Germany: M&A

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This country-specific Q&A gives an overview of mergers and acquisition law, the transaction environment and process as well as any special situations that may occur in Germany.

It also covers market sectors, regulatory authorities, due diligence, deal protection, public disclosure, governing law, director duties and key influencing factors influencing M&A activity over the next two years.

This Q&A is part of the global guide to Mergers & Acquisitions. For a full list of jurisdictional Mergers & Acquisitions Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/mergers-acquisitions/

  1. What are the key rules/laws relevant to M&A and who are the key regulatory authorities?

    The Civil Code (Bürgerliches Gesetzbuch), the Commercial Code (Handelsgesetzbuch), the Limited Liability Companies Act (GmbH-Gesetz) and the Stock Corporation Act (Aktiengesetz) provide the key rules to M&A with special rules for the different types of entities. Public companies and offers relating thereto are more specifically regulated by the Securities Trading Act (Wertpapierhandlesgesetz), the Securities Acquisition and Takeover Act (Wertpapiererwerbs- und Übernahmegesetz) and the Offer Regulation (Angebotsverordnung).

    Public takeovers are overseen by the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht ’BaFin’). BaFin is also competent for the supervision of the financial industry (banking and insurance), including regulatory review of acquisitions in those industries. The Federal Network Agency (Bundesnetzagentur) supervises transactions related to the energy, telecommunication and infrastructure sectors.

    Under the Foreign Trade Act (Außenwirtschaftsgesetz) and the Foreign Trade Ordinance (Außenwirtschaftsverordnung), the Federal Ministry for Economic Affairs and Energy (Bundesministerium für Wirtschaft und Energie) has the authority to review whether an acquisition of 25% or more of the voting rights in a German business by an acquirer domiciled outside the territory of the European Union (EU) or the European Free Trade Association (EFTA) poses a threat to public order or national security. Generally speaking, there is no obligation to notify any such transaction to the ministry or to seek the ministry’s approval. Nevertheless, if the acquisition includes a business that manufactures goods or provides services related to public order or national security (e.g. dual-use goods) most potential acquirers will apply for a certificate of non-objection (Unbedenklichkeitsbescheinigung) by the ministry in order to avoid a later interdiction of the acquisition. De facto acquirers should therefore notify such transactions to obtain legal certainty. A statutory obligation to notify an acquisition is only invoked if the target´s business concerns particularly sensitive goods (e.g. war weapons, products with IT-security functions used to process classified state information, etc.).

    With respect to merger control, for relevant transactions that are not within the regime of European merger control, the German Federal Cartel Office (Bundeskartellamt) is the competent authority.

  2. What is the current state of the market?

    Economically, in general and regarding M&A activity in particular, Germany is one of the leading countries in Europe. 2015 was a strong year for the German M&A market. Nevertheless, with regard to cross-border activity, the falling rate of the Euro complicates outbound M&A activity for German companies, while North American and Asian companies find investments in Europe cheaper and thus more attractive. Another general observation is that a number of reports come to the conclusion that purchase prices compared to real values of deals are rather overrated and assume that the inner-German market is overheated. Nevertheless, regarding M&A activity Germany remains one of the leading countries in Europe.

  3. Which market sectors have been particularly active recently?

    In Germany, mid-cap deals still form the biggest part of the total sum of M&A deals. Especially with respect to industries like automotive or chemicals the German M&A market is very strong. Another strong sector is the consumer sector. Unusual for the German M&A market, there was recently a significant increase in hostile takeovers.

  4. What do you believe will be the three most significant factors influencing M&A activity over the next 2 years?

    The long term financial and economic consequences of the ‘Brexit’ will have a significant influence on M&A activity in Europe and also in Germany. Moreover, the development of the USD-EUR exchange rate is always one of the most important factors for the attractiveness of European – and especially German – targets. Finally, the ability to solve the current fundamental political problems in Europe and Germany (refugee crisis, recent terrorism, the development of the ongoing Euro crisis) will be decisive for the development of M&A activity in Germany.

