Contributed By SZA Schilling, Zutt & Anschütz
Although the European M&A market experienced a downturn in the second half of 2018, it still reached its highest value in the post-crisis era. The deal volume amounted to USD989.2 billion, a 17.3% increase in deal volume compared to 2017. Thereby, Europe accounts for 28% of the global M&A market. The main reasons for the downturn are the current geopolitical uncertainties in the world. For example, the trade conflicts between the US and China, as well as, although to a lesser extent, between the US and the EU, political disputes between the US and Russia and Britain’s exit from the EU, the details of which are unclear at the time of writing.
The German M&A market has taken second place in Europe after the UK. With deals amounting to a deal volume of USD122 billion, Germany’s market share in Europe was 12.3%.
With regard to public takeovers, the German M&A market showed a decline in 2018, both in terms of market volume and number of transactions, after two previous years of growth in 2016 and 2017. The market capitalisation of the target companies totalled EUR29.1 billion compared with EUR58.6 billion in 2017 (calculated according to the takeover offers), which corresponds to a decline of 50.34%.
The German M&A market is driven by the desire to access new technologies. For many companies, M&A transactions are seen as a way to efficiently tackle digital disruption in their markets. Megatrends are primarily digitalisation and automation. Therefore, companies from the automotive, media, pharmaceutical and healthcare sectors are quite active. In addition, the still very low interest rate level in Europe drives investments.
Private Equity / Family-owned Companies
In 2018, transactions with private equity involvement reached their highest value in the post-crisis era. A total of USD195.5 billion across 1,458 buyouts was recorded. Family-owned companies, in contrast, were investing cautiously. The high levels of investments seen in 2015 were not achieved in 2016-2018.
Foreign investors, especially from the US and China, continue to have a strong interest in investing in Europe and in this context, it should be noted that investment conditions in certain sectors will become more difficult for foreign investors (see 3.2 Significant Changes to Takeover Law, below).
With ageing populations in Europe, M&A transactions in the pharmaceutical, healthcare and biotechnology sector were on the rise. While accounting for 10% of the total transaction volume in Europe in the first half year 2017, they increased to 20% in the first half year 2018. This sector has also received a high level of interest from the private equity side.
The most dominant German M&A transactions in 2018 took place in connection with the reorganisation of the German energy market, starting with E.on’s acquisition of innogy. Bayer’s acquisition of US seed manufacturer Monsanto also came to completion after approval by the cartel authorities and increased activity could also be observed in the media and telecommunications sector. Prominent examples were the acquisition of finanzcheck.de by Scout24 and that of Parship Elite Group by NCG-Nucom Group, a subsidiary of ProSiebenSat.1 Media.
Private M&A – Acquisitions of Non-Listed Companies
First, investment banks or M&A advisers co-ordinate an auction process, which begins with teasers being sent to potential buyers to promote the target company. Interested parties must sign a non-disclosure agreement before gaining access to an information memorandum containing basic financial and legal information about the target company. They will then be invited to submit non-binding offers setting out their ideas about the purchase price and transaction structure. Bidders who submit the best indicative bids will have access to a data room where they can exercise due diligence.
The due diligence process is followed by binding bids; the seller then enters into negotiations with those bidders who have submitted the most attractive bids. Some bidders require exclusivity in the course of the process; sometimes the parties conclude a term sheet. The main document of any private transaction is the sale and purchase agreement. Core elements of such an agreement are the determination and structuring of the purchase price, which typically follows a locked-box model or a cash-free/debt free mechanism with working capital adjustment, assurances and warranties, indemnities and the extent of possible damages.
Repurchase and guarantee insurance have gained in importance in recent years. In Germany, there is a legal separation between the conclusion of the purchase agreement (the signing) and the transfer of shares in rem (the closing). In most transactions, the transfer in rem of the shares is subject to the payment of the purchase price and other conditions precedent, eg, merger control clearances.
Public M&A – Acquisitions of Listed Companies
The most practical way to obtain control over a publicly listed company in Germany is to acquire shares by way of a public tender or takeover offer. A takeover offer (Übernahmeangebot) is mandatory if a party seeks to obtain control of a public company, ie, to acquire at least 30% of its voting rights (as defined by the German Securities Acquisition and Takeover Act (Wertpapiererwerbs- und Übernahmegesetz)). This requirement should be considered where an investor seeks to acquire a substantial interest in a publicly listed target company. A public takeover bid can be friendly or hostile. Although the management board of the target company is subject to the principle of neutrality, certain defence mechanisms and defence measures can be implemented with the consent of the supervisory board.
Cross-border statutory mergers of companies are possible under the German Transformation Act (Umwandlungsgesetz). However, cross-border statutory mergers of companies involving minority shareholders are of minor practical importance, as the purchase of shares against cash payment is less complicated. In addition, the merger appears to have no specific advantage, as the acquiring company has to offer an exit option to dissenting shareholders via cash compensation to be based on the intrinsic value of the target company. This regularly proves to be a prohibiting factor. In cross-border mergers it is common to conclude business combination agreements, which outline the major steps of the envisaged transaction.
Regulators for Public M&A – Acquisition of Listed Companies
The German Securities Acquisition and Takeover Act, the Takeover Act Offer Ordinance (WpÜG Angebotsverordnung) and other statutory ordinances regulate public takeovers of listed companies. Legislation not specific to public takeovers also applies, in particular the rules of the German Stock Corporation Act (Aktiengesetz), the Market Abuse Regulation and the Transformation Act (Umwandlungsgesetz). Compliance with the German Takeover Law is overseen by the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin), whose powers include preventing the bidder from making a proposed offer that does not comply with statutory requirements, from making any subsequent offers for one year and imposing fines.
