The German Risk Limitation Act: A New Means of Increasing Investor Transparency
Corporate & Finance Alert
November 25, 2008
On August 19, 2008, Germany took a substantial step in dealing with the ever more volatile financial markets. After long lasting and heated debate, the German legislature passed what is commonly referred to as the Risk Limitation Act (Riskobegrenzungsgesetz).1 The Risk Limitation Act (“Act”) substantially alters the disclosure requirements imposed upon investors in German corporations.
Acting in Concert
The most significant feature of the Act is the expansion of the “acting in concert” provisions of the Securities Trading Act (Wertpapierhandelsgesetz, “WpHG”) and the Securities Acquisition and Takeover Act (Wertpapiererwerbs- und Übernahmegesetz, “WpÜG”). In general, Section 22, paragraph 2, WpHG requires (for purposes of determining whether one of the notification thresholds of Section 21 WpHG is met) voting rights of a third-party investor to be attributed to a shareholder if the shareholder and the third-party investor coordinated their conduct. Similarly, Section 30, paragraph 2, WpÜG aggregates shareholder voting rights based on coordinated conduct to determine, among other things, whether the voting rights exceed the aggregate threshold of thirty percent (30%), in which case a mandatory public takeover offer must be made to all shareholders. Pursuant to previous case law of the German Federal High Court (Bundesgerichtshof), only investors who coordinated their voting at a general meeting of German stock corporations were found to be “acting in concert.” The revised provisions implemented through the Act eliminate this very narrow application and provide for the inclusion of coordinated conduct outside the general meeting. In particular, the new provisions view any coordinated behavior as “acting in concert” if the shareholders act with parallel interests and intend to change the company’s strategic direction in a permanent and substantial manner (e.g., the fundamental change of the company’s business model or the sale of an important business division).
Duty to Inform and Notify
Prior to the implementation of the Act, in determining whether a notification threshold was met, voting rights from shares directly held or attributed and voting rights of other financial instruments were not aggregated. The Act eliminates the segregation of share voting rights from those voting rights deriving from other financial instruments.
Additionally, influenced by French and U.S. examples, the new Section 27a WpHG forces shareholders with substantial interests to disclose additional information about their motives and the source of funds used to acquire such interests, considerably enhancing shareholder transparency for issuers and other market participants. These additional disclosure obligations take effect when a shareholder reaches or surpasses a ten percent (10%) interest in a German listed stock corporation. Such shareholders will be required to disclose their intentions with respect to the shares and the origin of the funds within twenty (20) trading days unless the company’s articles of association waive such obligation. Moreover, after the submission of its initial filing, the Act imposes a continuing obligation on the investor to update disclosed information in the event its originally stated objectives change.
Suspension of Shareholder Rights
Before the enactment of the Act, noncompliance with the notification requirements of Section 21, paragraphs 1 or 1a, WpHG caused a suspension of shareholder rights (specifically, voting and dividend rights) until the breach was cured. A shareholder therefore could comply with the notification requirements immediately prior to a general meeting curing any breach. In contrast, under the newly revised Section 28 WpHG, an intentional or grossly negligent noncompliance with the notification requirements may cause the suspension of voting rights for a period of at least six (6) months following compliance. However, the suspension of shareholder rights will not affect the right to receive dividends.
In Germany, information about registered shares is collected in share registers which store the identities of the bearers and allow for communication between the company and its shareholders. Share registers frequently show only a small percentage of the beneficial shareholders because many shareholders, especially foreign investors, make use of “nominee registrations” where a depositary bank or trustee is registered in the share register, thereby concealing the identity of the true owner. This practice still remains possible under the Act, but issuers may now limit such practice in their articles of association. In particular, the issuer may limit the number of shares that can be held by nominee shareholders. Moreover, companies have the right to request that nominees disclose the identity of the beneficial owner of the shares. Refusal to disclose the identity of the ultimate investor results in the suspension of voting rights until the company has received such information.
The Act adopts changes to the Works Constitution Act (Betriebsverfassungsgesetz), requiring management to notify either the works council or the economic committee of any proposed takeover by a third party. The Act also modifies certain provisions of the Civil Code (Bürgerliches Gesetzbuch), the Commercial Code (Handelsgesetzbuch) and the Code of Civil Procedure (Zivilprozessordnung) to strengthen the rights and protections of borrowers with respect to sales and assignments of loans.
1 The German text of the Act is available at http://www.bgblportal.de/BGBL/bgbl1f/bgbl108s1666.pdf.