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Revision to the German Takeover Act

Expected to come into force next year, the German Takeover Act will affect M&A activity and private equity transactions in Germany. Here Clifford Chance Punder presents the main areas for change.

The Ministerial Draft Securities Purchase and Takeover Act (Wertpapiererwerbs- und Übernah-megesetz), published on 12 March 2001 by the Federal Ministry of Finance, is based on the Discussion Draft dated June 2000. However, the Ministerial Draft provides for considerable changes. The Act is intended to replace the voluntary Takeover Code of the Stock Exchange Expert Commission currently in place and to regulate acquisition, takeover and mandatory offers.

Originally the German Takeover Act should have waited for the 13th EU Directive on company law in order to avoid contradictions between the two regulations. The final deadline for passing the Directive expires in October 2001. However, due to the discussions within relevant EU bodies' passing is uncertain. The German Act therefore was detached from the European procedure and should come into force on 1 January 2002, independently from the Directive.

Scope of the Act - acquisition, takeover and mandatory offers

The area of application of the Act was broadened. The Ministerial Draft covers not only takeovers but also all public acquisition offers, ie offers that are not aimed at acquiring control. All such offers are to be supervised by the Federal Office for Securities Trading (Bundesaufsichtsamt für Wertpapierhandel - BAWe). The Ministerial Draft intends to regulate the acquisition of shares and securities of stock corporations (Aktiengesellschaften - AG) and commercial partnerships limited by shares (Kommanditgesellschaft auf Aktien - KGaA) that are domiciled in Germany and whose shares are listed on an organised market within the European Economic Area.

Pursuant to the Ministerial Draft the same provisions will apply to the three types of offers, ie acquisition, takeover and mandatory offers. There are however additional provisions applying only to takeover and mandatory offers. The Ministerial Draft has clarified the scope of the Act and improved the implementation of the principle of transparency in capital market transactions.

Control - mandatory offers

When the Act comes into force, people who acquire the control, ie 30 per cent of the voting rights of a company are under an obligation to make an offer for all the shares of the target company. In certain cases, such as in the event of a restructuring within a group, the Federal Office for Securities Trading may allow voting rights to remain unconsidered when calculating the 30 per cent threshold. In some other cases voting rights, such as those of a subsidiary company or those held by a third party for the account of the offeror, are added to the voting rights of the offeror.

Documentation

The Ministerial Draft envisages that the offer documentation to be submitted must contain detailed information about the financing of the offer. The availability of the financing has to be confirmed by a securities service company (Wertpapierdienstleistungsunternehmen) that will also warrant the information.

Consideration

Consideration is the term for the payment received in return for the sale of an asset. The Draft regulates the consideration to be offered within the framework of takeover and mandatory offers and cash or marketable shares that are listed on a minimum of one organised market in the European Economic Area. Other consideration may be offered but the choice must be left to the shareholders accepting the offer. The offeror is, however, under an obligation to make a cash offer if he has acquired at least five per cent of the shares or the voting rights of the target company for cash during the three months prior to the publication of the decision to launch an offer. The offeror is also obligated to make a cash offer if he acquires for cash, shares of the target company during the acceptance period of the offer.

The consideration will generally be based on the weighted average share price of the voting shares of the target company during the last three months prior to the publication of the decision to launch an offer. If the offeror has acquired shares of the target company during the last three months prior to the public announcement of the decision to launch an offer, the consideration will be calculated on the highest price paid or agreed by the offeror. Block discounts of up to 15 per cent are admissible, but not if buying via the stock exchange. If the offeror acquires shares of the target company for a higher price during the acceptance period or within one year from the end of the acceptance period he will be under an obligation to make additional payments. The payment due will be the difference between the amount of consideration stated in the offer and the amount subse-quently paid to other shareholders outside the offer.

Duty of neutrality

Since the discussion draft of June 2000 the duty of neutrality remains a critical topic, which so far remains unchanged despite extensive discussions. The board of directors and the supervisory board will as a rule be obliged to observe neutrality, ie to refrain from measures that could prevent the success of the takeover. Especially prohibited are the issuance of shares, the acquisition of own shares by the target company and the conclusion of any legal transaction that would result in a substantial change to the active or passive balance sheet positions. However, some defensive measures are permitted, such as the search for a competing offer (white knight), the adoption of defensive measures on the basis of resolutions passed by the general meeting during the procedure and a capital increase that does not exclude the subscription rights of the shareholders. It is anticipated that the Governmental Draft of the Act to be published in Summer 2001 will bring about further clarifications and perhaps even changes in the question of the duty of neutrality.

Squeeze out

Together with the Ministerial Draft there are modifications envisaged to the Stock Corporations Act (Aktiengesetz - AktG). The exclusion of minority shareholders (squeeze out) in stock corporations and commercial partnerships limited by shares will become admissible above a threshold of 95 per cent. The general meeting can resolve upon the application of the main shareholder, to transfer the shares held by the minority shareholders to the main shareholder against cash compensation. The cash compensation is determined by the main shareholder and may not be below the market value of the shares. The minority shareholders may have the cash compensation examined by submitting it to a special court procedure. Under certain circumstances, however, the main shareholder is tied in determining the compensation. This happens if he acquired the position of main shareholder within the last six months on the basis of an offer and if such offer was accepted by at least 90 per cent of the shareholders at whom it was directed. In such a case the price paid within the framework of this public offer is decisive.

The Ministerial Draft has undergone various discussion rounds. A reworked governmental draft, which is still confidential, has been developed and forwarded to the German parliament. The political discussion is expected for Summer 2001.

Daniela Weber-Rey is head of corporate at Clifford Chance Pünder. Since joining the firm she has advised chiefly international clients - most of them major international companies, banks, other financial institutions and institutional investors - in the fields of corporate law and capital markets law. Since 1996 she has been a lecturer for mergers and acquisitions and corporate law at the University of Frankfurt am Main.

Clifford Chance is one of the leading law firms in mergers & acquisitions, advising on some of the world's largest and most complex M&A transactions and equity offerings. Their corporate practice is one of the largest of any law firm, with substantial resources in the key financial and business centres across Europe, the Americas and Asia. A specialist private equity practice provides advice on management buy-outs and buy-ins, leveraged buy-outs, exit strategies and the establishment and structuring of funds. http://www.cliffordchance.com

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