RUSSIAN UPDATE – Overview of the Key Amendments to the Russian Civil Code
Highlights
- On April 2, 2012, the Russian President introduced draft amendments to the Civil Code geared towards granting greater freedom in determining the management structure for private companies, execution of shareholders’ agreements, and changing the form of incorporation of legal entities.
- Rules intended to prevent abuse in corporate and ancillary relations will be introduced.
- New limited property rights will emerge addressing permanent landownership and development of land plots.
MAIN ARTICLE
On April 2, 2012 the President introduced to the State Duma draft amendments to the Civil Code (the Draft) prepared jointly by representatives of both the legal and business communities.
The Draft is primarily geared to improve regulations and the business environment in Russia. It should be furthered by the proposed modifications and enhancements with regard to legal entities, transactions, agreements, and other provisions.
The following should be noted as key changes.
1. CORPORATE LAW
First, the new regulation will grant greater freedom in determining the management structure for private companies, execution of shareholders’ agreements, and changing the form of incorporation of legal entities.
- Public and private companies
A new classification of business entities will be introduced, so that they will fall into the categories of either public or private companies.
As opposed to members of public companies (joint stock companies, or “JSCs”, with shares traded in regulated markets), members of private companies may freely determine the management structure. For example, they may forego a governing body and change the way general members meetings are convened, prepared, and held.
- JSC – a unified form
The form of a JSC as a closed joint stock company (“CJSCs”) will cease to exist. Before July 1, 2013 CJSCs may, at their own discretion, either (1) change their company type to an LLC or production cooperative; or (2) retain their JSC status (this will not require any extra steps to be taken as the JSC will be the standard form “by default”).
- A Shareholders’ agreement may be entered into not only between a company’s shareholders but also between shareholders, company creditors, and any third parties.
- Reorganisation scheme will be made available in various forms, including involvement of more than two corporate entities of any form of incorporation.
Second, rules intended to prevent abuse in corporate and ancillary relations will be introduced.
- Registered capital will from now on have to be paid for by cash only.
- Registration with the Uniform State Register of Legal Entities
Interested parties will be entitled to file their objections to amendments entered in the Uniform State Register of Legal Entities, and the registration authority will be bound to consider such objections and render its decision thereon.
- Shareholders agreement
Parties to a shareholders’ agreement will be obligated to notify the company as to its execution. If they fail to notify, they will be obliged to indemnify against any damages incurred by other company members.
Furthermore, information about shareholders’ agreements for public will be subject to mandatory disclosure.
Finally, resolutions of corporate governing bodies or transactions involving parties to shareholders’ agreements may be invalidated if such resolutions / terms of transactions contradict the shareholders’ agreement.
- Affiliation and control
Now the Russian Civil Code will define specific indicia of affiliation and control and the concept of controlling and controlled persons.
Furthermore, even if formal grounds are missing, a court may confirm actual affiliation upon an analysis of factual circumstances.
Liability of controlling entities will be strengthened. In certain cases, they will be liable jointly and severally together with controlled entities and responsible for any losses incurred by the latter and their members.
- Management liability
Management as well as those who have an actual possibility to give instructions to the company’s management will be liable for any losses incurred by the company through wrongful, unreasonable or unscrupulous acts. Those who actually determine a legal entity’s conduct, without having formal grounds for control, will be also liable.
2. TRANSACTIONS AND OBLIGATIONS
First, regulation as to invalidity of transactions will be clarified.
- Limitations on grounds for invalidation of voidable transactions
Only a voidable transaction which infringes upon the rights and interests of the contesting party may be invalidated. If a party approved a transaction or expressed its intention to uphold it, that party will not be able to later contest it.
- A presumption of voidability will be established in respect of: (1) resolutions passed by meetings; (2) transactions executed in breach of a law; (3) transactions executed without the required consent of a third party, corporate authority, government authority, local authority.
