Securities Trading Act
The German capital markets are regulated by a set of federal statutes, including the Securities Exchange Act ( Börsengesetz), the Securities Trading Act, the Sales Prospectus Act ( Verkaufsprospektgesetz) and the Investment Act ( Investmentgesetz), regulations promulgated under such statutes, regulations by BaFin, and rules of each of the eight German securities exchanges. Of the aforementioned statutes, the Securities Trading Act provides the regulatory framework of the capital markets that most affect the acquisition of publicly traded companies, including disclosure obligations, insider trading and disclosure liability.
Share Ownership Disclosure. Under the Securities Trading Act, the beneficial owner of shares in a German publicly traded company must notify the target company and BaFin every time the shares it beneficially owns reach, exceed or fall below the 5%, 10%, 25%, 50% or 75% threshold. The target company discloses such notifications in specific publications and BaFin makes such information available on its website. While the threshold is typically triggered through acquisition or disposition of shares, it can also be triggered (and consequently impose a disclosure obligation on shareholders) in the event of a change in the share capital of the company ( e.g., a capital increase). For purposes of determining beneficial ownership under the Securities Trading Act, in addition to the shares directly held by a shareholder, shares of subsidiaries of and certain other parties affiliated to or acting in concert with such shareholder are imputed to such shareholder.
The foregoing disclosure obligations of shareholders in German publicly traded companies is independent of the disclosure obligations such shareholders have when reaching the "control" threshold of 30% under the Takeover Act. While the former only indirectly affects any plans to acquire a publicly traded company in Germany, the later directly affects the timing and structure of the transaction. See also "Mandatory Offer—Control."
Ad Hoc Information Statements. Pursuant to the Securities Trading Act, every German publicly traded company must immediately publish any new non-public information that has an effect on the assets, financial position or general business condition of the company and, if published, is likely to have a material impact on the market price of its publicly traded securities. It is commonly accepted that an impact of 5% or more change in market price constitutes a material one. Failure to comply may result in a fine of up to €1.5 million.
Insider Trading. Under the Securities Trading Act, an insider is prohibited from using insider information in connection with insider transactions ( i.e., trading, directly or indirectly, on the relevant securities, advising others in connection with same or disclosing insider information to third parties). Insider information is any non-public information regarding the issuer or the relevant securities that, if made public, is likely to have a material impact on the market price of such issuer’s publicly traded securities. It is commonly accepted that an impact of 5% or more change in market price constitutes a material one.
Since transactions involving the acquisition of publicly traded companies invariably will involve the use of insider information ( e.g., in connection with a due diligence investigation by the potential acquiror), the insider trading rules have a significant impact on the conduct of the acquiror, the target company, their respective management, advisors and affiliates prior to and during such transaction.
Specifically, the insider trading rules prohibit certain trading of insider securities (typically, the securities of the target company) during the period in which insider information is made available to the acquiror, hence frustrating its attempts at gaining control prior to the offer. It also prohibits the unauthorized disclosure of insider information. This will have a potentially limiting effect on the due diligence process.
European Directive on Takeover Bids
On April 21, 2004, the European Union adopted a directive on takeover bids that requires its member states, including Germany, to amend their corporate and securities laws by May 20, 2006 to reflect the principles provided therein. The provisions of the Takeover Act and the Stock Corporation Act that will require amendments as a result of the directive include those relating to minimum consideration, defensive measures and minority shareholder rights.
VOLUNTARY TAKEOVER BID
Pre-Offer Arrangements. In the United States, the acquisition of a publicly traded company typically involves an agreement between the target company and the acquiror pursuant to which the acquiror agrees to issue a tender offer for all of the issued and outstanding shares of capital stock of the target company at an agreed price and subject to agreed terms and conditions, concurrently with an arrangement between the acquiror and major shareholders of the target company pursuant to which the shareholders agree to tender their shares pursuant to the agreed offer and/or to vote in favor of the proposed acquisition at the target’s shareholders’ meeting (should such a meeting be deemed necessary).
In Germany, acquisitions under the Takeover Act, with a few noted exceptions, have thus far not involved a comprehensive agreement between the acquiror and the target company prior to the takeover bid. Furthermore, acquirors have had to be careful about when, if at all, to enter into an agreement with the target’s major shareholders that would bind their actions vis-à-vis the offer or voting at a shareholders’ assembly, because such agreements might result in the attribution of the voting rights of such shareholders to the acquiror, hence resulting in a premature mandatory takeover obligation.