The German Securities Acquisition and Takeover Act concerns any public offer (öffentliches Angebot) to acquire shares of publicly listed stock corporations, European companies (SEs) and partnerships limited by shares that have their registered seat either in Germany and whose shares are traded on the German regulated market (the German Securities Acquisition and Takeover Act does not apply to stock corporations listed only in the open market segment), or – under certain further conditions – in another European Economic Area (EEA) member state.
There are three classes of public offers:
Stock Corporation Act (Aktiengesetz)
The Stock Corporation Act (and its extensive case law) is the main source of legislation for listed targets and their officers and shareholders. Its provisions are partially superseded or reiterated by the German Securities Acquisition and Takeover Act. Importantly, a German stock corporation's management board must always act in the company's best interests (Unternehmensinteresse), which are not necessarily identical to those of the shareholders. In general, the company’s best interest comprises the interests of the shareholders, the employees and, arguably, the creditors of the target company. This focus of the target management’s fiduciary duties on the company's best interest may give rise to numerous issues during a takeover. In addition, the Stock Corporation Act and the German Securities Acquisition and Takeover Act govern various defence measures of the target’s management against hostile takeovers and both also contain rules on squeeze-outs.
Securities Trading Act (Wertpapierhandelsgesetz)
This act concerns, among other things, the mandatory notification of voting rights and other instruments.
Market Abuse Regulation
Regulation 596/2014/EU (Market Abuse) and accompanying EU directives regulate insider trading, a criminal offence in Germany, ad hoc disclosure requirements by the target and directors' dealings. Due to the prohibition of insider trading, the target's management cannot share any inside information that makes due diligence into a publicly listed target somewhat difficult. The target may also be obliged to publish an ad hoc announcement regarding the takeover.
Stock Exchange Act (Börsengesetz) and Stock Exchange Ordinances (Börsenordnungen)
Among other subject matter, the Stock Exchange Act contains rules on a regular delisting, including the requirement of a mandatory offer in the case of a delisting from a regulated market. Furthermore, following a public-to-private transaction, the investor may seek to re-offer the shares publicly as an exit route, which would then also be governed by various statutory provisions, including the Stock Exchange Act and the Securities Prospectus Act, as well as the Stock Exchange Ordinances.
Regulating Rules for Both Private and Public M&A
Transformation Act (Umwandlungsgesetz)
The Transformation Act allows statutory mergers by transferring one entity's assets to another pre-existing entity, or by transferring two existing entities' assets to a new entity. It also provides a legal framework for de-mergers (Spaltungen) and changes of legal form (Formwechsel), such as a corporation transforming into a partnership. Statutory mergers under the Transformation Act combine the selective approach of an asset deal with the universal succession of a share deal. Universal succession under the Transformation Act takes effect by way of the registration of the statutory merger with the commercial register by the competent local court. Registration with the commercial register may, however, be blocked by voidance claims initiated by activist shareholders, which in turn may be overcome via a fast-track release proceeding (Freigabeverfahren).
The Act also contains provisions on a merger-specific squeeze-out. In addition, the instruments contained in the Transformation Act may be used to take a target private (cold delisting), such as by merging a listed target into a non-listed entity. Insolvency Act (Insolvenzordnung) and Voidance Act (Anfechtungsgesetz).
Any bidder intending to make an offer for a target or to a seller of a target that is insolvent (or close to insolvency) should consider the Insolvency Act and the Voidance Act. The Insolvency Act allows the restructuring of a target through proceedings similar to those under the US Chapter 11 rules. Under the Voidance Act, the transfer of assets to the detriment of the target's creditors may be voidable.
Commercial Code (Handelsgesetzbuch) and Civil Code (Bürgerliches Gesetzbuch)
The Civil Code governs any legal relationships between private individuals and entities. The Commercial Code adds rules specific to business entities (corporations and partnerships) and the businesses of sole proprietors. The offer to buy or exchange shares and the acceptance of such an offer, among other things, are governed by the Civil Code.
Banking Act (Gesetz über das Kreditwesen) and Insurance Supervision Act (Versicherungsaufsichtsgesetz)
With respect to regulated industries, including financial institutions and insurance companies in particular, the acquisitions of qualifying holdings have to be notified to and approved by the respective regulatory authorities before being consummated. A direct or indirect holding in an undertaking that represents 10% or more of the capital or of the voting rights, or which makes it possible to exercise a significant influence over the management of that undertaking, can already be considered as a qualifying holding. Hence, for investments in companies that are active in regulated industries, the supervisory law has to be considered.
Foreign investments in target companies active in certain sectors may be subject to restrictions. The Foreign Trade Act (Aussenwirtschaftsgesetz) and the relevant Ordinance (Aussenwirtschaftsverordnung) provide for two different review mechanisms. The so-called sector-specific review mechanism mainly concerns foreign investments in domestic companies active in the military and defence sector. Under the so-called cross-sectoral review, the Federal Ministry of Economics and Energy (Bundesministerium für Wirtschaft und Energie – BMWi) may review any direct or indirect acquisitions of at least 25% of the voting rights in a German target by investors from outside the EU or EFTA to determine whether such acquisitions may endanger the public order or security in Germany. The German Government may ultimately prohibit such acquisitions or impose obligations if this is necessary to safeguard public order or security.
Pursuant to an amendment effective since July 2017, acquisitions of German targets active in specific areas, eg, ‘critical infrastructure’ and the development of industry-specific software for the operation of critical infrastructure, must be notified to the BMWi. Critical infrastructure may, in particular, include the energy, water, information technology, health, financial services and insurance sectors, as well as transport and traffic.
Acquirers may apply to the BMWi for the issuance of a certificate of non-objection in order to obtain legal certainty for an investment.