- The following matters will be regulated comprehensively: (1) invalidation of resolutions passed by meetings; (2) transactions void ab initio in respect of property whose disposal is restricted or limited; (3) invalidity of transactions executed in error.
- New opportunities
Business entities may independently determine the effect of the invalidity of voidable transactions.
A party to a transaction executed ultra vires may withdraw from such a transaction.
Second, parties will have more liberty in determining terms of their transactions, the principles of optionality and freedom of contract will have a broader application.
- Conditioned performance of obligations
Despite the restriction of entering into conditional transactions that depend exclusively or primarily on one of the parties, the performance of obligations, exercise, change or termination of rights under a contractual obligation may nonetheless be made conditional in any manner.
- Irrevocable power of attorney may be used in business relations.
- Creditor agreements
Creditors will be able to enter into agreements regarding their demands for a debtor to perform its obligations and the priority of such demands.
- Managing pledged assets
Several creditors will be able to appoint a representative – a manager of pledged assets (by analogy with securities trustee known in foreign law systems) exercising the pledge rights on their behalf and to their benefit.
- Good faith acquisition of right of pledge and pledged assets
If assets are pledged by an unauthorised person, the good faith acquisition of a right of the pledge will be possible.
Onerous acquisition of pledged assets by a party, which was not aware of and was not obliged to be aware of the pledge, will be considered a good faith acquisition of the pledged assets and in such a case the pledge will be released.
- Late fee
The court’s powers to reduce the amounts of late fee penalties will be limited in business relations.
- Representations
Parties will be able to recover losses caused by false representations made prior to or following execution of an agreement.
- Indemnity
In business relations parties will be able to provide for one of the parties’ right to demand indemnification from the other party for pecuniary losses incurred in connection with performance, amendment or termination of obligations, including misconduct by third parties. Indemnity—a concept that is quite common and widely applicable in large and complex structured deals abroad—would be permitted under Russian law.
- New types of agreements
New contractual structures will be introduced: (1) a framework agreement (agreement with open terms); (2) option agreement (agreement with unconditional right to enter into a specific agreement); (3) subscription agreement (agreement with performance on demand); (4) escrow agreement.
Third, measures to protect parties’ rights will be improved.
- Pre-contractual liability will be stipulated as liability for bad faith negotiations or termination of negotiations in respect of an agreement to be executed.
- The amount of losses must be set by the court even if they cannot be credibly determined.
3. PROPERTY LAW
First, the existing system of property rights will undergo a serious change.
Second, new limited property rights will emerge: (1) permanent landownership; (2) development of land plots; (3) personal usufruct; (4) preferential acquisition of immovable property; (4) pecuniary benefit; (5) limited title of owner of a building to the land plot under such building.
This review covers only some of the changes being introduced to the Civil Code. Generally, the Draft offers a comprehensive revision of the Civil Code. It combines both innovatory and conservative proposals. Generally, the changes covered by this review are progressive in nature. Many of them meet the needs of Russian business practice and create an environment for their long-term improvement. These amendments will be conducive to better corporate governance, increased transparency and a clampdown on abuse in corporate relations, practices to preserve validity of transactions, and growth in business activity in general.
CANADIAN UPDATE – Is the Price Right? Increased Regulatory Scrutiny and Class Actions for Representations Involving Price
Highlights:
- Businesses operating in Canada should be aware of a recent trend towards greater regulation and enforcement action surrounding pricing representations where additional costs are not clearly disclosed up front.
- The federal government’s planned regulation of airline advertising, the Competition Bureau’s recent aggressive enforcement initiatives regarding price representations as well recent class actions involving pricing representations brought in Québec and Ontario should be taken as cautionary signals to businesses operating in Canada. In particular, when fees are imposed by the seller and are applicable to all customers – to avoid enforcement action or litigation – businesses should consider disclosing such fees up front and including such fees in the pricing featured in any advertising.
