German takeover law after the D irective

1. German takeover law • after the Directive

2. Final stage of implementation • The Act on the Implementation of the Takeover Directive • III. German takeover law after the Directive: main characteristics • IV. Control • V. Mandatory bids (Sect. 35 to 39 of the Act) • VI. Takeover bids (Sect. 29 to 34 of the Act) • VII. The default rule for target company behaviour: limited passivity • VIII. The opt-in/opt-out regime for (target) companies • IX. The right of squeeze-out • X. Concluding remarks

3. I. Final stage of implementation • Current takeover law (2002) as a partial implementation • Act on the Acquisition of Securities and on Takeovers (the “Takeover Act“) • Wertpapiererwerbs- und Übernahmegesetz (WpÜG) • Regulation on the Contents of the Offer Document, the Consideration in the Case of Takeover Bids and Mandatory Bids and the Exemption from the Obligation to Publish and Make a Bid (the “Bid Regulation“) • The Act on the Implementation of the Takeover Directive • Government Draft Bill of 15 February 2006 • hearing by the Parliamentary Financial Affairs Committee on 10 May • date of entry into force on 20 May or shortly thereafter

4. II. The Act on the Implementation of the Takeover Directive • Implementation of the Directive • minor modifications and amendments necessary: existing rules closely modelled in line with the Common Standpoint of 2001 • modifications • in particular, scope of application; competences of the BaFin • amendments • in particular, the ideas of the High Level Group: opt-in/opt-out rules, squeeze-out, sell-out, publication of takeover-relevant information • Other amendments • additional investigative powers of the BaFin as a consequence of TCI et. al. versus Deutsche Börse AG • Open questions and problems are not addressed

5. III. German takeover law after the Directive: • main characteristics • Legal Basis: Takeover Act, Bid Regulation, Stock Corporation Act, Commercial Code • Regulation of three types of bids • mandatory bid • takeover bid: bid aimed at acquiring control • simple bid: bid not aimed at acquiring control

6. Interaction between voluntary takeover bids and mandatory bids • requirements for both bids are (nearly) identical, e.g., • mandatory price rules for voluntary takeover bids • no partial voluntary takeover bid allowed • consequence: Mandatory bid requirement shall not apply upon acquisition of control as a result of a takeover bid (Sect. 35(3) of the Act) • Frustrating actions available to a target company: severely limited in scope • Squeeze out: transfer of shares by court order • Bundesanstalt für Finanzdienstleistungsaufsicht (“BaFin”) as a powerful supervisory authority

7. IV. Control • Threshold for control: 30 % of the voting rights of the target company at a minimum (Sect. 29(2) of the Act) • Unilateral attribution of voting rights to the offeror: if the offeror is able to control how the voting rights will be exercised in a shareholder meeting (Sect. 30(1) of the Act) • chain principle applies in attributing votes • Multilateral attribution of voting rights: voting rights owned by a third party with which the offeror or its subsidiaries coordinate their conduct in respect of the offeree company by virtue of an agreement or in any other manner; agreements on the exercise of voting rights in individual cases are exempted (Sect. 30(2) of the Act)

8. coordination or not? • formation of a voting trust: + • coordination with respect to strategic or structural objectives: + • agreement concerning the election of supervisory board members? • “simple” parallel share purchase: contested • standstill agreement: - • ambit of “coordination of conduct” currently awaits clarification by the Federal High Court: • Frankfurt Court of Appeals ruling of 25 June 2004: cooperation with the aim of coordinating and exercising voting rights on an ongoing basis in order to exert sustained influence

9. Munich Court of Appeals ruling of 27 April 2005: any single coordination related to the exercise of votes from shares • aimed at exerting sustained influence on the management board or the supervisory board, and • in pursuit of own interests • e.g., agreement determining the chairman of the supervisory board • acting in concert (Art. 2(1)(d) of the Directive): persons who cooperate with the offeror … on the basis of an agreement … aimed at acquiring control • identical in scope to Sect. 30(2) of the Act? • “acquiring control” by coordinating the exercise of votes? • minimum or maximum harmonisation?

10. V. Mandatory bids (Sect. 35 to 39 of the Act) • Persons required to make a bid: anyone who directly or indirectly gains control • mandatory bid to shareholders of an indirectly controlled company, e.g., a subsidiary of a target company • BaFin may grant an exception for small subsidiaries • several bidders in the case of an attribution of voting rights • unilateral attribution: the case of a subsidiary • multilateral attribution: all persons acting in concert? • compatible with Art. 5(1) of the Directive • exemptions available? • statutory exemptions or exemptions granted by the BaFin are not available • restrictive interpretation of the Statute? But see Art. 5(3) of the Directive

11. Bid price requirement: dual minimum price threshold • threshold 1: consideration offered must correspond at least to the highest consideration “granted” or “agreed” for the acquisition of shares of the target company … during the six (new!) months prior to the publication of the offer • but see Art. 5(4) of the Directive: “paid” or “gezahlt worden” and • threshold 2: Weighted average stock market price during the three months prior to the publication of the offer • in Line with the Directive because of Art. 3(2)(b) of the Directive? • not available: price adjustment by the BaFin (but see Art. 5(4) of the Directive)

12. Enforcement of the bid requirement • offeror is barred from exercising any membership rights attached to his or her shares • BaFin may impose administrative fines on the offeror • shareholders may claim interest for the delay • Shareholder claim for specific performance?

