a term not to exceed five years. During such term, a member’s service on the management board may only be terminated by the supervisory board for cause. The shareholders’ assembly may not terminate the service of a member of the management board, but may, with a simple majority, issue a vote of no confidence, which may serve as cause on the basis of which the supervisory board may, but need not, terminate such service. The termination of such service does not impact the contractual/employment relationship between the member of the management board and the stock corporation.
The supervisory board in a German stock corporation acts much the same as independent directors of a U.S. corporation. Members of the management board may not serve simultaneously on the supervisory board. The management board is required to report to the supervisory board. The supervisory board is responsible for the supervision of the management board’s activities, and may require the prior approval thereof for certain actions taken by the management board. Through this laundry list of "material activities" requiring supervisory board approval, the supervisory board can exercise certain high-level influence on the management of the stock corporation.
German labor and corporate laws grant the employees of larger stock corporations certain co-determination rights, including in the form of membership on the supervisory board. The members of the supervisory board representing the shareholders are appointed by a simple majority of the shareholders at the assembly for a term of up to five years. However, the articles of association can grant the right to appointment up to one-third of the supervisory board to a single shareholder ( Entsendungsrecht). A member’s service may be terminated by a 75% majority (or lower majority provided in the articles of association) at the shareholders’ assembly with or without cause.
The shareholders of a stock corporation may only act through resolutions adopted at a meeting thereof. The shareholders can of course act through a proxy. The exercise of voting rights at a shareholders’ assembly are barred as to treasury shares, cross shareholdings between stock corporations in excess of 25% and shares held by holders in violation of certain provisions of the Securities Trading Act and the Takeover Act.
The Stock Corporation Act provides strict guidelines for the preparation of a shareholders’ assembly, including the publication of invitation and agenda and disclosure to shareholders. Exhibit A hereto provides a list of certain matters in respect of which shareholders may vote at the assembly and the majority requirement in respect of each.
Many resolutions adopted at the shareholders’ assembly are only effective upon registration with the relevant commercial register ( Handelsregister). While in a small number of instances, a serious violation of the law or of the articles of association renders a resolution null and void, in most instances, a resolution is valid unless successfully challenged through an action to set aside the resolution ( Anfechtungsklage) filed with the district court ( Landgericht) in the district where the stock corporation has its registered office ( Gesellschaftssitz). Such an action may be brought by a shareholder at the assembly who objected to the resolutions in the meetings minutes, one who did not attend as a result of a failure to comply with the procedures for calling a shareholders’ assembly, the management board, or (in specific instances) a member thereof or of the supervisory board.
The action to set aside a resolution must be filed against the stock corporation within a month of such resolutions adoption, specifying the grounds for such challenge. A shareholder bringing such an action need not demonstrate a personal detriment resulting from the resolution being challenged.
Germany has recently adopted a voluntary corporate governance code ( Corporate-Governance-Kodex) that most publicly traded companies have at least partially adopted. The Stock Corporation Act requires publicly traded companies to issue a public statement as to their compliance with the code.
Confidential Information. Conducting a due diligence investigation is one of the initial and unavoidable steps toward consummating a merger or acquisition. The same would apply to the acquisition of a publicly traded corporation. Due diligence investigations invariably will involve access to and the review of confidential information. This is even more the case in respect of German publicly traded companies than their U.S. counterparts due to the relatively limited amount of information regarding German publicly traded companies that German securities laws require to be made publicly available. Notwithstanding the foregoing, however, German corporate and securities laws impose limitations on the disclosure of confidential information to third parties that can have adverse effect on the extent to which an acquiror can conduct a due diligence investigation and the structure of the proposed transaction.
In addition to the restrictions imposed on the dissemination and use of confidential information of a publicly traded company by the Securities Trading Act ( See "– Securities Trading Act— Insider Trading"), the Stock Corporation Act imposes its own set of restrictions on the extent and means by which a stock corporation’s management board and supervisory board may disclose confidential information (which for purposes hereof include confidential data ( vertrauliche Angaben) as well as secrets ( Geheimnisse)) to third parties.