MAIN ARTICLE
Businesses operating in Canada should be aware of a recent trend towards greater regulation and enforcement action surrounding pricing representations where additional costs are not clearly disclosed up front. The Minister of State for Transport announced that the Canada Transportation Agency is proceeding with regulations to require Canadian air carriers to include all fees, charges and taxes in advertised prices. This trend towards requiring up-front disclosure of all fees and charges in any advertised pricing is consistent with the enforcement initiatives recently undertaken by the Competition Bureau (the “Bureau”) as well as the approach taken in recent class actions involving pricing representations brought in Québec and Ontario. The Bureau’s aggressive enforcement approach combined with an increase in class actions concerning pricing representations suggests it may be prudent for businesses to consider disclosing all fees imposed by the seller and applicable to all customers up front in any advertising.
On December 16, 2011, the federal Minister of State for Transport, the Honourable Steven Fletcher announced that the Canada Transportation Agency will be developing regulations to require Canadian air carriers to include all charges in advertised prices. Mr. Fletcher explained that the regulations are intended to promote fair competition “by ensuring greater transparency of advertised airfares for Canadian travellers”. The Canada Transportation Agency is empowered under the Canada Transportation Act to make regulations respecting the prices for air services within or originating in Canada advertised in all media, including the Internet. The drafting and consultation process for the regulations is expected to take approximately a year to complete. The planned regulations will require air carriers who advertise prices to include “all costs to the carrier” of providing the service and to indicate in the advertisement all fees, charges and taxes collected by the carrier on behalf of another person. The advertised price must enable consumers to “readily determine the total amount” to be paid. The plans for Canadian airfare pricing regulation follow similar increased regulation in both the European Union and the United States regarding the pricing of airfares.
The move to require up front disclosure of all fees and charges in advertised prices for airline carriers also follows enforcement action undertaken by the Competition Bureau in other industries. Specifically, the Competition Bureau has taken the stance that “the popular trend” of advertising a price to consumers and then disclosing additional mandatory costs in accompanying fine print is misleading and may result in enforcement action. This stance is clearly evidenced in a recent settlement reached with Bell Canada regarding its approach to pricing representations as well as recent speeches by the Commissioner of Competition (the “Commissioner”) regarding the Bureau’s future enforcement activities.
On June 28, 2011, the Bureau announced that Bell Canada had agreed to modify certain advertisements which the Bureau alleged were contrary to the civil misleading advertising provisions in the Competition Act and to pay a penalty of $10 million as well as a sum towards the Bureau’s legal costs. According to the Bureau, Bell made false or misleading representations between December 2007 and June 2011 about the prices at which certain of its services were available. Specifically, the Bureau alleged that Bell’s advertisements created the misleading “general impression” that consumers need only pay the monthly price advertised in the main body of the advertisements and that Bell had used a variety of “fine-print disclaimers” to “hide” additional mandatory fees from customers. According to the Bureau, the actual price paid by Bell’s customers for the advertised products was higher than the price that was advertised in the main body of the advertisement. Although Bell did not accept the Bureau’s allegations, it agreed not to contest these allegations for the purposes of the settlement, and to modify all advertising at issue within 60 days.
Since the Bell settlement was announced, the Commissioner has given various speeches regarding the Bureau’s enforcement priorities for the coming year. In particular, the Commissioner has recently stated that “misleading representations continue to be an area of concern for the Bureau” and, with respect to pricing representations, the Commissioner has stated that the Bureau is “investigating several industries where we are concerned that Canadians have been taken advantage of, in this or related ways”. The Bureau’s focus on misleading advertising and consumer-oriented enforcement appears to be part of the Bureau’s goal to “demonstrate the relevance of the Bureau’s work to Canadians in their everyday lives”.
Given that the Bureau clearly considers price representations to be an enforcement priority, it is somewhat surprising that the Bureau has not issued any new guidance in the form of revised guidelines or any specific guidance to the industries where the Bureau is concerned about the disclosure provided (as it has done in prior instances). Rather, the Bureau appears to be taking aggressive enforcement action (such as that against Bell) in the hopes that such enforcement activity will motivate compliance. The lack of further guidance on this point is particularly surprising given that the use of “mice print” and disclaimers is widespread in Canadian advertising and the Bureau’s existing guidelines on point merely provide that “if a representation is made concerning the price of a product, any such additional required payment should be disclosed at the same time”. In other words, under the Bureau’s existing guidelines, it is certainly arguable that a customer has received adequate disclosure of the applicable price via the information contained in the smaller print.
