GERMAN UPDATE – Amendments to German Securities Trading Act (WpHG) with High Significance in Practice: Disclosure of Significant Shareholdings, Home Country Disclosure, Interim Financial Reporting
- Revised notification requirements with regard to significant shareholdings conferring voting rights in companies listed in Germany as well as with regard to (financial) instruments regarding such shares in force since 26 November 2015
- Mandatory standard form for notifications to be used
- Scope of sanctions for breach of disclosure requirements substantially broadened
- One-off disclosure requirements triggered by the mere amendment of the German Securitites Trading Act (WpHG), in particular, any holding of instruments in excess of 5% on 2 November 2015 has to be notified
- One-off disclosure requirement for all issuers if their (statutory or elected) home state (Herkunftsstaat) is Germany
On 1 October 2015 and 6 November 2015, the German Bundestag and Bundesrat passed the Act regarding the Implementation of the Amendment Directive to the Transparency Directive (Gesetz zur Umsetzung der Transparenzrichtlinie-Änderungsrichtlinie, hereinafter the “Implementation Act” – see official document (Drucksache) no. 482/15 of the German Bundesrat (http://www.bundesrat.de/bv.html?id=0482-15) to adopt Directive 2013/50/EU of the European Parliament and of the Council of 22 October 2013 which amends the European Transparency Directive (Directive 2004/109/EC of the European Parliament and of the Council) providing, inter alia, for disclosure requirements for significant shareholdings in companies listed in Germany (please note that, under certain circumstances, the German disclosure requirements may apply to non-German companies whose shares are listed on a German stock exchange). The new law has become effective on 26 November 2015 (hereinafter the “Effective Date“).
I. Summary of Status Quo of Notification Requirements in Germany
The German provisions on the disclosure of significant shareholdings conferring voting rights are set forth in the German Securities Trading Act (Wertpapierhandelsgesetz – “WpHG“), which in this regard is based on the European Transparency Directive. The WpHG has until now provided for the following three separate disclosure requirements with regard to significant shareholdings:
(a) The owners of shares conferring voting rights in German listed companies must notify the respective issuer and the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – “BaFin“) pursuant to Sec. 21 of the WpHG if certain threshold proportions (3%, 5%, 10%, 15%, 20%, 25%, 30%, 50% and 75%) of the total voting rights in the issuer are reached or exceeded (or if the shareholding falls below such threshold). In this regard, not only the shares conferring voting rights directly owned by the relevant person are taken into consideration but, pursuant to Sec. 22 of the WpHG, shares owned by a third party may be attributed to the relevant person, e.g., shares owned by subsidiaries of such person, or shares which are owned by a third party deemed to be acting in concert with the relevant person.
(b) In 2007 (amended in 2009), the German disclosure requirements were extended to include certain financial instruments and other instruments which entitle the holder to acquire voting rights pertaining to existing shares of the respective German listed company. These must also be notified to the issuer and BaFin pursuant to Sec. 25 of the WpHG if the aggregate percentage of shares conferring voting rights which may be acquired under such instruments together with shares owned or attributed to the relevant person pursuant to Sec. 21 and 22 of the WpHG reaches, exceeds or falls below any of the above mentioned thresholds (except for the threshold of 3%).
(c) As certain instruments with regard to the delivery of shares conferring voting rights (e.g., short positions under put options), and more significantly cash-settled instruments, were not captured by the definition of instruments set forth in Sec. 25 of the WpHG and did not trigger notification obligations, new disclosure requirements with regard to such instruments were introduced in 2012. Since then, Sec. 25a of the WpHG provides for a rather broad disclosure of instruments which do not grant an enforceable right to acquire voting rights but facilitate such acquisition at least economically (e.g., cash settled options or total return equity swaps) or provide for an obligation of the holder to acquire shares conferring voting rights (e.g., short positions under put options, share purchase agreements subject to conditions precedent which are not under the sole control of the purchaser). Furthermore, Sec. 25a of the WpHG even captures instruments whose holder is not the beneficiary but which facilitate the acquisition of voting rights by a third party. Again, any shareholding pursuant to Sec. 21 and 22 of the WpHG and holding of instruments pursuant to Sec. 25 of the WpHG must be aggregated with holdings of instruments pursuant to Sec. 25a of the WpHG for the purpose of determining whether the relevant thresholds of voting rights in the German listed company are met (except for the threshold of 3%). The disclosure requirements pursuant to Sec. 25a of the WpHG went well beyond the requirements stipulated by the European Transparency Directive thus far.
II. Amendment to the European Transparency Directive by Directive 2013/50/EU
The European Transparency Directive was amended by Directive 2013/50/EU of the European Parliament and of the Council of 22 October 2013. The key amendments with regard to voting rights notifications relate to the definition of financial instruments, which now not only captures financial instruments entitling the holder to acquire shares conferring voting rights but also financial instruments referenced to shares and “with economic effect similar to” those entitling the holder to delivery of shares (Article 13, para. 1 lit b) of the Transparency Directive (as amended)). Also, Article 13a of the Transparency Directive (as amended) now provides for an aggregation of voting rights held directly or indirectly and financial instruments within the meaning of Article 13 of the Transparency Directive (as amended). In addition, the scope of sanctions for a breach of the notification requirements has been significantly extended (including fines of up to the higher of EUR 10m and 5% of the total annual turnover according to the last available annual accounts), a public ‘naming and shaming’ of the relevant person and a loss of the right to exercise voting rights.