As a general rule, the members of the management board and supervisory board of a stock corporation are required to keep confidential and not disclose to third parties confidential information in respect of the stock corporation. A breach of this fiduciary duty is grounds for immediate termination of such board member, would subject such board member to personal liability and may constitute a criminal offense. The members of the management board and supervisory board are permitted to disclose confidential information in respect of the stock corporation if and to the extent such disclosure is in the interest of the company. Whether a disclosure of confidential information is in the interest of the company is determined objectively on a case-by-case basis, but the members of the boards enjoy a degree discretion comparable to the U.S. business judgment rule.
For purposes of the foregoing rule, shareholders of a stock corporation are deemed to be third parties. Consequently, the same rule applies to the disclosure of confidential information to shareholders unless disclosure is to all shareholders in connection with a shareholder’s assembly. Disclosure of confidential information to individual shareholders not only results in liability to those violating the rule but also imposes the obligation on the management board to disclose the same to all shareholders in a shareholders’ assembly.
Obviously, allowing a due diligence investigation of one’s company would require providing third parties access to confidential information. In fact, the sufficiently thorough due diligence investigation invariably involves the review of comprehensive confidential information about the target company. While the general rule, requiring the target company’s boards to balance the benefits of such disclosure against its detrimental effect, applies in determining whether and to what extent to disclose confidential information in a transaction, ambiguity in the law and disagreement among scholars have in many circumstances had significantly detrimental effect on pursuit of such transaction. A prudent member of the management board or supervisory board will have to apply the balancing test in determining the scope of information to be disclosed, the timing of such disclosure, the number of participants with access to such information and the use of such information.
If the potential acquiror is also a shareholder in the target company, the analysis becomes even more acute. While it can probably be successfully argued that the confidential information made available in connection with a due diligence investigation was made available to the potential acquiror in its capacity as such and not as a shareholder, such disclosure can become the basis for an action to set aside certain resolutions adopted at a shareholders’ assembly following the consummation of a takeover bid in which minority shareholders still exist. While it s likely that such actions will not prevail, they are more than a mere nuisance that could be avoided if the potential acquiror refrains from purchasing shares in the target company prior to the due diligence investigation.
A guaranteed precursor to any due diligence investigation involving confidential information will be a confidentiality agreement between the potential acquiror and the target company that binds the potential acquiror and its employees, management and advisors to secrecy, and sets forth the parameters by which confidential information is disclosed. It is likely that confidential information is only disclosed bitby- bit as the transaction progresses to ensure the disclosure of the most sensitive information at a time closest to the launching of a tender offer when the conditions to closing are the least. The agreement between the potential acquiror and the target company may contain standstill provisions that prohibit the purchase by the potential acquiror of shares in the target company without the consent of its management board to reduce the likelihood of a hostile takeover bid by one with access to confidential information.
Corporate Group. German corporate law regulates the conflict between the interest of a majority shareholder and that of the stock corporation and its minority shareholders through a body of law governing corporate groups ( Konzernrecht). This body of law permits a majority shareholder to exercise an amount of influence over the stock corporation and its finances not otherwise permitted by the Stock Corporation Act by entering into an enterprise agreement ( Unternehmensvertrag).
A domination agreement ( Beherrschungsvertrag) is a form of enterprise agreement that grants the majority shareholder the authority to issue certain instructions to the stock corporation’s management. A profit sharing agreement ( Gew innabführungsvertrag) is a form of enterprise agreement that permits the majority shareholder to receive all or a portion of the stock corporation’s profits. Often, enterprise agreements constitute a combination of both.
In exchange for the control that enterprise agreements provide a majority shareholder, the stock corporation and its minority shareholders are afforded certain rights in the form of guaranteed profits or profit sharing compensation as well as the right to sell their shares in the stock corporation to the majority shareholder for an exit consideration, the adequacy of all of which is determined by a court-appointed auditor. In addition, the majority shareholder must compensate the stock corporation for any net losses incurred each fiscal year during the term of the enterprise agreement in excess of its retained earnings.
The foregoing regime and the costs associated therewith are of particular importance to a potential acquiror of a publicly traded company that intends to take advantage of synergies and other financial benefits resulting from such acquisition through post-acquisition corporate measures. See also "Post- Acquisition Measures—Enterprise Agreements."
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