In a similar vein, allegedly misleading advertising and charging consumers “undisclosed” costs has given rise to a number of class actions in Québec on the basis of Québec’s Consumer Protection Act (the “Québec CPA”). Section 12 of the Québec CPA, which applies to advertisements in all forms, provides that “no costs may be claimed from a consumer unless the amount thereof is precisely indicated in the contract.” While the word “costs” (or “frais” in French) is not defined in the Québec CPA, Québec courts have interpreted this term broadly as including, for example, commissions, administrative fees and surcharges. Québec’s Consumer Protection Office has taken the position that the advertised price must be the total price that a consumer has to pay and that the only amounts that can be excluded from this price are amounts payable pursuant to federal or provincial legislation that are levied directly on the consumer and that are remitted to a public authority such as, for example, the Québec Sales Tax (QST) or GST. The alleged failure to comply with section 12 of the Québec CPA has given rise, most recently, to a proposed class action against a Québec-based telecommunications company seeking restitution for amounts allegedly improperly charged, as well as $5 million in punitive damages.
Class actions based on a lack of full disclosure of applicable fees and charges have been initiated in Ontario as well. For instance, a class action against United Parcel Service Canada Ltd. (“UPS”) was brought on the basis that UPS failed to disclose mandatory brokerage fees to consumers, and thereby breached various provisions of Ontario’s Consumer Protection Act (“Ontario CPA”). This class action was recently certified by the Ontario Superior Court of Justice. The brokerage fees were imposed on consumers for the delivery of items shipped from the United States, and as the judge pointed out, were not a government imposed duty or tax, but rather were levied by UPS for its customs clearing services. Further, the judge found that various standard form contracts used by UPS did not disclose the disputed fee. UPS has indicated it plans to appeal the Superior Court’s decision.
The federal government’s planned regulation of airline advertising, the Bureau’s aggressive enforcement initiatives regarding price representations as well recent class actions should be taken as cautionary signals to Canadian businesses. In particular, when charges are imposed by the seller and applicable to all customers – in order to avoid enforcement action or litigation – businesses should consider disclosing such fees up front and including such fees in the prices featured in any advertising.
DANISH UPDATE – Danish Disclosure Obligations Potentially Broader Than Other European Countries in M&A Context
Highlights:
- Under Section 27 of the Danish Securities Trading Act, inside information must be disclosed by an issuer at the earlier of (i) the coming into existence of the relevant circumstances or occurrence, albeit not yet formalised, (ii) the disclosure of the inside information to a third party, or (iii) a leakage of the inside information.
- This Danish implementation of Article 6(1) of Directive 2003/6/EC is broader than the interpretation of other European countries and could lead to more extensive and earlier disclosure.
1. Introduction
1.1 This article presents the Danish regulations on the disclosure obligations of listed companies and the most recent amendment – the “Rule on Leakages.” The article presents the implications of the Danish regulations to how parties and advisors should structure cross border mergers and acquisitions involving a Danish issuer of shares listed on NASDAQ OMX Copenhagen A/S or another regulated market (an “Issuer”) and to the relating documentation.
2. Executive Summary
2.1 In any potential or ongoing transaction involving an Issuer, the involved parties should prepare publicity guidelines specifying the procedure for any disclosure of information and the responsible parties.
2.2 The foreign party should take extra care when dealing with the press both domestically and abroad. Particular care should be given to the wording of non-disclosure agreements and confidentiality clauses in order to address the disclosure obligations of the Issuer under the Danish Securities Trading Act (consolidated Act no. 883 of 09-08-2011, the “Act”), including the Rule on Leakages found in Section 27 (2)(3) of the Act.
