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Overview of the new German Takeover Law

Rechtsanwalt Dr. Dirk Roger Rissel, LL.M.

* * *

On 1 January 2002 Germany has introduced its first ever takeover code, setting ground rules for companies and investors alike in a country where hostile bids are rare. This paper shall outline the scope of the Takeover Law, its structure, the provisions concerning a public offer, the specific defensive measures a target company´s management may implement and the introduction of the so-called “squeeze-out” provision.

1. Scope of the Takeover Law

The new German Takeover Law regulates all public offers to acquire certain market-traded equity securities of German domestic companies (whether for stock, cash or a combination thereof with additional provisions to apply where the acquisition or holdings exceed a defined threshold).
The Takeover Law sets
the reporting requirements
  the criteria for the consideration to be offered
  the duration of the offer period, and
  the conditions under which the target may employ defence tactics against a hostile takeover.
The Takeover Law applies to all public offers where the target is a German-based stock corporation (Aktiengesellschaft) or partnership limited by shares (Kommanditgesellschaft auf Aktien), whose stock is publicly traded on an “organised market” in Germany or anywhere within the European Economic Area (EEA). 

2. Structure of the Takeover Law

The Takover Law contemplates three sorts of public offers to acquire securities. 

The sections of the first main part  (“Securities Acquisition”, §§ 10 – 28) apply to all public offers made to stockholders to directly acquire their shares, without regard to the number of shares or the ultimate purpose of the acquisition. A public offer is defined in § 2 para. 1 as publicly announced offer to acquire a target company´s stock through purchase or exchange from individual shareholders.

The second part (“Takeover Offers”, §§ 29 – 34)  also applies if the public offer is submitted with the intent to gain a controlling interest in the target company (defined as 30 per cent of the voting shares). These provisions require the suitor to make a non-discriminatory offer for all the outstanding shares at a minimally acceptable price. 

The third part (“Mandatory Offers”, §§ 35 – 39) applies when a party in fact attains a controlling interest in a company  (i.e. 30 per cent or more of all voting shares). Pursuant to these provisions the party is obliged to make a fair and non-discriminatory offer (Pflichtangebot) to the remaining shareholders subject to essentially the same criteria regulating the voluntary takeover offer.

3. The public offer under the Takeover Law

Once a party makes a decision to submit a public offer, it is first obliged to notify the relevant exchange authorities and the Federal Supervisory Office for Securities Trading (hereinafter FSO). 

It is then obliged to announce the intention to submit a public offer without undue delay through the officially prescribed methods of publication. 

If validly submitting the offer requires authorisation by corporate resolution, the offeror may announce the offer as subject to shareholder approval. Apart from that conditions to the offer, the fulfilment of which lie completely within the control of the offeror (or those acting in concert), may not be set (§ 18 para. 1). The offeror may condition the offer on a minimum of acceptances. However, the offeror may not reserve an unconditional right to rescind the offer (§ 18 para. 2). 

Within four weeks of the public announcement of the intention to make an offer, the offeror is required to submit a detailed “offer document” (Angebotsunterlage) to the FSO. According to § 11 this offer document must contain

   ufficient identifying information on the offeror
  the consideration being offered
   effective dates of the offer period
   any conditions for acceptance
   the purpose of the acquisition
   means of financing
   post-acquisition plans for the target

In case of cash or combination offers, a certified statement from an independent financial institution (Wertpapierdienstleistungsunternehmen) – normally an investment bank – confirming that the offeror has secured adequate means of financing to complete the proposed transaction is also required (§ 11). Only after the document is approved by the FSO, whose decision shall be issued within ten workdays of submission, the offer document may be publicly distributed (§ 14 para. 2). After approval by the FSO the document must be posted on the Internet without delay and either distributed broadly in print form free of charge or published in the officially designated financial gazettes (§ 14 para. 3). A copy must also be delivered to the target company´s management board (§ 14 para. 4) which, in response to the public offer, must publish a report containing thorough assessment of the offer´s probability of success, likely effect on company affairs and a recommendation to the shareholders (§ 27 para. 2). 

The acceptance period which the offeror determines must be at least four weeks long, and last no longer than ten weeks (§ 16 para. 1, citing § 14 para. 3 sent. 1). If a competing offer is issued, or if changes to the original offer are made, automatic extensions will be imposed. If a competing offer is issued, the acceptance period for the original offer will be automatically extended by two weeks. Amendments to the offer may be made until one day prior to its expiration. Such changes may however only be ones favourable to the target shareholders, such as an increase in consideration offered, a lowering of the minimum acceptance threshold, or waiver of other conditions. During the offer period, the offeror is obliged to report the number of acceptances weekly, and during the final week, daily, via the Internet (§ 23 para. 1),  thereby keeping shareholders informed of current developments. After the original closing date (as well as upon expiration of any extension period), the results must be posted immediately (§ 23 para. 1) In case of a limited offer, over-subscription by shareholders will be satisfied strictly on a pro rata basis (§ 19). 