III. Implementation of revised European Transparency Directive into the WpHG
The revised Transparency Directive is implemented into German law by the Implementation Act (the WpHG as amended by the Implementation Act in the following the “Revised WpHG“). BaFin has published on its website, among other materials, Frequently Asked Questions (FAQ) with regard to the new disclosure requirements under Sec. 21/22, 25 and 25a of the WpHG (as revised) to give guidance on the new law:
The key changes made to the disclosure requirements under the WpHG can be summarized as follows:
1. Continuation of System of three different Disclosure Regimes but with revised Trigger Events
The new disclosure requirements under Sec. 21/22, 25 and 25a of the Revised WpHG still provide for three separate disclosure regimes as before, but with different trigger events and content:
(a) Holding/Attribution of Voting Rights
Sec. 21 and 22 of the Revised WpHG require a disclosure of voting rights held or attributed to the relevant person (including rights held by parties acting in concert with them).
(b) Holding of Instruments
Sec. 25 of the Revised WpHG combines the current disclosure requirements under Sec. 25 and 25a of the WpHG: pursuant to Sec. 25 of the Revised WpHG (x) instruments entitling the holder to acquire shares conferring voting rights as well as (y) other instruments relating to shares conferring voting rights and having similar economic effect as the instruments pursuant to (x) (irrespective of an actual delivery of shares) will have to be notified if the aggregate holding of such instruments reaches, exceeds or falls below the (unchanged) thresholds pursuant to Sec. 21 of the Revised WpHG (except for the threshold of 3%, which still applies only to holdings/attributions of shares conferring voting rights). Please note that Sec. 25 of the Revised WpHG only takes into account the (direct or indirect) holding of instruments for the purpose of determining whether the relevant thresholds are met.
Thus, the disclosure requirements pursuant to Sec. 25 and 25a of the WpHG regarding (financial) instruments have been consolidated in Sec. 25 of the Revised WpHG. Such consolidation shall, pursuant to the explanatory notes of the legislator to the Implementation Act, not result in a change to the scope of instruments which were previously to be notified pursuant to Sec. 25 and 25a of the WpHG although the definition of the relevant other instruments (i.e., instruments under (y) above) has been slightly reworded. However, there will at least be a minor change of scope resulting from the new wording: under Sec. 25a of the WpHG instruments had to be disclosed even if they facilitated the acquisition of shares by a third party rather than their holder. Sec. 25 of the Revised WpHG no longer refers to third parties so that only instruments from which the actual holder benefits have to be disclosed by the holder. However, if an instrument provides for a benefit to a third party (e.g., under a contract containing third party rights) that third party may itself be required to make a disclosure notification pursuant to Sec. 25 of the Revised WpHG.
(c) Aggregation of Voting Rights and Instruments
Sec. 25a of the Revised WpHG provides for a separate disclosure requirement with regard to the aggregated holding/attribution of shares (Sec. 21 and 22 of the Revised WpHG) and the holding of instruments (Sec. 25 of the Revised WpHG), in addition to the individual notification requirements for each of these. Such aggregation had to be made under the old law as well but as part of the disclosure of instruments rather than as a separate disclosure as it is now provided for in Sec. 25a of the Revised WpHG. Under the new law, if the aggregate holding of shares and instruments reaches, exceeds or falls below any of the thresholds pursuant to Sec. 21 of the Revised WpHG (except for the threshold of 3%) this must be notified pursuant to Sec. 25a of the Revised WpHG even if no disclosure requirement pursuant to Sec. 21/22 and 25 of the Revised WpHG is triggered.
Example: shareholder A holds 2% of the shares of the German listed company X AG (covered by Sec. 21 of the Revised WpHG) and instruments entitling the holder to a delivery of 2% of the shares of X AG conferring voting rights (i.e., an instrument within the meaning of Sec. 25 of the Revised WpHG). Under the new law (as under the current law) such holding (i.e., shares and instruments) does not trigger any notifications as no relevant threshold is reached or exceeded. If A now acquires another 2.9% in the form of instruments relating to the shares of X AG, such acquisition does not trigger a notification pursuant to Sec. 21 of the Revised WpHG as the shareholding is still below 3% (namely 2%) or a notification pursuant to Sec. 25 of the Revised WpHG as the holding of instruments is still below 5% (namely 4.9%). However, a notification pursuant to Sec. 25a of the Revised WpHG is triggered as the aggregate holding of shares and instruments has exceeded 5% (namely 6.9%). Thus, a notification pursuant to Sec. 25a of the Revised WpHG must be made by shareholder A.
2. Sec. 21 of the Revised WpHG: Unconditional Right or Obligation to transfer Shares triggering Voting Rights Notifications
With regard to shares directly held by or attributed to the relevant person, voting rights notifications will no longer be triggered by the closing of the trade/acquisition, i.e., the transfer of legal ownership of the shares. Instead, the right (or obligation, in case of a disposal) to transfer legal ownership of the shares will trigger the voting rights notifications if such right or obligation is (x) unconditional (unbedingt) and (y) to be settled without delay (ohne zeitliche Verzögerung). This is usually the case for the acquisition or disposal of shares via a stock exchange which are settled on the second trading day after the trading on the stock exchange (“t+2”); in such cases, the voting rights notifications are triggered on the day of the trade on the stock exchange already (“t”) rather than on the day of settlement of such trade by delivery of the shares (“t+2”).
Please note that such amendment applies only to the voting rights notifications under the Revised WpHG, and not to the determination of control (30% threshold of voting rights in a German listed company reached or exceeded) under the German Takeover Act (Wertpapiererwerbs- und Übernahmegesetz, WpÜG) for which the settlement of the acquisition and thus legal ownership of the shares remains relevant.