Notwithstanding the foregoing, a comprehensive agreement between the acquiror and the target company may be in the interest of both the acquiror and the target company and its shareholders. The agreement would enable the acquiror to obtain access to confidential information about the target company to which it would otherwise have none, by providing the terms and conditions pursuant to which a due diligence is conducted. The acquiror would also obtain greater comfort through certain representations and warranties, and obtain the cooperation of the target’s management in connection with certain pre-closing matters (including anti-trust/merger control filings) through certain covenants. It may also provide for a break-up fee in the event the transaction is not consummated, for instance, because of a competing offer. It is unclear, however, to what extent break-up fees are enforceable in Germany.
The agreement would enable the target company to negotiate the best possible price and conditions to the offer for its shareholders, and provide greater certainty as to the future of the target company and its other constituencies.
The agreement would also enable both parties to obtain a standstill arrangement vis-à-vis the other. The acquiror would agree not to purchase any shares of the target outside of the agreed tender offer, hence reducing the likelihood of a hostile takeover during or after the due diligence phase. The target company would agree, subject to the limitations imposed by its duty of care and loyalty, to recommend the proposed offer to its shareholders and not to solicit any competing offers during the term of the agreement. The same duty of care and loyalty principals play a role in determining the appropriateness of any break-up fees provided in the agreement.
Whether the parties enter into a business combination agreement or not, the acquiror in a friendly takeover will wish to open a dialog and achieve the greatest level of cooperation with the target’s management throughout the acquisition period. A successful dialog with any major shareholders of the target company will also have a significant impact on the outcome of the takeover bid. Consequently, it is advisable to pursue both as early as possible following the preliminary review of the target.
Acquiror’s Objectives. The level of ownership and control that an acquiror wishes to achieve are the most important factors to consider in structuring a takeover transaction. While control is deemed achieved under the Takeover Act once the 30% threshold has been reached, acquirors will typically not consider the level of control a 30% or even a 50% ownership offers sufficient.
Aside from the level of ownership that tax and accounting rules require for various consolidation and synergistic purposes, the rights that German corporate laws afford minority shareholders requires acquirors to pursue significantly greater ownership in the target to achieve their objectives. Because a greater than 25% minority can block a number of significant corporate measures ( e.g., removal of members of the supervisory board, amendment to articles of association, capital increases and approval of enterprise agreements), most acquirors are forced to pursue at least a 75% ownership. In addition, it is worth noting that minority shareholders can only be involuntarily removed ( i.e., squeezed out) if at least a 95% ownership has been achieved. See "Post-Acquisition Measures."
While the publication of the decision to make an offer is the single event that leads to and dictates the timing of all other principal events in connection with a voluntary takeover, there are a number of important steps that precede such publication when pursuing the acquisition of a German publicly traded company.
In a typical transaction, the acquiror will conduct a preliminary review of the target company based on the limited information regarding the target company that is publicly available. This includes corporate information filed with the applicable commercial register, shareholder information filed with BaFin, financial information published in the Federal Gazette, as well as annual, semi-annual and continuous disclosure as well as disclosure relating to specific public offerings made available pursuant to applicable securities laws and exchange rules.
After the preliminary review, the acquiror will wish to begin a dialog with the target’s management in order to obtain access to more confidential information and to conduct a due diligence investigation. As indicated in the previous section, the limitations imposed by German corporate and securities laws and the ambiguities surrounding the same have in many circumstances impeded the conduct of a comprehensive due diligence investigation, hence thwarting the successful consummation of the proposed transaction. See "Statutory Framework—Stock Corporation Act—Confidential Information."
Once the transaction structure and its terms and conditions are determined, the decision to issue a tender offer must be published (with a prior submission of the text thereof to BaFin and the securities exchanges on which the relevant securities are listed). The publication must indicate the bidder’s intention to issue a tender offer in the form of a takeover bid. It must identify the target company and the securities that are the subject of the tender offer, and the internet address on which the tender offer documents will be posted.