If the offeror initially has the intention to acquire control of 30 per cent or more of the voting shares through the contemplated offer, his offer is defined in § 29 as a takeover bid (Übernahmeangebot). Takeover bids are subject to the additional requirements set out in §§ 30 – 40. These provisions require that in a takeover attempt any offer must be extended to all shareholders in a non-discriminatory manner, and that the consideration offered for the shares be “reasonable” (§ 31). “Reasonableness” of the consideration offered will be determined by the FSO with reference to the weighted average market price over the three-months-period immediately preceding the offer announcement, and the price paid by the offeror, or those deemed acting in concert, for any shares acquired over the preceding three months, including non-market packet purchases (§ 31 para. 1). Any cash payments must be made in Euro (§ 31 para. 2). In case stock is offered wholly or partially for the target´s shares, it must be “liquid”, i.e. readily convertible to cash, and vested with voting rights (§ 31 para. 2). If the offeror has acquired a substantial block of the target´s shares (i.e. 5 per cent or more) through cash purchase in the three months preceding the announcement of the offer, or has paid cash for any shares subsequent to the announcement to make an offer, he will be obliged to offer cash contribution for the shares yet to be acquired (§ 31 para. 3).

An offer which seeks to acquire more than 30 per cent but is limited to less than 100 per cent of the remaining outstanding shares (a limited offer for control) is expressly forbidden (compare § 32 and § 19). However, an offer to acquire less than a controlling stake is permitted, provided it does not ultimately result in control, directly or through others acting in concert, of 30 per cent or more of the target company´s voting shares.

If a voluntary takeover offer succeeds in gaining 30 per cent or more of the voting shares, the acceptance period will be extended another two weeks to allow the remaining shareholders to take advantage of the offer (§ 16 para. 2). Shareholders who accept the offer will be entitled to a supplemental matching payment if the offeror subsequently pays higher consideration for similar shares in a non-market transaction within one year following the effective date of the original offer (§ 31 para. 5). 

Even if there is no intention to take over a company, a shareholder may nevertheless gain direct or indirect control of 30 per cent or more of the voting stock (the percentage includes offeror´s subsidiary´s holdings in the target, shares held by others for the benefit of the offeror, or shares held by others acting in concert with offeror with regard to the target company). Such shareholder will be compelled to extend to all remaining shareholders an offer similar to that required under a voluntary takeover bid. When the 30 per cent threshold has been reached the controlling shareholder must publicly disseminate this fact through the supra-regional official financial gazette or appropriate electronic financial reporting system (§ 35 para. 1). Prior to reaching the 30 per cent threshold, however, a shareholder is under no additional obligation to publish the extent of his holdings under the Takeover Law. Within four weeks of publication of a controlling stake, the shareholder has to submit a mandatory offer to his fellow shareholders (§ 35 para. 2). If the control of 30 per cent was accomplished through a properly constituted voluntary takeover offer, the acquirer is freed from the duty of announcing his holdings and resubmitting an offer document (§ 35 para. 3). Like a voluntary takeover bid, the offer must be “reasonable” and non-discriminatory, treating all remaining shareholders on equal terms (see the reference in § 39). 

4. Defensive measures 

In contrast to the previously submitted drafts of the Takeover Law which have opted for management neutrality (with narrow exceptions) as the general rule, § 33 of the Takeover Law grants a target company´s management board considerable power in opposing a hostile takeover bid. 

Two situations exist in which the management board can get authorisation to defend against takeovers: prior to the announcement of any takeover offer and after the announcement of an actual offer.

Prior to the announcement of any takeover offer, the shareholders of a potential target company may resolve to grant the management board advance authorisation to undertake certain measures if an offer is made (each of which must be specified in the shareholder´s resolution). Such an authorisation is valid for up to 18 months (and so, in practice, must be renewed annually). Such shareholder´s resolution empowering the board must be passed by a 75 per cent majority of the share capital present and voting. In addition, the company´s supervisory board must approve the implementation of any such measures before they are actually undertaken.

If the bidder has already made a takeover offer, the target company´s management board may employ any permissible defence measures to prevent the takeover being successful, provided it obtains express approval from the supervisory board for each measure. 

The sort of measures the Takeover Law contemplates include

  the issue of a large number of further shares in the target company for example to a “friendly” third party with 
    shareholders´ subscription rights disapplied.
  the buy-back of shares 
  the sale of certain profitable parts of the target company´s business which are important to the bidder
  the launch of a counter-offer for the shares of the bidder company
  soliciting alternative offers of friendlier bidders (permissible without the approval of the supervisory board once an actual offer is announced) 

Although the Takeover Law gives companies looking to defend themselves against potential bidders considerable power, in practice, the requirement that any defensive measures must be approved by a 75 per cent majority of the share capital present and voting will be a significant obstacle. Moreover, authorisations for defence measures rendered either before or after the announcement of an offer do not free the management board from its ultimate duty of care and responsibility to act in the best interest of the company. Selling off a core business for example might prevent a takeover, but it may not be attractive if it significantly affects the remaining businesses or the company´s profitability.

5. “Squeeze-out” provision

The Takeover Law contains an amendment to the German Stock Corporation Act (Aktiengesetz) that allows majority holders to acquire minority shareholders´ stock via a mandatory cash buyout (“squeeze out”). When a shareholder acquires more than 95 per cent  of the voting rights of a company, he is entitled to acquire the remaining shares by compelling the minority holders to sell him their shares for a fair price for strictly in cash and thus consolidate control in the hands of single party or group (§ 327 of the Stock Corporation Act as amended). This demand to purchase must be approved by shareholder resolution at the general shareholders´ meeting. The price for the shares is to be determined by the majority shareholder, taking into account the current circumstances. However, if an offer has been made in the previous six months and reached a level of acceptance of 90 per cent this offer´s consideration shall serve as criterion for what constitutes a reasonable offer.
It is important to note that the “squeeze out” is neither limited to stock corporations nor needs there to be a preceding takeover offer.

update: March 2002



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