3. Amended Attribution Rules pursuant to Sec. 22 (1) of the Revised WpHG
(a) Sec. 22 (1) of the Revised WpHG provides for an attribution of voting rights in case of a temporary transfer of voting rights without the underlying shares for consideration (no. 7 of Sec. 22 (1) of the Revised WpHG) and in case of shares which are lodged as collateral (Sicherungsverwahrung) provided the holder of the collateral controls the voting rights and declares his intention to exercise the voting rights (no. 8 of Sec. 22 (1) of the Revised WpHG). The temporary transferee or collateral holder would have to make a notification if the shareholding thresholds under the WpHG were met. Neither attribution rules should have a significant impact in respect of German listed companies, however. A separate transfer of voting rights without the underlying shares is not permissible for shares in a stock corporation (Aktiengesellschaft) incorporated under German law. Collateral over shares, meanwhile, is usually granted by way of pledge over the shares rather than by way of security transfer or security assignment of legal ownership of the shares to the holder of the security, so legal ownership of and thus the voting rights pertaining to the shares remain with the pledgor and the pledgee is not subject to a disclosure requirement pursuant to Sec. 21 and 22 of the WpHG.
In this respect, BaFin is changing its practice with regard to pledges over shares providing for forfeiture (Verfallklausel); in the view of BaFin such pledge no longer is an instrument within the meaning of Sec. 25 of the Revised WpHG.
(b) Furthermore, the definition of the term “subsidiary” is now included in Sec. 22a of the Revised WpHG. This inclusion has no substantive consequences, but formally consolidates the definitions which were previously spread across Sec. 22 (2) and (3) of the WpHG and the Capital Investment Act (Kapitalanlagegesetzbuch).
4. Non-counting of Voting Rights pertaining to Shares held for Stabilization Purposes
Sec. 23 (1a) of the Revised WpHG implements Article 9, para. 6a of the European Transparency Directive (as amended). Pursuant to the new para. (1a), voting rights pertaining to shares are not to be counted towards the disclosure thresholds if such shares have been acquired for stabilization purposes in accordance with Commission Regulation (EC) no. 2273/2003 of 22 December 2003 (buy-back-programs and stabilization of financial instruments), provided the voting rights attached to those shares are not exercised or otherwise used to intervene in the management of the issuer. Against this background, BaFin is changing its approach to shares subscribed by underwriters in an IPO which will be exempt from notification pursuant to Sec. 23 (2) no. 1 of the Revised WpHG if held for no longer than three trading days for the purposes of settlement of the IPO.
5. Form of Disclosure and Deadline for Notifications due under the Revised WpHG
(a) New Standard Form for Notifications
Any notification pursuant to Sec. 21/22, 25 and 25a of the Revised WpHG must be made to the issuer and BaFin using the official standard form as will be attached to the Legal Ordinance regarding Securities Trading Notifications and Insider Lists (Wertpapierhandelsanzeige- und Insiderverzeichnisverordnung, WpAIV). The use of the standard form is mandatory and will improve the comparability of notifications. Furthermore, under the new law only one notification is usually required for groups of companies rather than a separate notification by each group company.
(b) Timing of Notification
As under the existing regime, Sec. 21 (1) of the WpHG states that notifications have to be made without undue delay (unverzüglich) and in any case no later than four trading days after the shareholder gains knowledge of the acquisition or disposal of shares or of a holding of instruments. However, under the Revised WpHG it is also irrefutably assumed (unwiderleglich vermutet) that the relevant shareholder has gained such knowledge two trading days after the trade of shares or instruments has occurred (irrespective of the settlement of such trade). This amendment should not generally have a substantial impact in practice but it underlines the German legislator’s intention to increase the standard of diligence applied by market participants to notification requirements, and hence the risk of sanctions for non-compliance.
Broadening the scope of sanctions triggered by a breach of the notification requirements is one of the Implementation Act’s key objectives.
(a) Loss of Rights pertaining to Shares, Sec. 28 of the Revised WpHG
A loss of voting rights and dividend rights was previously triggered only by a breach of the disclosure requirement relating to shares directly owned or attributed pursuant to no. 1 and no. 2 of Sec. 22 (1) of the WpHG (although fines could still be imposed). Under the new law a loss of rights is also triggered by the breach of a disclosure requirement arising due to any of the other attribution rules under Sec. 22 of the Revised WpHG. Most importantly, this also includes a breach of disclosure requirements with regard to voting rights attributed to parties that are acting in concert within the meaning of Sec. 22 (2) of the Revised WpHG. In these cases, the loss of voting rights and dividend rights not only relates to the shares directly held/owned by the person in breach of the disclosure requirements but also to the shares held by third parties which are attributed to such person pursuant to Sec. 22 of the Revised WpHG.
Example: If shareholders A and B are acting in concert with regard to their respective shares held in a German listed company and if shareholder A (or its direct and indirect controlling shareholder(s)!) does not comply with the disclosure requirements pursuant to Sec. 21 and 22 (2) of the Revised WpHG, both shareholder A and shareholder B will be subject to a loss of rights pertaining to the shares held even if shareholder B has fully complied with his disclosure requirements. Parties acting in concert will therefore have to make sure that each party fully complies with his respective disclosure requirements to avoid a loss of rights.
In addition, any breach of the disclosure requirements pursuant to Sec. 25 (1) (holding of instruments) and 25a (1) (aggregation of holding of shares and instruments) of the Revised WpHG will result in a loss of voting rights and dividend rights pursuant to Sec. 28 (2) of the Revised WpHG. However, such loss of rights relates to shares (directly) held by the relevant person being in breach of the disclosure requirements only but not to shares held by a third party. Previously, a breach of the disclosure requirements relating to (financial) instruments did not result in a loss of rights but could result in a fine being imposed by BaFin.