2.3 The Issuer must have a procedure for immediately publicly disclosing the inside information and should in cases involving a high risk of leakage (mainly transactions) keep a draft company announcement ready.
3. Danish and EU provisions on disclosure and leakage
3.1 Under Section 27 (1) of the Act, any Issuer shall publicly disclose inside information immediately upon the coming into existence of the relevant circumstances or occurrence, albeit not yet formalised. This implements the Danish interpretation of Article 6 (1) of Directive 2003/6/EC on insider dealing and market manipulation (the “Market Abuse Directive”); that the Issuer as a starting point is obligated to disclose inside information only when the inside information has been realised. Other member states interpret the article to mean that all inside information must be published, regardless of whether the inside information relates to something which is a fact.
3.2 Inside information must be publicly disclosed simultaneously with the disclosure of the inside information to a third party, unless such third party is considered an insider and is subject to a duty of confidentiality, see Section 27 (2) of the Act, or immediately after the Issuer becomes aware or should have become aware of having disclosed the said inside information. The wording of Section 27 (2) is an implementation of Article 6 (3)(1),(2) in the Market Abuse Directive, which is likely implemented the same way in all the member states.
3.3 On 1 January 2011 the so-called “Rule on Leakages” was implemented as a new Section 27 (2)(3) of the Act. The amendment was implemented to ensure information parity in the market and to some extent to protect the market from being affected by rumours. The Rule on Leakages is not an implementation of any EU directive or regulation, but is implemented following a dispute regarding the interpretation of the Danish disclosure obligations (see below).
3.4 The Rule on Leakages stipulates that the Issuer must publicly disclose any inside information no longer held confidential (leakage of inside information), regardless of whether the source of the breach can be identified.
3.5 The Issuer’s disclosure obligations may be illustrated as follows:
4. Leakage case
4.1 In mid-July 2005, major Danish tele-, broadband and cable-TV supplier TDC A/S (“TDC”) was approached by a club of private equity funds (Apax, Blackstone, KKR, Permira and Providence) with the purpose of submitting a voluntary takeover bid for minimum 90 % of the outstanding share capital.
4.2 Negotiations continued during 2005 and very specific rumours concerning the transaction began to circulate in the media. On 17 August 2005, the transaction and the names of all the potential buyers were published on the front page of The Wall Street Journal, citing “sources close to the transaction” as the source. TDC published a company announcement confirming only that TDC “continually receives inquiries from interested buyers.” On 30 November 2005, TDC published a company announcement confirming that the five funds mentioned above were issuing a joint offer for TDC.
4.3 The Danish Securities Council ruled – on recommendation of the Danish Financial Services Authority (the “FSA”) – that TDC had failed to comply with its disclosure obligations under the Danish Securities Trading Act applicable at the time. According to the FSA’s interpretation of the Danish Securities Trading Act, the Issuer should publish any inside information as soon as the Issuer became aware of it, regardless of whether the inside information had become a fact. The ruling was never published because the high-profile case could not effectively be made anonymous.
4.4 On 19 April 2007, the FSA published a memo describing the above-mentioned interpretation of the Act. This interpretation was highly debated in Danish capital markets law and was eventually overturned by a ruling from the Danish Companies Appeals Board of 11 September 2008, incidentally in another case concerning TDC.
4.5 In accordance with the decision above, the interpretative notes of the Rule on Leakages reaffirm that the Danish Companies Appeals Board’s interpretation of Section 27 (1) of the Act, see clause 3.1 above, is in accordance with the Market Abuse Directive, and that the Danish rules are now supplemented with the obligation to disclose inside information in case of a leakage.
4.6 Today, the Rule on Leakages would imply that the issuer is forced to immediately disclose inside information confirming the leaked inside information. Such premature disclosure of course increases the risk of serious negative implications to the transaction and of the attraction of event driven hedge funds.