The merger control provisions of the German Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen) apply if transactions qualify as concentrations and the parties meet certain thresholds. If a transaction is subject to German merger control, it must be notified to the German Federal Cartel Office (Bundeskartellamt) and must not be consummated before clearance has been obtained. It is a particular feature of German merger control that concentrations subject to review are not limited to control acquisitions. For instance, acquisitions of 25% or 50% of the voting rights or capital interests also qualify as concentrations, as do acquisitions of a competitively significant influence.
The notification thresholds are met if the combined aggregate worldwide turnover of the involved parties exceeds EUR500 million, the German turnover of at least one involved party exceeds EUR25 million and the German turnover of another involved party exceeds EUR5 million. If the last threshold (ie, a German turnover exceeding EUR5 million) is not met by the target or another party, a notification will still be required if the value of the consideration for the transaction exceeds EUR400 million and the target has significant activities in Germany.
The target company's management board must, without undue delay, inform that company’s works council or, if there is no works council, the target's workforce directly, of a takeover announcement, and must forward to them the public offer document. However, there is no obligation to consult the works council (or workforce) of the offer. The works council can comment on the offer; its comments have to be attached to, and published with, the target's management board's reasoned opinion.
According to the German Co-Determination Act (Mitbestimmungsgesetz), certain companies (stock corporations, partnerships limited by shares, limited liability companies and co-operatives) with more than 2,000 employees have to establish a supervisory board in which half the members must be employee representatives (employees and union representatives). The same applies to companies with more than 500 employees, pursuant to the German One Third Participation Act (Drittelbeteiligungsgesetz), but only one third of the members are required to be employee representatives.
To increase the number of women in management positions (Gesetz für die gleichberechtigte Teilhabe von Frauen und Männern an Führungspositionen), the German Federal Government passed a law in May 2015, pursuant to which listed companies subject to the Co-Determination Act have to fill vacancies in their supervisory boards with (at least) 30% women. Companies that are either listed or co-determined are obliged to set up their own targets regarding the proportion of female members in the supervisory board, the executive board and the top management level, and to inform about it in their annual report.
As explained previously, the sector-specific review mechanism concerns foreign investments in domestic companies that are active in certain segments of the military and defence sector, as well as providers of certain IT security products. A direct or indirect acquisition of at least 25% of the voting rights in such a company by a foreigner must be notified to the BMWi. Different from the cross-sectorial review, this notification obligation also applies to investors from other EU or EFTA member states. The German Government may ultimately prohibit such acquisitions or impose obligations if this is necessary to safeguard essential German security interests.
In September 2018, the German Federal Supreme Court (Bundesgerichtshof – BGH) took a landmark decision on the definition of so-called ‘acting in concert’ under the German Securities Trading Act. The legal instrument of acting in concerthas various impacts on the scope of co-operation between two or more shareholders of a public listed company. The BGH ruled that a one-time agreement between two shareholders regarding the exchange of the members of the supervisory board in order to achieve business realignment does not constitute acting in concert. Therefore, such a co-operation does not lead to a mutual allocation of voting rights under the German Securities Trading Act (Wertpapierhandelsgesetz). It follows that in such a situation the shareholders are also not obliged to extend a takeover offer.
There have been changes to German takeover law in 2018 that are of particular interest for foreign investors. In December 2018, the scope of the German Foreign Trade Regulation (Außenwirtschaftsverordnung) was extended. Together with the German Foreign Trade Act (Außenwirtschaftsgesetz) and the relevant European regulations (such as the Dual Use Regulation), the German Foreign Trade Regulation is the most important element of German export control with regard to companies operating in the defence sector, and companies operating so-called critical infrastructure such as, inter alia, energy, information technology, telecommunications and transport.
As a result of the 2018 reform, the participation threshold for notification to, and review by, the German Federal Ministry of Economics regarding transactions in the defence sector as well as transactions in the area of critical infrastructure is lowered from 25% to 10%. In addition, export control is extended to media companies. At EU-level, a regulation for the screening of foreign direct investments into the EU is planned to come into force in 2019. The current draft mentions areas that lie beyond the scope of the German Foreign Trade Regulation, such as electoral infrastructure or biotechnologies.
Apart from that, the Second Financial Market Amendment Act (Zweites Finanzmarktnovellierungsgesetz) – enacted in 2017 but taking effect in most parts of Germany in 2018 – brought changes to the German Securities Trading Act (Wertpapierhandelsgesetz), the Takeover Act as well as to other financial market-related laws. Those changes were driven by EU law and focus on investor protection. They will probably have only small effects on takeovers. Furthermore, the German legislator is currently implementing the Second EU Shareholders’ Rights Directive. It aims at enhancing transparency and protecting shareholders’ interests and will, inter alia, improve the right of the annual general meeting to have a say on the remuneration of the management board and the supervisory board members (‘say on pay’).
In practice, stakebuilding without issuing a public takeover offer is limited to a maximum of 30% of the voting rights, since that is the threshold for a mandatory public takeover offer. Since German law provides for strict notification requirements that apply for much smaller stakes (for details see 4.2 Material Shareholding Disclosure Threshold, below), concealed stakebuilding is difficult to realise and has become rather uncommon.
If the 30% threshold is crossed due to a voluntary takeover offer, the bidder is free to acquire additional shares without being required to issue another (mandatory) takeover offer. This allows a bidder to acquire a block of shares just below the 30% threshold and then publish a voluntary takeover offer at a relatively low price, which will probably be accepted by only a few shareholders. If the bidder acquires enough shares to exceed the 30% threshold, the bidder is free to buy additional shares without being obliged to publish a mandatory takeover offer (‘lowballing’ or ‘creeping in”).