The monetary fines in case of a breach of the disclosure requirements have been substantially increased (Sec. 39 (4) of the Revised WpHG). So far, fines of up to EUR 1m can be imposed. Under the Revised WpHG, fines in the amount of up to EUR 2m may be imposed by BaFin on natural persons being holder of shares/instruments; for legal entities, the increase is very substantial: BaFin may now impose fines of up to the higher of EUR 10m and 5% of the annual consolidated turnover of the group to which such legal entity belongs. BaFin may increase the fine up to an amount equal to two times the economic benefit (including avoided losses) resulting from the non-compliance with the disclosure requirements.
(c) Naming and Shaming
Moreover, BaFin will now publish actions taken and fines imposed as a result of any breach of the disclosure requirements on its webpage. Such publication will include the name of the relevant person(s) (including individuals) and the disclosure requirement which has not been complied with (Sec. 40c of the Revised WpHG) and will be made regardless whether the administrative action of BaFin is or still can be challenged.
7. One-Off Disclosure Requirements triggered by the Amendment of the WpHG
Sec. 41 (4f) of the Revised WpHG provides for three different one-off disclosure requirements (Bestandsmitteilungspflicht) which are triggered simply by the fact that the WpHG has been amended by the Implementation Act, i.e., without any acquisition or disposal of shares or instruments:
(a) Pursuant to Sec. 41 (4f) sentence 1 of the Revised WpHG, every person must disclose, by 15 January 2016 at the latest, its current holding of shares conferring voting rights pursuant to Sec. 21 and 22 of the Revised WpHG as per the Effective Date if, solely due to the amendment of Sec. 21 and 22 of the WpHG, one of the thresholds under Sec. 21 of the Revised WpHG is reached or exceeded. It is relatively unlikely that such notifications will be triggered in practice given that the new attribution rules pursuant to no. 7 and no. 8 of Sec. 22 (1) of the Revised WpHG should only very rarely apply. A notification might be triggered by the new rule that the trading rather than the closing of a trade is to the relevant triggering event in the future (see 2. above). Again, however, this would only apply to rather exceptional cases, e.g., trading on the day before the day the Implementation Act becomes legally effective. Given that BaFin is of the opinion that a one-off disclosure pursuant to Sec. 41 (4f) sentence 1 of the Revised WpHG is not required if a notification pursuant to Sec. 21/22, 25 or 25a of the Revised WpHG is made ordinarily, such one-off notifications should be rare in practice.
(b) Pursuant to Sec. 41 (4f) sentence 2 of the Revised WpHG, every person must disclose its holding of instruments within the meaning of Sec. 25 of the Revised WpHG as per the Effective Date if such holding is equal to or greater than 5% on the Effective Date. Please note that such notification requirement solely depends on the holding of instruments reaching or exceeding the threshold of 5% on the Effective Date. Any holder of instruments within the meaning of Sec. 25 of the Revised WpHG reaching or exceeding the threshold of 5% through such instruments is thus required to make a one-off disclosure pursuant to Sec. 41 (4f) sentence 2 of the Revised WpHG. Such disclosure must be made by 15 January 2016 at the latest. However, if a regular disclosure pursuant to Sec. 25 of the Revised WpHG is triggered after the Effective Date due to a change in the holding of instruments and a respective notification is made, no one-off disclosure as per the Effective Date is required in the view of BaFin if this disclosure has not already been made.
(c) Pursuant to Sec. 41 (4f) sentence 3 of the Revised WpHG, every person must disclose, by 15 January 2016 at the latest, its current aggregated holding of shares and instruments pursuant to Sec. 25a of the Revised WpHG as per the date the Effective Date if, solely due to the amendment of Sec. 21/22 and 25a of the WpHG, one of the thresholds under Sec. 21 of the Revised WpHG is reached or exceeded (except for the threshold of 3%). Again, it should be rather unlikely that such notifications will be triggered in practice given that the change in the law should in almost all cases not result in a different aggregated holding of shares and instruments as under the current law.
A breach of the one-off disclosure requirements can result in fines up to EUR 200,000 (Sec. 44 (5) of the Revised WpHG). However, failure to comply will not result in a loss of rights and, the “naming and shaming” provisions do not apply.
IV. Select Overview of Further Changes
By the Implementation Act further changes to the WpHG will be made which do not relate to the notification of the holding of shares and instruments but with significance for issuers, in particular:
- One-off disclosure requirement for all issuers if their (statutory or elected) home state (Herkunftsstaat) is Germany, Sec. 2c of the Revised WpHG; the disclosure has to be made without undue delay (unverzüglich) after the Effective Date. In case of a breach, fines of up to EUR 200,000 may be imposed. BaFin has made available a draft form of such disclosure in its internet site
- Issuers of shares listed in Germany have to disclose, without undue delay (unverzüglich), any increase or decrease of the number of shares outstanding, Sec. 26a of the Revised WpHG (while up to know such disclosure has to be made only at the end of the month)
- Interim financial reporting:
- Suspension of requirement to publish interim management statements (Zwischenmitteilungen) pursuant to Sec. 37x of the WpHG; however, interim reporting requirements under applicable listing rules of stock exchanges remain unaffected thereby
- If interim management statements are to be reviewed by an auditor such auditor has to be elected by shareholder’s resolution.
- Deadline for the publication of half-yearly financial reports extended from two to three months, Sec. 37w of the Revised WpHG
- New reporting requirements for certain mineral exploiting (mineralgewinnend) and wood harvesting (holzeinschlagend) companies, Sec. 37x of the Revised WpHG
- Monitoring of financial statements: strengthening of the enforcement procedures pursuant to Sec. 37n et seqq. of the Revised WpHG
- De-regulation: Repeal of several publication and notification obligations of issuers (deletion of Sec. 30c, 30e (1) no. 1 c), no. 2 of the WpHG
The scope of triggering events for notifications of holdings of shares and instruments does not change substantially under the Revised WpHG as compared to the current law. However, as the potential sanctions for non-compliance with the disclosure requirements have been substantially increased, market participants should familiarize themselves carefully with the new and existing rules and the official form of notifications to be made. Furthermore, it is worth checking whether the one-off disclosure requirements pursuant to Sec. 41 (4f) of the Revised WpHG apply, in particular with regard to the holding of instruments reaching or exceeding the threshold of 5% on 26 November 2015.