5. The Rule on Leakages and cross-border public M&A
5.1 The Danish disclosure obligations, including the new Rule on Leakages, are highly relevant to both cross-border and domestic mergers and –acquisitions.
5.2 In any transaction involving a Danish Issuer, the involved parties should carefully consider preparing publicity guidelines specifying the procedure for any disclosure of information and the responsible parties.
5.3 In a cross-border transaction, the foreign party should take extra care when dealing with the press both domestically and abroad to prevent that the Issuer is obligated to publicly disclose inside information about the potential transaction.
5.4 Under Section 27 (1) of the Act, the board of directors of the Issuer may be obligated to disclose a particularly firm indication by a potential offeror or merger partner of an upcoming public tender offer or merger proposal. Therefore, it is in the interest of a potential offeror that the Issuer is bound by a non-disclosure agreement as early as possible, and the initial contact with the Issuer should specify that the decision to put forward a public tender offer or merger proposal is not a certainty as well as what factors the decision will depend on, e.g. satisfactory due diligence.
5.5 Particular care should be given to the wording of non-disclosure agreements and confidentiality clauses in order to address the disclosure obligations of the Issuer under the Danish Securities Act (including the Rule on Leakages), which may differ from the disclosure obligations under the foreign party’s domestic regulations. In relation hereto, a foreign party in the EU should be aware of whether the foreign party’s home country employs the Danish interpretation of Article 6 (1) of the Market Abuse Directive, see clause 3.1 above.
5.6 These procedures and documents should be in place in order to (i) disclose inside information to as few people as possible, especially external persons, and on a need-to-know basis only and (ii) complete any confidential transactions as soon as possible, both in order to minimize the risk of a leakage of inside information.
5.7 Any leakage or true rumour in the market will obligate the relevant Issuer to disclose the leaked inside information, which could be very detrimental to a potential or ongoing transaction. Danish Issuers must have a procedure for immediately publicly disclosing inside information which is no longer held confidential and should in cases involving a high risk of leakage (mainly transactions) keep a draft company announcement ready.
GERMAN UPDATE – New Disclosure Requirements to Prevent Secret Stake-building in German Listed Companies
Executive Summary:
- New share- and instrument holding disclosure rules concerning German listed companies go into force on 1 February 2012.
- The new rules particularly intend to prevent secret stakebuilding in listed companies.
- The new rules are likely to have a significant impact on public takeovers.
- The rules may also apply, under particular circumstances, to non-German companies listed on a German stock exchange.
MAIN ARTICLE
Germany tightens disclosure requirements for significant shareholdings
In April 2011, the Law on the Strengthening of Investor Protection and the Improvement of Financial Markets (Gesetz zur Stärkung des Anlegerschutzes und zur Verbesserung der Funktionsfähigkeit des Kapitalmarkts – “AnSFuG“) was passed. The AnSFuG tightens, inter alia, the disclosure requirements for shareholdings in German listed companies. The main objective of the new legislation is to capture arrangements which so far fell outside the existing disclosure requirements, even though they may be (and have been) used to build up positions in a German listed company (“creeping-in”). The new disclosure requirements will enter into force on 1 February 2012. The rules may also apply, under particular circumstances, to non-German companies listed on a German stock exchange.
I. Existing German Notification Requirements
The German provisions on the disclosure of significant shareholdings conferring voting rights are set out in the German Securities Trading Act (Wertpapierhandelsgesetz – “WpHG“). Based on the European Transparency Directive (Directive 2004/109/EG), the WpHG requires owners of shares in German listed companies to disclose their voting rights by notifying the issuer and the German Federal Financial Services Supervisory Authority (“BaFin“) if certain thresholds (3%, 5%, 10%, 15%, 20%, 25%, 30%, 50% and 75%) are reached or crossed. The disclosure requirements applicable to owners of shares are supplemented by provisions which attribute to the notifying shareholder voting shares owned by certain other related shareholders (e.g. shares owned by subsidiaries, shares held by a third party for the account of the notifying party, acting-in-concert). These disclosure requirements applicable to shareholders remain unaffected.