Once the intention to issue a tender offer has been published, the acquiror has a four-week period during which it must prepare and submit to BaFin a disclosure package containing all of the relevant terms and conditions of the offer. Within ten business days after submission of the disclosure package with BaFin or after satisfactory revision thereof based on comments from BaFin, the acquiror is required to publish the disclosure package on an official stock exchange gazette or make available for free distribution by a distribution agent, and post the same on a dedicated internet web site.
The acceptance period begins with the publication of the disclosure package and may be as short as four weeks or as long as ten weeks. The Takeover Act provides for a number of circumstances ( e.g., amendments to the offer by the acquiror, a competing offer, shareholders’ assembly in response to the acquiror’s tender offer) that will automatically extend the acceptance period. Furthermore, if all of the conditions to a takeover bid have been fulfilled prior to the expiration of the acceptance period, the target’s shareholders will non-the-less have an extended acceptance period of two week following the expiration of the ordinary acceptance period to tender their shares in accordance therewith.
During the acceptance period, the target’s shareholders have the right to express their acceptance of the tender offer and tender their shares through their respective depositary banks. Once the acceptance period has expired, the sale and transfer of the shares so tendered will be consummated by the shareholders’ depositary banks and the acquiror’s exchange agent.
The offeror must publish the results of the tender offer on a weekly basis during the acceptance period, on a daily basis during the last week of the acceptance period and immediately following the expiration of the acceptance period. The offeror is also obligated to publicly disclose the purchase of the securities that are the subject of the tender offer for a period of one year following the publication of the offer documents.
The timeline of a takeover bid with consideration that includes a non-cash component will of course also have to take into account the issuance and listing of the shares to be offered as consideration, including the necessary corporate approvals and admission for listing.
The Takeover Act and the regulations promulgated thereunder prescribe the preparation and dissemination of offer documents, the content of which is sufficiently detailed and complete to enable the shareholders at whom the tender offer is directed to make an informed decision with respect thereto. While the Takeover Act and the regulations promulgated thereunder identify in great detail the necessary information that must be contained in the disclosure package, no specific form is prescribed by law or by BaFin, as compared to its counterpart in the United States ( i.e., Form TO).
Notwithstanding the foregoing, the typical disclosure package involving a voluntary takeover bid consists of the following general sections: (i) restrictions on the offer, (ii) summary, (iii) the offeror, (iv) the target company, (v) securities subject to the offer, (vi) consideration, (vii) conditions to the offer, (viii) acceptance period, (ix) procedures, (x) withdrawal rights, (xi) governing law, (xii) responsibility for the disclosure package and (xiii) signature of offeror.
The disclosure concerning the offeror includes a description of its business, its reasons for the acquisition, its affiliates and related persons involved in the transactions, amount of shares directly and indirectly held by the offeror and the effect of the acquisition on the offeror and its business. The disclosure concerning the target company includes a description of its business and the intentions of the offeror and effect of the acquisition on the target company and its management.
In addition, the offeror is required to disclose in the disclosure package how it intends to finance the proposed acquisition and provide as an exhibit thereto a confirmation by an independent financial service provider as to the adequacy and availability of funds to satisfy the consideration under the offer.
By signing the disclosure package, the offeror (and anyone else assuming responsibility for the disclosure package or any portion thereof) is liable for any material misrepresentations or omissions therein. Only those shareholders to whom the offer is directed who have accepted the offer and who have suffered a loss resulting from the alleged material misrepresentations or omissions have the right to sue.
To the extent the transaction involves a consideration in the form of newly issued shares of capital stock of the acquiring company, certain rules and regulations concerning disclosure under the Sales Prospectus Act ( Verkaufsprospektgesetz) also apply.
The offeror is required to deliver the disclosure package, contemporaneously with its publication, to the management board of the target company. Shortly after receiving the disclosure package, the management board and supervisory board of the target company must issue a reasoned opinion regarding the takeover bid much like their counterparts in the United States ( i.e., Form 14D-9).
Like the offeror’s disclosure package, the target’s information statement containing its management’s reasoned opinion must be published in an official stock exchange gazette and posted on an internet web site.
The management board is required to distribute the offeror’s disclosure package to the target company’s works council ( Betriebsrat) or, in case a works council does not exist, directly to its employees. To the extent the works counsel issues a statement regarding the transaction to the target’s management, such statement will have to be included in the target’s information statement.