Executive Summary: The European Commission approved a proposed acquisition which would create a merged entity that would be the only producer of naphthenic base and process oils in the EEA. The Commission’s investigation found that failure to approve such merger would result in a loss of refinery assets and significantly reduce production capacity in the EEA, resulting in higher prices for EEA consumers would follow any closure.
On 2 September 2013 the European Commission adopted a decision under the EU Merger Regulation approving the proposed acquisition by Nynas AB of Shell Deutschland Oil GmbH’s Harburg refinery assets (close to Hamburg, Northern Germany), leaving the merged entity as the only producer of naphthenic base and process oils in the EEA. The Commission’s Phase II investigation established that the closure of the Harburg refinery and the exit of those assets from the EEA market would be the most likely result in the absence of the proposed acquisition. No causal link could therefore be established between the proposed acquisition and the deterioration in competitive market structure. Furthermore, as closure would significantly reduce production capacity in the EEA, the Commission determined that higher prices for EEA consumers would follow any closure.
Article 2(3) of the Merger Regulation requires the Commission to prohibit concentrations which significantly impede effective ‘competition, in particular through the creation or strengthening of a dominant position.’ However, Article 2(2) emphasises that the impediment to effective competition must be ‘as a result’ of the concentration. This causal requirement forms the basis of the development by the Commission and the European courts of an exception to the prohibition requirement: the so-called ‘failing firm’ defence. This has been incorporated into the Commission’s Horizontal Merger Guidelines, in particular at paragraphs 89-91. Where the deterioration in competitive market structure after a concentration would result even if the transaction had not occurred, the Commission may approve a concentration reducing the number of competitors in the market.
A successful failing firm defence requires the establishment of the following criteria:
(a) the failing firm would in the near future be forced out of the relevant market because of financial difficulties, if not taken over by another undertaking;
(b) there is no less anti-competitive purchaser or alternative course of action, as may be demonstrated by the fact that various other scenarios have been explored without success; and
(c) in the absence of the merger, the assets of the failing firm would inevitably exit the market. In the case of a merger between the only two players in a market, this may justify a merger-to-monopoly on the basis that the market share of the failing firm would in any event have accrued to the other merging party.
Although recognized by the Commission since 1993, the failing firm defence is exceptional in nature and, in practice, is only rarely successful. The burden of proof to show the above criteria lies with the notifying parties, and in practice tends to necessitate a full Phase II investigation.
THE COMMISSION DECISION
Nynas produces and sells naphthenic base oils for industrial lubricants, process oils and transformer oils (TFO). Base and process oils are intermediary products derived from crude oil and used in the further production of numerous applications, including industrial greases, metalworking fluids, adhesives, inks, industrial rubber and fertilisers. Nynas has its core business in Nynashamn, Sweden.
Shell Deutschland Oil GmbH is part of the Shell Group: a global group of energy and petrochemical companies engaged in exploration, refining, distribution, retail sales and many other aspects of the value chain. The refinery assets which are being sold to Nynas comprise a base oil manufacturing plant and certain parts of the refinery needed to produce distillate from crude oil. Shell will retain the remaining parts of the Harburg refinery.
The Commission initiated an in-depth Phase II investigation on 26 March 2013 because of concerns that Nynas would have a near-monopoly in the EEA market for naphthenic base and process oils. Nynas would be the only remaining producer of naphthenic base and process oils and the largest producer of TFO in the EEA. The only other credible competitor would be Ergon, a US-based company importing into the EEA market since 2008.
Notwithstanding the Commission’s concerns, the parties were able to demonstrate that it was not economically sustainable to continue operating the Harburg refinery in its current form. However, Nynas’s business model offered more opportunity for success. The parties also demonstrated that Nynas was the only buyer interested in acquiring the Harburg assets and that, absent the acquisition, the most likely alternative scenario would be the closure of the refinery. The reduction in the number of competitors was therefore inevitable. Moreover, the exit of the Harburg refinery assets would significantly reduce production capacity in the EEA and almost certainly lead to higher prices for EEA consumers.
More positively, the Commission also found that the proposed acquisition would have some positive effects on competition, as Nynas would be able to achieve significant reductions in supply costs and would likely pass on these efficiency benefits to customers.
In light of these considerations, the Commission concluded that the proposed acquisition did not raise competition concerns.
5. Commission temporarily approves rescue aid for Slovenian banks Factor banks d.d. and Probanka d.d. —The Commission has temporarily (for two months, or until the Commission adopts a final decision on a restructuring or orderly winding down) approved Slovenian plans to grant State guarantees on newly issued liabilities of two Slovenian banks. It found that the guarantees were necessary to ensure the continuing stability of the financial system and market in Slovenia and that they did so without unduly distorting competition. The reforms meet the requirements of Section 4 of the “New Banking Communication”, in particular being limited to the minimum necessary, adequately remunerated and providing safeguards to minimise the distortions of competition during the rescue period (IP/13/822, 06.09.2013).
- The private equity business it has recovered to a constant level. In 2012, private equity transactions related to Germany reached a total volume of approx. EUR 5.8B. Other than in the United States, volumes and conditions have not returned to their levels of before 2007, but there is development in this direction.
- Following 2007, leverage decreased significantly and most recently settled between 50% and a maximum of 70%. At present, a return to pre-2007 leverage ratios is not to be expected in the short term, also in view of the increasing capital requirements for banks. Leveraging transactions by a combination of bank financing and (in some cases, structurally junior) bond financing via the capital market is clearly on the rise.