Disclosure thresholds and filing obligations mainly concern exchange-listed companies on organised markets. Investors that build stakes in exchange-listed companies on an organised market are required to notify the company as well as the BaFin if their voting rights exceed or fall below 3%, 5%, 10%, 15%, 20%, 25%, 30%, 50% or 75% of the voting rights. The company is obliged to publish any notifications of its shareholders. Investors have to consider that not only voting rights from shares that are directly held must be taken into account. If an investor acquires financial instruments that entitle the holder to acquire shares or have a similar economic effect, voting rights can be attributed to an investor who does not yet physically own the respective shares and is not yet able to exercise the respective voting rights. Moreover, shares held by subsidiaries of the investor or for the account of the investor may be attributed.
Finally, voting rights held by different investors who co-ordinate their actions with respect to the company (‘acting in concert’) are to be aggregated. These rules can lead to unintentional violations if notification requirements are overlooked, particularly in complex legal situations. It is advisable to examine the legal situation thoroughly, since violations can not only lead to serious fines but also to a suspension of all shareholders’ rights for the period during which the infringement persists and, under certain conditions, even for longer periods.
For private stock corporations and stock corporations listed in the open market segment, disclosure thresholds and filing obligations are much less rigid. If the stake of investor exceeds or falls below 25% or 50% of the shares in a German stock corporation, the investor is obliged to notify the company. Under certain circumstances, shares of third parties are to be attributed. The respective rules are similar but less complex than those applicable to exchange-listed companies on an organised market. A failure to comply with the notification requirements leads to a suspension of the voting rights from the respective shares.
The acquisition of shares in limited liability companies (GmbH) follows its own legal rules. These rules allow tracing of any acquisition of shares, since the commercial register contains a list of the shareholders that is to be updated after shares have been traded.
The German Money Laundering Act (Geldwäschegesetz) also provides for certain disclosure requirements. All legal entities governed by private law, registered partnerships, trusts and similar legal forms are obliged to file certain data that inter alia relates to shareholdings with the Transparency Register. In some cases, however, exemptions apply (mainly where the respective data is publicly available from other sources due to other equivalent filing requirements).
The thresholds mentioned previously are mandatory and therefore cannot be waived. Additional disclosure obligations can within certain limits be stipulated in the articles of association but are not common.
Dealings in derivatives are permissible but can lead to the notification obligations mentioned above. Generally, dealings in derivatives are not a feasible way to avoid or circumvent disclosure obligations.
Depending on the circumstances and the types of derivatives, dealing in derivatives may trigger the same disclosure obligations as dealing in shares. Therefore, investors who consider a takeover strategy that involves dealing in derivatives should carefully perform a case-by-case analysis with respect to disclosure requirements.
If an investor issues a public takeover offer, the offer document has to state the objectives the bidder pursues relating to the target. Therefore, such information is disclosed to the public. Following the acquisition of 10% or more of the voting rights in an exchange-listed companies on an organised market, investors are required to inform the target company of their intentions and their source of funding. The law specifies in detail the information to be disclosed in such a scenario and the respective catalogue comprises in particular whether the investment serves strategic goals or is a mere capital investment; whether the bidder intends to increase the investment; and whether there are intentions to influence the management or substantially change the capital structure.
With regard to disclosure duties, a distinction must be made between listed and non-listed companies.
If the target company is listed, it can be obliged to make so-called ad hoc announcements at different stages of the transaction. The European Market Abuse Regulation (MAR) governs the specific requirements of the obligation to make ‘ad hoc’ announcements. According to the MAR, an issuer must inform the public as soon as possible of inside information that directly concerns that issuer. It is therefore decisive whether or not the information in question is 'inside information'. For this to be the case, the following conditions must be met. The information:
In a protracted process that occurs in stages – eg, in the case of a M&A transaction – it is recognised that not only the final steps (signing/closing) may trigger the obligation to make a so-called ad hoc announcement, but that this is already the case for significant intermediate steps.
The MAR allows for exceptions, however:
a) immediate disclosure is likely to prejudice the legitimate interests of the issuer;
b) delay of disclosure is not likely to mislead the public; and
c) the issuer is able to ensure the confidentiality of that information.
If the target company is non-listed, it has no obligation to disclose the transaction or the related intermediate steps.
Although both the target company and the potential purchasers are usually interested in avoiding early disclosure, it is not possible to defer from legal requirements. The parties may attempt to structure the transaction in a way that allows for a delay of disclosure, however. With regard to listed companies and as already stated earlier, the issuer can delay disclosure of inside information if certain conditions are met (see 5.1 Requirement to Disclose a Deal, above). In this context, it must be noted that the disclosure of the transaction can no longer be delayed if there are already sufficiently accurate rumours about the transaction in the market. Here, the issuer must disclose the inside information to the public as soon as possible.
The scope of the due diligence depends strongly on the circumstances of the respective transaction. In most cases the potential purchasers will conduct a financial, legal and human resources due diligence, with compliance due diligences becoming more and more important as well. Furthermore, the scope of the due diligence depends on the business areas in which the target company is active. Transactions in technical industrial fields often require technical and environmental due diligences.
Apart from that, it must be pointed out that the information provided by target companies varies. The management of the target company is generally only allowed to disclose information if the disclosure is in the company’s best interest. In the sector of private M&As, disclosure requires a shareholders’ resolution. Furthermore, the managing bodies must comply with certain information disclosure restrictions, such as those stipulated by data protection law. Beyond that, many M&A transactions take place under considerable time pressure, which can ultimately also affect the review.
To some extent, potential purchasers can also review publicly available sources of information, which is of course mainly important if the target company cannot be accessed. Among the major sources of information about listed companies in Germany are their annual financial statements, their entries in the commercial register, their ad hoc announcements and their entries in the federal gazette. However, if the target company is accessible, the potential purchaser’s management will typically only comply with its duties if it conducts a due diligence that also extends to information from the target company itself. In this case it is typically not sufficient to rely on external information alone.
