GERMAN UPDATE – New Disclosure Requirements to Prevent Secret Stake-building in German Listed Companies
- 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.
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.
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.