- The current uncertainties in the debt and [capital/equity] markets and the resulting requirement of being able to react to changes on short notice are often reflected in flexible sales schemes or exit strategies
- Multiple-track processes are currently standard practice, especially in larger transactions, and are also used outside the private equity business by industrial companies in carving-out or selling sub-groups.
- Deals are increasingly structured to include management participation in the profit or losses
Multi-track transactions, club deals and direct investments by pension funds: currently wide-spread development in transactions.
Börsen-Zeitung, 15 June 2013
Although the private equity business in Germany has yet to reach pre-Lehman Brothers volumes again, it has recovered to a constant level. In 2012, private equity transactions related to Germany reached a total volume of approx. EUR 5.8 billion according to the industry association BVK. Other than in the United States, volumes and conditions have not returned to their levels of before 2007, but there is development in this direction. The trend has been confirmed within the first five months of the current year, when CVC funds bought Ista in the first billion-volume deal.
It’s all about the right mix
If one takes a closer look at the M&A transactions with a private equity component, however, it becomes evident that there are major differences as compared to the years until 2007.
Leverage. Until 2007, the share of non-equity financing (leverage) was as high as 90%. In the years that followed, this share decreased significantly and most recently settled between 50% and a maximum of 70%. The decline is not surprising, given the consequences that the financial crisis had also for the banking system. At present, a return to pre-2007 ratios is not to be expected in the short term, also in view of the increasing capital requirements for banks. Against this background – and also in view of the trend towards corporate bonds – leveraging transactions by a combination of bank financing and (in some cases, structurally junior) bond financing via the capital market is clearly on the rise. A current example is the bond financing in connection with the Ista transaction.
Multiple-track transactions. The current uncertainties in the debt and [capital/equity] markets and the resulting requirement of being able to react to changes on short notice are often reflected in flexible sales schemes or exit strategies. This is especially the case where the sell side also involves a private equity firm (secondary or tertiary transactions).
The sale of Kabel BW by EQT to Liberty in 2011, which served as a role model for other transactions, is a prominent example. In parallel to the auction process, the former owners – funds advised by EQT –prepared for an IPO as well as for a refinancing through the placement of a bond on the capital market. By simultaneously preparing multiple alternatives for a partial or complete exit from the investment, they intended to achieve the highest degree of transaction security that was possible in those uncertain times. In the end, the deal comprised a sale to a strategic bidder (Liberty) and the placement of a bond in the period between signing and closing of the transaction, allowing for part of the proceeds to be distributed prior to the closing date by way of recapitalisation.
Multiple-track processes are currently standard practice, especially in larger transactions, and are also used outside the private equity business by industrial companies in carving-out or selling sub-groups (such as the spin-off of Osram from Siemens or ThyssenKrupp’s sale of its stainless steel business in 2012). Due to their high complexity, multiple-track transactions make very high demands.
Management rollover. One of the material success factors of private equity is the participation of the management and of key employees in the company with the aim of synchronizing their interests and the Company’s interests to the highest degree possible. In most cases, the participation is structured in such a way that if the company’s development is normal or negative, management participates less, and if the targets are overachieved, management participates more.
New challenges arise due to the increase in transactions in which private equity funds are involved both on the seller’s and on the purchaser’s side. Upon initial participation in the target company, management is often in an inferior economic position due to the limited funds it can invest and frequently needs financial support (such as a loan) to fund the participation. Accordingly, their position when it came to negotiating the conditions of the management participation programme has been weak.
The past years, however, have shown that the balance of power can shift quickly, at the latest after the first successful exit in which management participated to a large degree in the resulting profit. If the sold company is again acquired by a private equity company, the latter is then dealing with a party that is considerably more self-confident when negotiating th next management participation in the target company. Management then – at least partly – sees itself more as a co-investor. From a legal perspective, the transfer of the existing participation to the transferee is a particular challenge, if the parties seek to avoid unnecessary back and forth payments.
Club deals. In particular in transactions involving infrastructure entities (airports, power grids, gas grids etc.), the number of club deals, i.e., transactions involving a consortium of bidders, has lately increased. Current examples are the acquisition of Open Grid Europe by a consortium consisting of Macquarie, Adia, Meag and BCIMC as well as the acquisition of Net4Gas by Allianz Capital Partners and Borealis Infrastructure (a subsidiary of the Canadian Omers pension fund).
But also in traditional private equity transactions, bidders have teamed up on numerous occasions, for example the mid cap funds Bregal and Quadriga for the acquisition of LR Health, or Aea Investors and the Teachers Private Capital pension fund for the acquisition of Dematic.
Besides risk sharing considerations and the increase of the potential transaction volume, regulatory requirements play a role. The acquisition of a majority holding, for example, would regularly not be permitted for pension funds, or would not be desirable, for example for insurance companies or banks, for consolidation or capitalisation aspects.
Club deals do not show any special characteristics on the sell side, as the parties involved normally pool their assets to form an acquisition vehicle; at most, the procedure for obtaining the necessary antitrust clearance may become more complicated due to the larger number of parties involved. On the bidder side, however, the transaction will definitely be more complex, as, in addition to the acquisition documentation, a consortium agreement is needed. In such agreement, in addition to provisions governing capitalisation, the rules on corporate governance and a later exit must be stipulated. In this context, problems may arise in particular where different investment horizons are involved.
Direct investments. The trend towards mega funds and the significant management fees associated therewith have led some investors to consider engaging in the private equity business themselves. This is especially true for the major Canadian pension funds, which play a trendsetting role in this regard (e.g. Ontario Teachers, Canada Pension Plan or Omers) and which have established their own private equity departments or subsidiaries. These pension funds usually refrain from taking the lead in the acquisition of companies, mainly due to regulatory constraints, but direct investments are on the upswing.