By concluding a standstill agreement, the bidder commits him or herself to not further increase his or her stake in the target company. Therefore, the target company sometimes demands standstill agreements as a means of defence. Although standstill agreements are generally permitted under German law, there are restrictions on the target company’s side as well as on that of the bidder. Regarding the target company, note that its management is obliged to act in the best interest of the company, which can require it not to hinder the takeover. The bidder on the other hand must comply with the provisions of the German Takeover Act and can be obliged to extend his bid to all shares of the target company. In this case it is impossible for him to enter into a standstill agreement.
An exclusivity agreement, in contrast, obliges the seller of the target company not to negotiate with other potential buyers (for a limited period). It is not uncommon for a buyer to demand such an agreement to justify further investments in the course of preparing for the transaction. Exclusivity agreements are generally permitted under German law. There are restrictions, however, that are comparable to the restrictions already mentioned. The management of the selling company is obliged to act in the best interests of the company, and it can be advantageous for the selling company to set up a transaction process with several bidders in order to achieve a higher purchase price.
The German Takeover Act, supplemented by the German Takeover Act Offer Ordinance governs the legal requirements for public takeover offers (see 2Overview of Regulatory Field, above). Both regulations require the offer document to contain very detailed information in order to provide the shareholders of the target company with a sufficient information basis for their decision about acceptance or rejection of the offer. The offer document must contain information on, inter alia:
The offer document also determines the subsequent content of the share purchase agreement and contains its terms and conditions. To support the shareholders in a ‘take it or leave it situation’ caused by this, both the management board and the supervisory board of the target company are obliged to give a reasoned opinion on the assessment of the offer. The reasoned opinion must address four topics in particular:
The duration of a takeover process cannot be generalised and differs between private and public transactions.
In private M&A transactions, the duration varies widely. In small transactions, the whole process can be completed in a matter of weeks. In large and more complex transactions, it can take months or in some cases years (considering the whole time from the planning stage to the closing of the transaction). The required term depends on the size and complexity of the involved companies, the time pressure on both the seller’s and the purchaser’s side, the structure and financing of the transaction and eventually required approvals of authorities.
Public M&A transactions regularly take about three months form the bidder’s announcement to issue an offer to complete (the maximum is 22 weeks; longer durations are possible if concurring offers are published). The duration of preparatory actions, particularly stakebuilding and due diligence are not included and can vary widely, depending on similar factors as outlined above.
An investor who acquires 30% or more of the voting shares of a company that is exchange-listed on an organised market is required to issue a mandatory takeover offer to all other shareholders. The bidder may apply to BaFin to be exempted from the obligation. However, such exemptions are only granted in extraordinary cases. One practically relevant example is cases in which the takeover is the first step for a recapitalisation of the target company.
Both cash and shares (or a mix of both) can be used as consideration. If the bidder uses shares, these must be liquid and exchange-listed on an organised market; the owners of voting shares in the target must be offered voting shares as consideration. Moreover, if the bidder acquires 5% or more of the shares for a cash consideration during the six months before the announcement of the takeover offer, a cash consideration must be offered to all shareholders of the target; a consideration in shares can be offered as an alternative.
In practice, German bidders in most cases offer cash as consideration, while foreign bidders in some cases offer shares or a mix of cash and shares.
The conditions that apply to mandatory and voluntary takeover offers are primarily subject to legal requirements under the German Takeover Act and the Offer Ordinance. The bidder is obliged to offer an ‘adequate’ consideration. Such consideration is required be at least equal to both:
In addition, if the bidder acquires shares at a higher price during the offer period or within twelve months after the end of the offer period, the higher price is to be paid to all shareholders who accept the takeover offer.
Under certain circumstances, particularly in non-liquid markets, the amount of the consideration is not to be determined on the basis of the stock market price, but on the basis of a valuation of the company’s intrinsic value.
The minimum pricing requirements do not only apply to mandatory but also to voluntary takeover offers that aim to obtain control of the target company.
Mandatory takeover offers cannot be made subject to conditions (except where the conditions concern legal requirements for the takeover). With regard to voluntary takeover offers, less rigid rules apply. In such offers, the bidder may define conditions that must be met for the offer to become effective. These conditions can comprise minimum acceptance conditions (ie, a certain percentage of shares must be tendered before the offer becomes effective) or the approval of authorities. In practice, it is sometimes difficult to formulate certain conditions with sufficient precision so that they depend on objective criteria (eg, material adverse change conditions). Moreover, the law excludes certain conditions. This pertains particularly to conditions that the bidder himself can bring about. An offer made subject to revocation or withdrawal is also inadmissible.
In most cases, the acceptance thresholds are chosen in such a way that the bidder acquires sufficient shares to be able to implement essential decisions in the target company without the co-operation of other shareholders. Even though a regular majority of 30% is sufficient, the participation rate of the bidder as a precaution frequently exceeds 50% or 75%, since these are the most important majority requirements for shareholders’ resolutions in German stock corporations.
In general, the resolutions of the shareholders’ meetings are taken with a simple majority that exceeds 50% of the votes. However, for some important measures, particularly all measures that require an amendment of the articles of association, a majority that exceeds 75% of the share capital represented in the shareholders’ meeting is required. For some measures – in particular all measures that lead to a squeeze-out of minority shareholders – even higher majorities are required (see 6.10 Squeeze-out Mechanisms, below). Therefore, in some cases, bidders may consider even higher thresholds than those previously covered.
Before issuing a public takeover offer, the bidder is required to ensure that he has the necessary financial resources to fulfil the obligations to the shareholders who accept the offer. For a cash offer, the bidder must prove that sufficient funds are available by obtaining confirmation from an investment service company (usually a bank). Therefore, the bidder cannot make a takeover offer that is subject to obtaining financing.
Generally, agreements on deal security measures between the bidder and current shareholders are not subject to any specific restrictions. Thus, the bidder and key shareholders can make any arrangements they consider reasonable (eg, the major shareholder can undertake to accept the bid irrevocably vis-à-vis the bidder) as long as these are in line with general legal requirements (eg, general antitrust law, etc).