13. VI. Takeover bids (Sect. 29 to 34 of the Act) • Full bid requirement • Mandatory bid price requirement identical to bid price requirement governing mandatory bids • in line with the Directive? • admissible because of Art. 3(2)(b) of the Directive? • but see Art. 15(5) of the Directive: different presumptions regarding the fair consideration to be offered in squeeze-out proceedings depending on the type of the preceding bid

14. VII. The default rule for target company behaviour: limited passivity • Interplay between Sect. 33 of the Act and Sect. 93(1) of the Stock Corporation Act • Starting point: after the publication of the decision to make a bid the management board of the target company may not take any actions that may frustrate the success of the bid (first sentence of Sect. 33(1)) • applicability to the supervisory board doubtful • not applicable to the shareholder meeting • General exemptions (sentence 2): • actions taken by a prudent and diligent manager who does not face a bid • search for a white knight

15. Exemptions depending on a prior approval by the supervisory board (sentence 2) • decision to approve a particular frustrating action (supervisory board) or to engage in such an action (management board) must not violate the duty of care and the duty of loyalty • identical standards for members of both boards • BJR (sentence 2 of Sect. 93(1) of the Stock Corporation Act): not applicable because of a conflict of interest (possible job loss) • applicable standard: • action must be in the target company's interest • Independence as such being a company's interest? • the company's interest must clearly outweigh the shareholders' interest in selling their shares

16. Exceptions depending on a shareholder meeting’s authorization obtained during the offer period. • limited relevance for several reasons: • minimum period for calling a shareholder meeting • offeror will challenge a resolution by filing an action to set aside said resolution • Exceptions depending on a shareholder meeting’s authorization obtained before the publication of the decision to launch a bid (Sect. 33(2) of the Act) • authorization must be expressly granted for the purpose of frustrating a hostile bid • but: shareholders may only authorize such actions that fully comply with the general requirements of the Stock Corporation Act

17. e.g., in case of authorized capital shareholders may empower the board to exclude pre-emptive rights in order to frustrate a hostile bid, but are barred from authorizing the board to issue the new shares below their intrinsic value • e.g., a sale of substantive assets may be authorized but not at a below-market price

18. VIII. The opt-in/opt-out regime for (target) companies • opt-in in the articles of association • opt-in with respect to • board passivity (Art. 9 of the Directive) or/and • break-through rule (Art. 11 of the Directive) • opt-out with respect to a bidder if the bidder or a controlling “enterprise” does not face comparable restrictions other than those chosen by the bidder • bidders or controlling “enterprises” (“Unternehmen”) • broader than Art. 12(3) of the Directive (“companies”) since “Unternehmen” do not have to be organized in a corporate form • shareholder resolution

19. IX. The right of squeeze-out • (mostly) uniform rules regardless of the type of preceding bid • Two squeeze-out mechanisms in the form of exclusive alternatives available: • Sect. 39a et seq. of the Act and • Sect. 327a et seq. of the Stock Corporation Act • Fair Consideration • offer price to be presumed fair where, through acceptance of the bid, the offeror has acquired at least 90% of the voting rights comprised in the bid (irrefutable presumption) • extension of the 90% threshold to mandatory bids in line with Art. 15(5) of the Directive?

20. irrefutability of the presumption • in line with Art. 15(5) of the Directive? • Squeeze-out following a mandatory bid: in line with European guarantee of fundamental rights? • Squeeze-out following a takeover bid • general standard for shareholder compensation established by the German Federal Constitutional Court: dual minimum compensation requirement, i.e., capitalised earnings value or current stock market price (if higher) • consequence: constitutionality is questionable

21. Squeeze-out by a decision of a Frankfurt civil court: procedural aspects • bidder has to file a motion before the Frankfurt civil court of first instance • problem: several bidders (acting in concert!) • bidder must hold 95% of the voting rights in the target company (Art. 15(2)(a) of the Directive) • non-implementation of Art. 15(2)(b) of the Directive despite less strict preconditions for exercising the squeeze-out right? • 95% requirement must only be fulfilled at the time of the final oral hearing before the court, not at the time of filing the motion • bidder can file a motion for a squeeze-out even in the case of a conditional offer (e.g., pending approval by cartel authorities)

22. transfer of shares only upon the court decision's becoming final • court decision also determines the fair consideration to be paid to shareholders: potential for considerable delay! • contrary to squeeze-out pursuant to Sect. 327a et seq. of the Stock Corporation Act • implementation in line with Art. 15 of the Directive (effet utile)? • squeeze-out right with respect to preferred non-voting stock available

23. X. Concluding remarks • German takeover law, in the main, complies with the Takeover Directive; (possible) deviations often reflect well-founded uncertainty regarding the content of the Directive • German takeover law, in implementing the Directive, does not create new barriers for cross-border takeovers, in particular. • However, non-discriminating barriers for takeovers may result from • the minimum bid price requirement pertaining to takeover bids • the bidder-unfriendly squeeze-out procedure • German target companies, on the other hand, still lack effective defensive mechanisms compared with companies in other European countries

24. To sum up, German takeover law may well act more to deter institutional investors from playing a more active role in corporate governance (a kind of reverse “acting in concert”-threat) than to deter potential bidders from launching an offer for German companies