One of the most fundamental and relatively unique characteristics of the Takeover Act is the set of provisions prescribing the minimum consideration that an offeror must offer in connection with a takeover bid or a mandatory offer. As a general rule, the Takeover Act prescribes a consideration in type and value that is appropriate.
As far as the type of consideration is concerned, the consideration is deemed appropriate if offered in the form of cash (denominated in euros), shares listed on a European organized exchange or a combination of both. However, in a tender offer involving consideration with a non-cash component, if the offeror has, directly or indirectly, acquired shares for a consideration in cash in excess of 5% of the target’s total share capital during the three-month period immediately preceding the publication of the decision to issue a tender offer or in excess of 1% during the acceptance period, then the offeror must offer an alternative consideration in cash.
As far as the value of the consideration is concerned, the offeror must offer a consideration not less in value than the consideration paid by the offeror, directly or indirectly, for shares acquired during the three-month period immediately preceding the publication of the decision to issue a tender offer (including option arrangements), shares purchased outside of the tender offer during the acceptance period, and shares purchased in a private transaction (an off-market transaction) during the one-year period following the expiration of the acceptance period. Furthermore, the consideration offered in a takeover bid or mandatory offer must equal to or exceed the weighted average market price of the respective shares during the three-month period immediately preceding the publication of the decision to issue a tender offer.
Conditions to Offer
The Takeover Act prohibits the issuance of tender offers that are subject to conditions, the satisfaction of which is exclusively in the hands of the offeror and its affiliates. The Takeover Act does not prohibit conditions, however, that are completely or partially outside the control of the offeror. These include governmental approvals ( e.g., anti-trust approvals), certain conduct of the target’s management and the amount of shares tendered pursuant to the offer. In a recent transaction, BaFin has also approved certain force-majeure and market based material adverse change conditions that are common place in U.S. tender offers.
Of course, if the permissible condition is not satisfied solely because of action or inaction by the offeror in bad faith, a court will probably consider the condition satisfied for purposes of the offeror’s obligations under the tender offer.
Furthermore, except in transactions involving consideration in the form of shares the issuance of which is to be approved by the offeror’s shareholders, the Takeover Act prohibits any form of financing condition, even though such condition is in many circumstances outside the control of the offeror. In fact, the existence of sufficient funds or financing to consummate the transaction must clearly be disclosed in the disclosure package and confirmed by an independent financial service provider.
Amendments to Offer
Once the offeror publishes its disclosure package, it may only amend its offer in a very limited number of circumstances, all of which are to the benefit of the shareholders at whom the offer is directed. The offer may be amended no later than one business day prior to the expiration of the acceptance period to (i) increase the consideration offered, (ii) offer an additional form of consideration, (iii) waive a condition to the offer or (iv) reduce the minimum amount of shares required to be tendered in order to consummate the transaction. The amendment must be published in the same manner as the disclosure package relating to the offer.
The Takeover Act prohibits an amendment to the tender offer by which the offeror extends the acceptance period. If the tender offer is amended during the last two weeks of the acceptance period, however, the acceptance period is automatically extended by two additional weeks. The offeror is prohibited, however, from further amending the tender offer during such extension period.
In the event of a competing tender offer, the Takeover Act prescribes the right by the shareholders having accepted the original tender offer to withdraw their acceptance and to consider the competing offer.
In addition, in the event a competing tender offer is issued, the acceptance period of the original tender offer is extended to match that of the competing offer. Each offeror may extend the acceptance period by amending its offer; provided, that the offerors are barred from amending their offers during any extended acceptance period resulting from an amendment during the last two weeks of the acceptance period, hence limiting the extent to which a bidding contest extends the acceptance period.
One of the most controversial and unique features of the Takeover Act is the mandatory offer obligation that it imposes on anyone who, directly or indirectly, reaches the control threshold. In fact, since the adoption of the Takeover Act, many transactions involving the acquisition of significant holdings in a German publicly traded company without the intent to acquire actual control of the company have been thwarted notwithstanding their business merits, because the Takeover Act defines "control" as holding 30% or more of a German publicly traded company’s voting rights. In addition, the 30% threshold has had a significant impact on the structure and timing of transactions that have been consummated, especially those with the original intent to acquire the target over a long period of time.