Restrictions apply if measures require co-operation of the target company, since the management board of the target is obliged to act in the best interest of the company (which is not necessarily identical to the interest of key shareholders who intend to sell their shares). Therefore, the target company can only assume obligations in the context of deal security measures if these are in its best interest and comply with all requirements of applicable stock corporation law. Since it is in most cases hard to prove that the target is interested in being owned by a specific shareholder, deal security measures are often legally problematic if the target company assumes obligations.
In practice, break-up fees are occasionally agreed. However, if the target company (and not only a key shareholder) is made subject to payment obligations in that context, the enforceability of such agreements is at least doubtful since admissibility of the arrangements can be questioned for a number of reasons, in particular regarding capital maintenance rules. Therefore, a legal uncertainty remains and a careful legal assessment is advisable in each case.
The conclusion of business combination agreements in the preparation of a transaction may also clash with the very strict rules of the Stock Corporation Act on the constitution of a stock corporation. The permissibility and enforceability of such agreements is under dispute in legal literature and depends very much on the precise content of an agreement. Therefore, business combination agreements require particularly careful legal assessment and alignment to the principles of stock corporation law.
In German stock corporations, the options to implement special rights for certain shareholders are limited. The basic structure of the corporate governance of a stock corporation and the rights of the corporate bodies cannot be amended. In particular, the members of the management board and supervisory board cannot be bound to follow instructions from the shareholders. The shareholders generally have to be treated equally and their rights only depend on their respective participation rate. The main thresholds the participation rate must exceed to obtain control over the most important decisions taken by the shareholders’ meeting are 50% and, for some decisions, 75% (see 6.5 Minimum Acceptance Conditions, above).
If a shareholder wishes to obtain decision-making powers that he or she would not normally be entitled to with his participation rate, it is possible to enter into a pooling agreement and co-ordinate voting rights with other shareholders. These, however, may constitute ‘acting in concert’ and trigger a mandatory takeover obligation.
A special right that may be granted to a shareholder in the articles of association would be the right to appoint a member of the supervisory board. If a shareholder’s participation rate exceeds 50% of the shares, that shareholder can decide on the appointment of supervisory board members anyway by a majority vote. However, a shareholder who does not control the majority vote in the shareholders’ meeting may ask for the right to appoint a representative to the supervisory board.
Shareholders are permitted to send representatives to the shareholders’ meeting and to vote by proxy.
German law provides for three types of squeeze-out mechanism, all of which allow a bidder to acquire the shares of shareholders who have not accepted a public takeover offer:
In addition to the abovementioned squeeze-out variants, another way to acquire the shares of minority shareholders would be a delisting of the target company. The Stock Exchange Act (Börsengesetz) requires that an offer to the remaining shareholders be published prior to delisting. The legal requirements regarding such an offer are very similar to those of a public takeover offer under takeover law. However, since the tradability of shares that are no longer exchange-listed is very much limited, there is a chance that shareholders who rejected a public takeover offer accept an offer in the context of a delisting.
It is possible under German law to obtain commitments to tender by principal shareholders. While such agreements used to be very common they have become less so in recent years. The reason for this is that irrevocable commitments can trigger disclosure obligations to the target company and the supervisory authority (see 4.2 Material Shareholding Disclosure Threshold, above), which makes them hardly useful for concealed stakebuilding.
Where irrevocable commitments are still used today, such commitments normally define a minimum price the bidder must offer for the commitment to become effective, since the conditions of the takeover offer are usually not known when an irrevocable commitment is negotiated. Moreover, they are usually subject to a ‘drop dead date’ on which they become ineffective if the bidder has not published a public takeover offer.
In accordance with the German Securities Takeover Act, the bidder has to publish his decision to submit an offer immediately following the decision, having communicated it to the stock exchanges’ management and the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht). The announcement needs to contain the parties involved in the transaction, the offer’s nature and the offer price. It shall be disclosed in German by publication on the internet and via an electronic information distribution system. Subsequently, the publication has to be sent to the management of the stock exchange and the Supervisory Authority, and to the target company’s management board. Within four weeks of publication of the decision to submit an offer, the bidder has to submit the offer document to the Supervisory Authority. As soon as the Authority permits the offer or if it does not refuse it within ten days, the offer document needs to be published immediately on the internetand published in the German Federal Gazette or by being available for distribution to the public without charge.
In fact, anyone who directly or indirectly acquires control of a target company – other than as a result of a takeover bid – has to publish this immediately, at the latest within seven days, stating the amount of his share in the voting rights. The publication must be made on the internetand via an electronic information distribution system. Within four weeks of the publication of the acquisition of control, the bidder has to submit an offer to the Supervisory Authority and publish it immediately on the internetand by publication in the German Federal Gazette or by being available for distribution to the public without charge. Under the German Securities Takeover Act, acquiring control means the holding of at least 30% of the voting rights in the target company.
Public takeovers by German bidders are commonly exclusively made for cash consideration. If in fact shares are publicly offered, then equivalent disclosure and prospectus requirements apply as to other public share offerings, and the German Securities Prospectus Act (Wertpapierprospektgesetz) needs to be followed.
Before shares are offered to the public, the issuer has to publish a prospectus, by making the prospectus available in printed form for distribution to the public or on the issuer’s website without charge. Under the German Securities Prospectus Act (Wertpapierprospektgesetz), the prospectus has to contain, inter alia, various pieces of information about the issuer and the shares to be issued.
Additionally, according to the Securities Trading Act (Wertpapierhandelsgesetz), an acquisition of 3%, 5%, 10%, 15%, 20%, 25%, 30%, 50% or 75% of the voting rights in the target company generally requires immediate notification to the issuer and the Supervisory Authority within four days.