In addition, the current disclosure requirements catch financial instruments which entitle the holder to acquire voting shares, such as call options. Voting shares which can be acquired under such financial instruments must be added to direct or attributed voting share ownership. These disclosure requirements, however, so far, do generally not capture arrangements (such as certain securities lending transactions and repos) which do generally not fall within the ambit of the “financial instruments” definition.
II. Overview of Main Amendments
The following key changes to the German disclosure rules for significant shareholdings will be introduced:
- The existing disclosure requirements for “financial instruments” are extended to include “other instruments” (which do not qualify as financial instruments) granting the right to acquire voting shares.
- New disclosure requirements are introduced for instruments which do not grant an enforceable right to acquire voting shares but still make an acquisition of voting shares (at least economically) possible.
There will, consequently, in future be three disclosure regimes, i.e. (i) for voting shares (§§ 21, 22 WpHG), (ii) instruments granting the holder an enforceable right to acquire voting shares (§ 25 WpHG), and (iii) instruments which do not grant an enforceable right to acquire voting shares but make such acquisition possible (§ 25a WpHG). These disclosure regimes are distinct, but linked by the provisions requiring the aggregation of positions held in each of the different categories.
1. Other Instruments Granting a Right to Acquire Voting Shares (§ 25 WpHG)
The disclosure requirements for financial instruments are amended to include “other instruments” granting their holder the right to acquire voting shares.
As a consequence, the following instruments may, for example, be relevant for purposes of this disclosure requirement:
- Rights for the delivery of voting shares under a share purchase agreement (or other agreement such as a shareholders´ agreement) with deferred delivery or subject to conditions precedent under the exclusive control of the purchaser (e.g., approval of corporate bodies of purchaser).
- Rights for the redelivery of voting shares under a securities lending agreement or repurchase agreement.
2. Instruments making it possible to acquire voting shares (§ 25a WpHG)
New disclosure requirements are introduced for instruments which “make it possible” to acquire voting shares. In contrast to the already existing disclosure requirements for instruments granting a right to acquire voting shares, the instruments captured by the new provision do not grant a legally enforceable right to acquire shares. However, due to their particular economic features or their underlying business logic, they may bring about the opportunity for the holder to acquire voting shares. Furthermore, it will be sufficient for disclosure purposes, if a third party rather than the holder of the instrument is entitled to acquire voting shares (e.g. by way of a contractual agreement for the benefit of third parties / Vertrag zugunsten Dritter).
This broad and somewhat imprecise new rule is complemented by two statutory provisions exemplifying circumstances under which arrangements are deemed to make the acquisition of voting shares possible:
- The counterparty might be able to hedge its risks arising under the instrument, in whole or in part, by holding voting shares; for the disclosure requirements in a given case it is, however, irrelevant whether such hedging actually takes place.
- The instrument provides for the right or the obligation to acquire voting shares.
a) Possibility of hedging through the holding of voting shares
The possibility of hedging through the holding of voting shares will, for example, inevitably be given in a cash settled transaction which confers the economic benefit and burden arising out of voting shares upon the holder of the instrument. Thus, for the new disclosure requirements it is not decisive whether an instrument provides for a cash settlement or the physical delivery of the underlying shares.
As a consequence, the following cash-settled instruments may have to be disclosed:
- Total return equity swaps (from the perspective of the counterparty exposed to the economic risks and benefits of the underlying shares)
- Cash-settled long call/short put options/ contracts for difference
b) Right or obligation to acquire voting shares
As far as the right or obligation to acquire voting shares is concerned, an instrument may be regarded as making the acquisition of voting shares possible within the meaning of the new law even if the initiative for the acquisition of the shares must come from the other party to the transaction. Further, the new provision also captures instruments granting the right to acquire voting shares when these instruments are only subject to conditions whose fulfillment is not under the exclusive control of its holder. Currently, instruments (even in the form of financial instruments) are generally not captured by the existing disclosure requirements if such conditions are agreed.