The negative consequences of the mandatory takeover obligation are further exacerbated by the attribution rules provided thereunder. Under the Takeover Act, not only are the voting rights of a host of a holder’s affiliates attributed to such holder, but also the voting rights of those persons acting in concert with such holder as well as any subsidiaries thereof. Consequently, a holder may find itself in "control" and subject to the mandatory offer obligation without such intent, and in certain circumstances, without being aware of such status.
The attribution rules under the Takeover Act have created a number of unresolved problems, including the potential imposition of a mandatory offer obligation on multiple parties that are related but not necessarily with identical or even compatible interests.
Transactions involving (i) the acquisition of a block of shares in a German publicly traded company, whether in a private transaction or through the exchange, (ii) the subscription of new shares in connection with a capital increase in a German publicly traded company or (iii) the exchange of securities in connection with a business combination, could potentially lead to the acquisition of "control" as it is defined by the Takeover Act and, consequently, impose a mandatory takeover obligation on one or more parties to such transactions.
The Takeover Act provides a number of exceptions to the mandatory takeover rule, however. For example, an offeror in a takeover bid is not required to follow such bid with a mandatory offer once it acquires control through such takeover bid.
In addition, the Takeover Act grants BaFin the authority to exempt parties from the general obligation to issue a mandatory offer either by excluding the attribution of certain shares acquired by a party to such party for purposes of determining control or by granting a exemption despite achieving control because of the nature of the transaction pursuant to which control was achieved.
Shares acquired as part of a trading portfolio of certain financial institutions may, with the permission of BaFin, be excluded from the general attribution rules imposed by the Takeover Act. In addition, BaFin may exempt from the attribution rules transactions involving the transfer of shares between individual members of a family, a change in corporate form or restructuring measures within a corporate group ( Konzern).
Regulations promulgated under the Takeover Act provide circumstances in which BaFin may, subject to a pre-acquisition application, grant an exemption. These circumstances include transfer of shares through inheritance or gift, transfers in connection with a reorganization of the target company, transfers in connection with a security interest, reaching control as a result of a reduction in total number of voting rights (typically in connection with a redemption of outstanding shares), unintentionally reaching the threshold as long as the party seeking such exemption disposes of sufficient shares after such application to fall below such threshold.
In addition, BaFin may grant an exemption if an unrelated third party also holds a significant amount of voting rights that are not attributable to the applicant, the applicant is not likely to exercise more than 50% of the voting rights represented at the target’s shareholders’ assembly when taking into account the voting rights present at the target’s past three shareholders’ assemblies, or the applicant acquired control as a result of acquisition of another company, so long as the shares in the target held by such company have a book value that is less than 20% of the book value of such company’s total assets.
The Takeover Act imposes a series of relatively severe penalties in the event the mandatory offer obligation is not fulfilled. Specifically, the Takeover Act imposes a fine of up to Euro 1 million. In addition, once a mandatory offer is issued, the offeror must pay interest on the consideration required by the Takeover Act equal to 5% per annum above the base interest rate determined by the German Civil Code ( Bürgerliches Gesetzbuch), for the entire period during which the offeror failed to make the offer. Most notably, however, the rights (including voting rights) under shares held directly and indirectly by such person can not be exercised during such period.
While there are relatively few effective defensive measures available to German stock corporations in comparison to their U.S. counterparts, many conditions in Germany act as natural barriers to hostile takeovers that do not necessarily exist elsewhere. The most obvious is the relatively insignificant amount of material information publicly available regarding German publicly traded companies as compared to their U.S. counterparts, making a due diligence investigation (which is only available in a friendly transaction) even more vital to a successful acquisition.
Furthermore, the ambiguity that existed prior to the adoption of the Takeover Act in respect of efforts by the various corporate bodies of a target company to frustrate an unsolicited acquisition has only increased with the adoption of the Takeover Act and its set of rules concerning such activities. Because the few hostile takeover attempts in Germany since the adoption of the Takeover Act have all transformed into friendly ones once the consideration was increased, BaFin and the courts have thus far not had the opportunity to provide greater guidance as to the enforceability of any of the potential defensive measures and the limitations imposed by German corporate and securities laws thereon.