Under EU Regulation No 809/2004, a prospectus has to precede a share issue, which must also include pro-forma financial statements about the companies involved in the transaction, and therefore also about the bidder. These pro-forma financial statements need to be prepared in a manner consistent with the accounting policies applied by the issuer in recent annual financial statements.
In principle, the right to confidentiality of negotiations is respected. The first exception is the bidder’s offer document, which has to be disclosed in full. This document announces the plan to submit a public offer and needs to contain the parties involved in the transaction, the nature of the offer and the offer price. The statement of the target company’s management and supervisory board about the offer has to be fully disclosed by publication on the internet and by publication in the German Federal Gazette, or by being available for distribution to the public without charge. The declaration has to cover the consideration’s nature and amount, the likely consequences for the target company and its employees, the bidder’s goals, etc.
Further, the bidder has to publish the number of shares and voting rights tendered in response to the offer, as well as the number of shares and voting rights held by the bidder in total including voting rights allocated to the bidder as well as financial instruments requiring notification under the Securities Trading Act. This information has to be published repeatedly and at certain dates and milestones.
With the exception of the one-tier SE, stock corporations in Germany have a two-tier board system. While the management board runs the company and takes the main business decisions, the supervisory board acts as an advisory and supervisory body. Generally, both boards must act in the target company’s best interest. Other interests, such as the personal interests of the members of the management board and supervisory board who hold shares in the target company, may not be taken into account. Furthermore, according to the German Takeover Act, the management board of the target company must refrain from any action that could prevent the success of the takeover offer. There are exceptions, however. Actions that would have also been undertaken by a diligent manager of a company not affected by a takeover offer are excluded. Apart from that, the management and supervisory boards must issue a reasoned opinion on the takeover offer (see 5.5Definitive Agreements, above).
These restrictions do not apply in the private M&A sector, however. The management of private companies, such as the limited liability company (GmbH), is bound only by the obligation to act in the target company’s best interest as well as by the shareholders’ instructions (the shareholders of a limited liability company are able to instruct the management, which is different from the situation in the stock corporation).
Takeover committees are mainly established at supervisory board level in order to increase the efficiency of the decision-making processes if the target company has a large number of supervisory board members. On the other hand, it is very unusual to establish a takeover committee at management board level.
In case of conflicts of interest, the affected board members can refrain from taking part in the corresponding decision-making processes. In this respect, the formation of a takeover committee is not mandatory. Moreover, conflicts of interest of board members of the target company are disclosed in the reasoned opinion.
In Germany, the business judgement rule applies to acts of the members of the management board in entrepreneurial decisions, if the member of the management board could reasonably assume that he was acting in the company’s best interest on the basis of appropriate information. The business judgement rule does not apply in case of mandatory legal requirements, however. With regard to takeover situations, the requirements of the German Takeover Act are lex specialis. According to the Act, the management board of the target company must refrain from any action that could prevent the success of the takeover offer (see 8.1 Principal Directors' Duties, above). The business judgement rule applies in the context of the reasoned opinion on the takeover offer (see 5.5 Definitive Agreements, above). Therefore, the management board must assess the takeover offer, eg, whether the consideration is appropriate, whether it is based on appropriate information, and whether it is unencumbered by special interests.
Although the German Takeover Act does not require the management board or the supervisory board to seek external advice, the business judgment rule will only apply if their decisions are based on appropriate information (see 8.3 Business Judgement Rule, above). In public takeover situations, the boards of the target company are obliged to issue a reasoned opinion, which requires an in-depth assessment of the offer document (see 5.5 Definitive Agreements, above). It is therefore recommended – and also common practice – to take legal and economic advice. To assess the appropriateness of the consideration of the takeover offer, the boards of the target company should obtain a fairness opinion on the company’s fair value. Apart from that, outside advice is usually required in the context of due diligence (see 5.3 Scope of Due Diligence, above).
Conflicts of interest of board members can affect takeover situations for a variety of reasons. It is not uncommon for board members to also hold a board position in another company. In a takeover situation, the interests of both companies can be conflicting. Furthermore, board members can be shareholders of the target company themselves and may therefore be inclined to support or to defend against the takeover offer for personal financial reasons. As already mentioned above, board members are obliged to act in the best interest of the company. Personal interests must not be taken into account.
A further reason for potential conflicts of interest of board members can arise if the bidder seeks to incentivise board members by granting or promising cash payments or non-cash benefits to them. The potential conflicts of interest caused by this are directly addressed in the German Takeover Act. According to the Act the bidder and persons acting in concert with the bidder are prohibited from granting or promising unjustified cash payments or other unjustified non-cash benefits to members of the management board or supervisory board of the target company in connection with the takeover offer. The assessment whether a benefit is justified or unjustified can only be done on a case-by-case basis. As a general rule, the benefit will only be justified if it does not keep the board members from acting in the best interests of the target company.
In contrast, shareholders are generally allowed to pursue their own interests in a takeover situation.
According to German law, a public offer does not require the consent of the management of the target company. Hostile takeovers are therefore permissible. However, they are still extremely rare in Germany due to German capital maintenance rules, the duty of the board members of the target company to act in the best interest of the target company and various other obligations under German takeover and company law. The last major hostile takeover attempt was Vonovia’s failed offer for Deutsche Wohnen in 2016.
Under German law, the management board of the target company is generally entitled to take defensive measures. The German Securities Takeover Act does not provide for any restrictions for the period prior to the announcement of a takeover offer. Therefore, in principle, any defensive measures can be taken. Following the announcement of a takeover bid, the management board may not, however, frustrate a bid under the German Securities Takeover Act (and the EU Directive on Takeover Bids).
German law requires listed stock corporations to disclose all defensive mechanisms in the management report. Based on this information, the supervisory board is required to make a statement on these mechanisms in its statement to the annual general meeting.