Neither the new law nor the accompanying legislative materials contain any specific exemption for agreements under corporate law (share purchase agreements, shareholders´ agreements, articles of association), which make it possible to acquire voting shares. The practical handling of such broad obligation will need to be thoroughly reviewed.
As a consequence, the following instruments may, inter alia, be relevant:
- Rights for the delivery of voting shares under a share purchase agreement (or other agreement) which are subject to conditions precedent not under the exclusive control of the purchaser (e.g., merger control clearance, approval of corporate bodies of seller)
- Put options on voting shares with physical delivery (from the perspective of the option writer) unless the bond may exclusively be covered by newly issued shares; this may, inter alia, include the put right of the issuer under a mandatory convertible bond (Pflichtwandelanleihe)
- Rights for the delivery of voting shares under a stock option plan subject to certain vesting conditions
3. Instruments Referring to Baskets or Indices
A disclosure requirement only arises if an instrument relates to voting shares in German listed companies. There is no requirement, however, for the instrument to relate exclusively to such shares. The new disclosure requirements also cover financial instruments referring to baskets or indices. The new law does not require any minimum weight of a particular share within a basket or index in order for the underlying instrument to be relevant for disclosure purposes. However, the German Ministry of Finance is authorized to exempt certain financial instruments from the new disclosure requirements by executive ordinance. It remains to be seen whether the German Ministry of Finance will introduce any safe harbour provisions for well-diversified instruments with a multitude of underlying shares.
4. Disclosure Requirement, Relevant Thresholds and Aggregation Rules
Notifications of significant holdings in relevant instruments are subject to the same publication requirements as notifications of significant shareholdings. This means, in particular, that the relevant issuer must publish information on such holdings received from an instrument holder without undue delay but at the latest within three business days of receipt of the notification.
Whereas the lowest threshold for the disclosure of voting shares held or attributed to the notifying party is 3 % under German law, financial and other instruments relating to voting shares must only be disclosed if they relate to 5 % or more of the voting shares of the listed company. The new law does not provide for long and short positions to be netted off for purposes of the disclosure requirements applicable to significant shareholdings.
In order to determine whether a threshold for the disclosure requirements applicable to financial and other instruments has been reached or crossed, own or attributed shares, instruments granting a right to acquire voting shares and instruments making it possible to acquire voting shares must be aggregated. Besides specifying the aggregate number of voting shares, the relevant notification must, however, differentiate between own and attributed voting shares, instruments granting a right to acquire voting shares and instruments making it possible to acquire voting shares.
The number of voting rights to be disclosed for financial and other instruments is generally determined by the number of shares which can be acquired under the instrument. If the instrument does not relate to a specific number of shares, the number of voting rights must be determined by the amount of shares which the other party would require for a full hedge of its position under the instrument. For instruments which refer to a basket or index, the pro rata amount of the underlying share in the basket or index must be considered. The AnsFuG authorizes the German Ministry of Finance to issue an executive regulation specifying, inter alia, the details of the calculation.
5. Transitional Provisions
The new disclosure requirements will also be relevant for holdings acquired before and still held when the new law enters into force on 1 February 2012. On this date, a party holding instruments making it possible to acquire 5 % or more (taking into account the aggregation rules) of the voting shares of a German listed company, must disclose this holding without undue delay but at the latest within 30 trading days. Existing structures should, therefore, be carefully reviewed.
6. Sanctions
Non-compliance with the disclosure requirements for voting shares may lead to the loss of rights arising under such shares, including dividend rights and voting rights. The same may apply to attributed voting shares, depending on which attribution rule has been violated. In addition, non-compliance may result in a fine from the BaFin.
Non-compliance with the disclosure requirements applicable to financial and other instruments generally does not lead to a loss of rights under the underlying shares even after they have actually been acquired. BaFin may, however, fine such non-compliance. The maximum fine will be increased to EUR 1,000,000 per violation by the AnsFuG.