A firm position
These are direct participations in the (topmost) holding company through which the target company is acquired. In the past, the typical clients of private equity funds were pension funds that invested in them and thus participated in the fund’s total return only. Direct investments allow for a more targeted risk allocation when investing, and also give the private equity company greater flexibility in structuring its fees.
It becomes clear that private equity continues to hold a firm position in the German M&A market. In the long-run, only those equity investors will remain successful that are able to react flexibly and quickly to changes in the markets will remain successful. And, the market leaves room for dynamics.
GERMAN UPDATE – What Managers of Private Equity Funds should know about the new German Investment Law
- New notification and disclosure requirements will apply to managers of private equity funds under the German AIFMD implementing legislation.
- Managers of private equity funds will also be subject to asset stripping restrictions regarding European target companies.
- The new rules will apply not only to German domiciled funds, but also to EU and non-EU funds and their EU and non-EU fund managers as long as the fund is marketed in Germany and the target company is domiciled in the EU.
- Marketing on a private placement basis will no longer be possible under this new regime.
I. The new German Capital Investment Act
On 21 July 2011, the European Directive 2011/61/EC on Alternative Investment Fund Managers (“AIFMD” or the “Directive”) entered into force which introduced the first comprehensive regulatory framework for managers of alternative investment funds (“AIF”) in Europe. The Directive does not only affect European managers but also third country managers (e.g. managers domiciled in the United States) if they manage or market alternative investment funds in the European Economic Area (“EEA”).
All EU Member States must implement the Directive no later than 22 July 2013. The German legislator will implement the Directive by creating an entirely new statute, the Capital Investment Act (Kapitalanlagegesetzbuch – “KAGB”). The KAGB will become effective on 22 July 2013.
While the Draft KAGB focuses on the regulation of German fund managers, in particular their licensing and passporting into other Member States, as well as on the passporting for non-German fund managers and their funds, it also contains some frequently overlooked provisions for foreign private equity funds which are marketed in Germany by way of public or, more commonly, private placement.
II. Specific Requirements for Managers of Private Equity Funds
Private equity funds domiciled in Germany or, in the case of non-German funds, marketed in Germany (see under A), whose investment objective is to gain control of an unlisted company or an issuer (see under B), must fulfil certain notification requirements (see under C), must meet certain disclosure requirements (see under D) and are subject to certain rules prohibiting so-called “asset stripping” (see under E).
(A) Affected Private Equity Funds
(i) The new rules apply to alternative investment funds whose objective is to acquire control over unlisted companies or certain issuers. Alternative investment funds are defined as collective investment schemes which raise capital from investors in order to invest such capital according to a defined investment policy for the benefit of the investors and which are not UCITS. The new rules do not apply where a fund manager domiciled in Germany and its group companies only manage alternative investment funds with an aggregate volume of no more than €100 million or, in the case of unleveraged alternative investment funds with no redemption rights during the first 5 years, with an aggregate volume of no more than €500 million.
(ii) These rules do not only apply to private equity funds domiciled in Germany but also apply to private equity funds domiciled outside of Germany if one or more of the following conditions are met:
– the fund manager is domiciled in Germany,
– the fund manager is domiciled outside the EEA but has (i) Germany as a reference state or (ii) manages a private equity fund which is marketed in Germany.
(iii) “Marketing” is any sales activity of the fund manager or of third parties on the fund manager’s behalf, including private placement, except where the sale of a fund unit occurs upon the exclusive initiative of the investor. Please note that there is no private placement regime under the KAGB.
(iv) As far as the target investments of the aforementioned private equity funds are concerned, the following rules apply only with respect to unlisted companies having their registered seat in the European Union with the exception of SMEs, i.e. small and medium-sized enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding €50 million, and/or an annual balance sheet total not exceeding €43 million. Special purpose vehicles for the acquisition, the holding and the management of real estate do not qualify as unlisted company in this context. Certain of the following rules also apply with respect to issuers of securities admitted to trading on a regulated market provided the issuer has a registered seat in the European Union (in the following the “Issuer”).
(B) When is a private equity fund deemed to gain control of a target company or an Issuer?
(i) “Control” is defined as the holding of 50% or more of the voting rights of a target company, either alone or acting in concert with others. Voting rights held by companies controlled by the private equity fund and voting rights held by individuals or legal entities acting on behalf of the private equity fund or on behalf of a company controlled by the private equity fund are attributed for this purpose to the private equity fund.
(ii) In the case of issuers, and exclusively for purposes of the disclosure obligations and prohibitions on asset stripping set out below, control is defined with reference to the European Takeover Directive as the percentage of voting rights which confers control for purposes of establishing the takeover obligation as determined by the rules of the EU Member State in which the Issuer has its registered office.
(C) Which notification requirements apply in connection with the ACQUISITION OF INTERESTS IN AN UNLISTED COMPANY?
(i) The fund manager must notify the German Federal Financial Services Supervisory Authority (“BaFin”) of the proportion of the voting rights held by the private equity fund if the percentage shareholding in an unlisted target company reaches, exceeds or falls below the thresholds of 10%, 20%, 30%, 50% and 75%.
(ii) Where the private equity fund, alone or jointly, gains control over an unlisted company, the fund manager will have to inform the following of the acquisition of control:
(a) the unlisted company,
(b) the target’s shareholders whose identities and addresses are available to the fund manager, can be made available by the unlisted company or are available through a register to which the fund has or can obtain access, and
(iii) The aforementioned notification must contain the following additional information:
(a) the resulting situation in terms of voting rights,
(b) the conditions under which control was acquired, including information about the identity of the different shareholders involved, any private individual or legal entity authorized to exercise voting rights on their behalf and, where applicable, the chain of undertakings through which voting rights are actually held, and
(c) the date on which control was obtained.