A company that could be the target of a takeover bid can for example prepare in co-operation with its advisers a so-called defence manual in which, in particular, the first steps with the respective organisational and possible defensive measures are defined and discussed. Further, the management board can propose to the general meeting that anticipatory resolutions be adopted that entitle the management board to take certain defensive actions. Besides, it is possible to exclude access to due diligence or to take certain restructuring measures to make the target unattractive for a takeover.
However, following the submission of a takeover bid for the company, the executive board's scope of action is limited. The management board of the target company is prohibited from preventing the success of the offer. Nevertheless, the management board may search for alternative offers by other bidders, so-called white knights. Defensive measures can only be taken by the management board in exceptional cases and only if they are approved by the general meeting of the target company and, if applicable, by the supervisory board.
The management board of the target company is obliged to act in the best interest of the company at all times. The interests of the company are not necessarily identical with the concerns of the shareholders, but encompass and combine the interests of the shareholders, the employees and the creditors. In addition, the defensive measures must be in line with the provisions of German stock corporation law.
According to the German Takeover Act, the management board of the target company is obliged not to frustrate a takeover offer after its announcement. Nevertheless, the management board may convene a shareholders' meeting to take defensive measures. The opinion of the management board often influences the decision of the (further) shareholders and thus the success of the offer.
Company acquisitions are of great importance in German practice. After an M&A transaction, disputes sometimes arise between the parties. In private M&A transactions, disputes between the bidder and the target company often involve termination or break-up fee clauses, a breach of warranties or the due date of variable purchase price payments. In the case of public M&A transactions, minority shareholders primarily challenge the amount of compensation after certain corporate taking-private transactions, such as squeeze-out or delisting resolutions.
However, litigation is not common and published court decisions are extremely rare. There are two main reasons for this:
In connection with private M&A transactions, litigation is conducted in various phases. If, for example, there is a dispute about break-up fee clauses, the legal dispute takes place before the actual transaction. In contrast, a legal dispute, eg, over the breach of warranties, takes place after the M&A transaction has been completed.
Public M&A processes, in particular challenges by minority shareholders, generally follow the resolution of the general meeting, eg, on a squeeze-out, for example, delisting or other structural measures. The actions then block the entry of the resolution of the general meeting in the commercial register.
In Germany, the Girmes ruling of 1995 was an early example of a proxy fight. The editor of a business magazine launched a public campaign against a planned capital reduction. He obtained the power of attorney of other shareholders to reject the proposal of the management board at the general meeting. In the end, he succeeded in preventing the capital measure. Another example of shareholder activism was the case of Celesio in 2017, when a shareholder acquired a significant stake in Celesio in order to force the bidder to increase the consideration offered.
This kind of shareholder activism has increased significantly in recent years in Germany. A substantial reason for this is that Germany offers activist shareholders a comfortable environment. Both the number of potential target companies and the diverse minority rights under stock corporation law promote shareholder activism. Shareholder activism is generally a constructive, agenda-driven approach that frequently seeks short-term effects and benefits. To achieve their goals, shareholders make use of their minority rights under the German Stock Corporation Act (eg, the right to request an addition to the agenda or submit counterproposals at shareholders' meetings, or to initiate legal disputes with board members or majority shareholders), as well as the possibilities to challenge shareholders' resolutions (see below). The motives of activist shareholders are manifold and their approach varies accordingly, ranging from limited activism to aggressive interaction with the company. The latter cases, in particular, have increased considerably in recent years (see 11.2 Aims of Activists, below).
Also, the practice of challenging various shareholders' resolutions with actions for rescission is in focus. Due to the revised EU Shareholders' Rights Directive of 2017, which must be transposed into German law by June 2019, shareholder activism is likely to increase further in the coming years. One of the central concerns of the Shareholders' Rights Directive is to include certain types of shareholders more closely in the corporate governance of a stock corporation: institutional investors and asset managers monitor investment companies and their affairs, such as strategy, performance development and corporate governance. The stated motive behind the provisions of the Shareholders' Rights Directive is a long-term increase in the value of the company. However, it remains to be seen what motives and approaches institutional investors and asset managers will actually have.
Shareholders can file actions for rescission against resolutions of the Annual General Meeting on major structural measures such as statutory mergers, control and profit transfer agreements or squeeze-outs to block the entry in the commercial register that is mandatory for them to become effective. This practice of professional minority shareholders to use such legal proceedings to their own advantage is important for companies and investors to take into account. However, a court procedure introduced specifically to overcome this blocking effect faster, the release procedure (Freigabeverfahren), now considerably reduces the potential for interference by minority shareholders.
For the reasons previously stated (see 11.1 Shareholder Activism, above), shareholder activism is steadily growing in Germany. Activist shareholders in Germany pursue a wide variety of objectives. In recent years, shareholder activism has also increasingly focused on corporate strategy and restructuring measures (eg, Bilfinger and ThyssenKrupp) as well as takeover bids (eg, Deutsche Börse, Stada, Daimler and – as previously mentioned – Celesio). This upward trend endured throughout 2018 and is expected to continue.
In theory, activism itself does not jeopardise the completion of the announced transactions. However, if the bidder submits an offer subject to a certain quota of acceptance, an activist shareholder with a reasonable direct and/or proxy majority may be in a position to determine the fulfilment of the condition and thus influence the success of the offer.
More often, activist shareholders intervene in corporate and restructuring measures subsequent to a transaction (see 10.2 Stage of Deal, above), which can also influence the decision to make an offer in the first place.
Due to the already existing frequency and the current trend regarding the objectives of shareholder activism as well as the expected increase – not least due to the EU Shareholders’ Rights Directive – of such shareholder activism, future public transactions may be exposed to an increased risk in this respect. Thus, expert advice is strongly recommended in order to minimise these risks.