As a general rule, the principals governing the conduct of the various corporate bodies set forth in the Stock Corporation Act have not been altered by the Takeover Act. The powers available to the management board, however, have been slightly curtailed. Specifically, the Takeover Act prohibits the management board of a target company from taking actions that could frustrate a takeover bid during the tender offer period, unless such actions (i) would have been taken by a prudent and diligent management board in the absence of a takeover bid, (ii) involve the search for a competing offer, or (iii) have been approved by the target’s supervisory board. The foregoing exceptions, notably the last one, effectively gut the general prohibition against defensive measures during the tender offer period.
The defensive measures available to a potential target company under the Stock Corporation Act and the Takeover Act can be divided into the following categories principally because of the interplay between the two statutes.
Pre-Acquisition Defensive Measures
While the Stock Corporation Act provides for a number of measures that a company may take prior to any proposed takeover bid to fend off undesired offers, most of these measures have the additional undesired effect of limiting the company’s business and financial activities. Consequently, as a practical matter, they tend to be of limited use. Because of the drastic effect they may have on the success of a takeover bid and the future of the company in the event one is consummated, it is important for potential acquirors to ensure that none of such measures are in place or understand their effect on the proposed transaction if one or more are in place, prior to launching a tender offer.
Preferred Shares. Because the Takeover Act requires takeover bids and mandatory offers to be issued in respect of all of the issued and outstanding share capital of a target company, the issuance of preferred shares with no voting rights may act as a financial deterrent. However, German corporate law prohibits the issuance of preferred shares with multiple voting rights. Such preferred shares act as an even more effective deterrent in jurisdictions where such measures are available.
Severance Arrangements. While German corporate law requires the compensation schemes of the management board to be appropriate in light of the company’s financial condition and the members’ responsibilities, golden parachutes that meet such criteria and silver parachute plans that offer large severance packages to a broader group of employees triggered by a change of control, can act as a significant deterrence against hostile bids.
Change of Control Provisions. Change of control provisions in material agreements to which the target company is a party that alter or terminate the arrangement could have a significant impact on the business condition of the target following a successful takeover bid. While such provisions require an independently justifiable basis for the approval of which not to violate the management’s fiduciary duties, if the agreements and the effect of the provision on the underlying arrangement are of material significance, they can play a deterring factor in hostile takeover bids.
Super-Majority Requirements. Because most of the majority requirements for actions before a shareholders’ assembly can be increased in the company’s articles of association, such increased requirements can play a deterring role in companies that may become the target of a hostile bid. For example, the majority requirements for amending the articles of association or appointing and removing members of the company’s supervisory board may be increased, making it more difficult for a hostile offeror who has acquired only a simple majority of the company’s shares from pursuing some of the post-acquisition measures it would like or need to pursue. As with other defensive measures of this nature, increasing the majority requirements will also have a restricting effect on the conduct of the company’s business and financial activities in the absence of a takeover bid. For a list of resolutions adopted at a shareholders’ assembly and the requisite majority, see Exhibit A hereto.
Supervisory Board Appointment Rights. Under the Stock Corporation Act, the articles of association of a company may grant the holders of specific shares in such company the exclusive right to appoint up to one-third of the members of the supervisory board representing the shareholders ( Entsendungsrecht). Once granted, the removal of such right requires an amendment to the articles of association of the company that is not only approved by the requisite supermajority but also by the holder whose right is to be removed. See also "Statutory Framework— Stock Corporation Act— Corporate Governance."
Blocking Minority. One of the most effective defenses against a hostile takeover is a shareholder with a blocking minority interest. Since many of the more important measures before a shareholders’ assembly require the approval by 75% of the votes represented, the holder(s) of slightly greater than 25% of the shares outstanding (or even less in a company with dispersed shareholding) can effectively discourage a hostile bid. Of course, a bid hostile to the company’s management is not necessarily always one hostile to the holder of a blocking minority.
Unaffiliated companies that hold a blocking minority interest in each other can create a great degree of deterrence against hostile bids for one-another’s shares. Under German corporate law, voting rights in respect of such holdings are limited to 25%, even if a greater interest is actually held by each, and no voting rights may be exercised by such holders in connection with the appointment of supervisory board members.
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