(iv) All of the aforementioned notifications must be made as soon as possible, but no later than 10 working days after the private equity fund has reached or passed the relevant threshold or gained control.
(v) When informing the target company, the fund manager must request the target’s management board to inform the employees’ representatives, or where there is no such employees’ representation, the employees themselves of the acquisition of control by the private equity fund and of the further information listed above. The fund manager must use its best efforts to ensure that the target’s management board properly fulfils the aforementioned information requirements.
(D) What are the disclosure requirements when a private equity fund acquires control of an unlisted company or an issuer?
(i) Where the private equity fund has acquired control over an unlisted company or an Issuer, it must provide the recipients listed in C (ii) above with the following information:
(a) the identity of the private equity fund(s) involved,
(b) the policy for preventing and managing conflicts of interest, in particular between the fund manager, the private equity fund and the target, including information about the specific safeguards established to ensure that any agreement between any of them is concluded at arm’s length and
(c) the policy for external and internal communication relating to the target in particular as regards employees.
(ii) As in the case of the aforementioned notification requirements, the fund manager must use its best efforts to ensure that the employees or their representatives are properly informed of the information listed in (i) above by the target’s management board (cf. C (v) above).
(iii) The fund manager must ensure that the private equity fund’s intentions concerning the future business of the unlisted company and the likely repercussions on employment, including any material change in the conditions of employment are disclosed to the target and its shareholders. Furthermore, the fund manager must ensure that the target’s management board will disclose this aforementioned information to the target’s employees or employee representatives, as the case may be.
(iv) As soon as a private equity fund acquires control over an unlisted company, its manager must provide BaFin and the investors in the private equity fund with information concerning the financing of the acquisition.
(v) The following information must be included in the private equity fund’s financial reports or in the target’s financial reports, which should be timely prepared and made available to the target’s employees or employee representation:
(a) a fair view of the development of the target’s business,
(b) any important events since of the end of the financial year,
(c) the target’s likely future development, and
(d) the information required in the case of the acquisition of own shares.
(vi) The fund manager must ensure that the private equity fund’s financial information is either (x) timely provided by the target’s management board to the employees or employee representation or (y) timely provided by the fund manager to the investors in the private equity fund.
(E) What are the rules prohibiting asset stripping where a private equity fund acquires control over an unlisted company or an issuer?
(i) For a period of 24 months following acquisition of control over the target, the fund manager is obliged
(a) not to allow, facilitate, support or instruct any distribution, capital reduction, share redemption and/or acquisition of own shares by the target as set out in (ii) below,
(b) where the fund manager is authorized to vote on behalf of the private equity fund in the meetings of the target’s governing bodies, not to vote in favour of any of the aforementioned measures,
(c) to use its best efforts to prevent the target from effecting any of the aforementioned measures.
(ii) Independent from the specific legal structure of the corporation (e.g. stock corporation or limited liability company), the amounts available for distribution must always be determined on the basis of the annual accounts of the immediately preceding financial year. This wording of the new rule resembles the wording of the existing Second Corporate Directive (Directive 77/91/EEC) which has been implemented in Germany in the Stock Corporation Act, but not in the Limited Liability Company Act. As a consequence, where the target company is a German limited liability company which may at present make interim dividend distribution, the new rules of the KAGB would, arguably, constitute a limitation of the applicable corporate laws. With respect to the determination which amounts are available for distribution, the AIFMD and the KAGB are not quite clear. One interpretation would be that the strict rules applying to stock corporations, in particular as regards the prohibition to resolve and distribute certain reserves, apply to all target companies regardless of their specific legal structure, e.g. also to German limited liability companies. The interpretation more consistent with the purpose and spirit of the AIFMD, however, appears to be that the applicable provisions of the target’s national corporate law statutes determine which amounts are free for distribution, in particular which reserves can be resolved and distributed. Please note that distributions are defined as the payments of dividends or interests relating to shares. The latter includes interest payments convertible bonds and other forms of hybrid instruments but may also extend to acquisition finance loans.
(iii) The purchase of own shares is only permissible (a) if it does not lead to an annual loss, (b) where it serves to offset losses or (c) where it serves the purpose to include sums of money in a non-distributable reserve provided that such reserve is not greater than 10% of the reduced subscribed capital. Furthermore, the prohibition to purchase own shares does not apply in certain circumstances set out in Art. 20 (1) lit. (b) – (h) of Directive 77/91/EEC. The restrictions for the purchase of own shares and the aforementioned general prohibition of capital reductions go beyond the restrictions imposed by German corporate law.
III. Grandfathering provisions
(A) While fund managers managing exclusively German domiciled private equity funds which are fully invested on 21 July 2013 and do not make any further acquisitions after this date do not have to comply with the aforementioned rules, there is no corresponding grandfathering provision for private equity funds domiciled in other countries, be they EEA Member States or third countries.
(B) The private placement rules for private equity funds established prior to 22 July 2013 continue to apply until 21 July 2014. After this date public or private placement of a private equity fund requires a notification to BaFin as Germany, unlike other European jurisdictions, will not enact private placement rules for alternative investment funds. A European passport for such funds will not be available before 2015.
UK UPDATE – Understanding and Dealing with Hedge Funds and Shareholder Activism Across Europe: The Impact of the Financial Crisis
The attached guide takes a pan-European look at trends and developments through the 2008 financial crisis and in the period since, focusing on:
- the position of hedge funds: their behaviour, performance and strategies in that period, as well as the changed regulatory landscape they now face, and
- activist behaviour by both hedge funds and other investors during that period.