  5. What are the key means of effecting a merger?

    In Germany a statutory merger of most German entities can be executed according to the German Law Regulating Transformation of Companies (Umwandlungsgesetz). With respect to public companies the shares of which are listed at a stock exchange a merger can be performed according to the rules of the Takeover Act and as the case may be a combined merger agreement / business cooperation agreement which is agreed upon in the context of a takeover.

    A statutory merger has to fulfil in principal the following legal minimum requirements: (i) notarisation of the merger agreement, (ii) minimum content of the merger agreement (e.g. parties, direction of merger), (iii) merger report, (iv) legal merger audit and (v) the approval of the merger agreement by the shareholders’ meetings of both companies. Moreover, there are further special requirements which depend on the legal form of the involved companies. The merger becomes effective with its registration in the commercial register. In principle opposing shareholders have the right to file an action to set aside the shareholders’ resolution (Anfechtungsklage). Such action postpones the effectiveness of the merger unless with respect to stock corporations the court decides upon the registration of the merger in an accelerated procedure (Freigabeverfahren). Apart from this, shareholders have the right to file an action in court regarding the valuation of the company in a special proceeding (Spruchverfahren). Such special proceeding does not postpone the effectiveness of the merger and usually takes more than two years considering that also an appeal is possible.

  6. What information relating to a target company will be publicly available and to what extent is a target company obliged to disclose diligence related information to a potential acquirer?

    Private companies are obliged to disclose general information such as the names of the managing directors, the capital stock and in some cases the names of shareholders, financial statements and the articles of association. These documents are available at the Commercial Register (Handelsregister) kept with the Local Courts and at the Federal Gazette (Bundesanzeiger) and can be inspected by potential acquirers (usually online).

    Regarding public companies financial statements must comply with the EU Directive on Takeover Bids. Pursuant to its implementation in the disclosure requirements for public companies, all listed companies in Germany are required to disclose additional takeover-relevant information in their financial statements, inter alia, about the existence of change-of-control-clauses / covenants and golden parachutes. Moreover, additional information has to be published on the public company's homepage.

    In addition, a bidder can rely on certain public information if the target is a listed company, such as ad hoc announcements, analyst statements, stock exchange filings, reports of shareholders crossing voting rights thresholds, financial statements to the extent they have been published, etc.

  7. To what level of detail is due diligence customarily undertaken?

    The scope of due diligence differs in particular between private acquisitions and public takeovers. While the due diligence in private acquisitions is rather broad (often amongst others due to requirements by financing banks), the due diligence in the pre-takeover phase in Germany is typically limited in scope. In some cases it is limited to publicly available information. In other cases the target may under certain circumstances allow a limited due diligence to a bidder. In such case the disclosure must be in the interest of the target and a strict non-disclosure agreement must be in place.

    In private auction processes usually different levels of due diligence are provided for. In the initial stage only a limited due diligence review is allowed to bidders who have documented their interest in a letter of intent or a memorandum of understanding and signed an non-disclosure agreement. In the next stage an extended due diligence may be granted to a smaller number of bidders who have for instance submitted an indicative offer. Only the preferred bidder is usually granted an in-depth due diligence before signing the purchase agreement.

    In an increasing number of M&A transactions W&I insurance plays an important role in particular, in private equity transactions. The insurer usually performs its own due diligence in addition to inspecting the due diligence report of the buyer.

  8. What are the key decision-making organs of a target company and what approval rights do shareholders have?

    German stock corporations (AG) are governed by a two-tier board system. While the executive board (Vorstand) is responsible for the day-to-day management of the company, the supervisory board (Aufsichtsrat) controls and advises the executive board. The same governance system applies to the SE unless the company opts for a one-tier system (rarely done in practice). In a German limited liability company (GmbH) the managing directors are responsible for the day to day business. A supervisory board is in principal not required. However the articles of association may provide for a supervisory board (Aufsichtsrat) or a similar organ (e.g. Beirat). Approval rights for the supervisory board of a stock corporation or limited liability company are usually provided for in the articles of association. Certain structural measures such as a capital increase or a statutory merger require the approval of the shareholders’ meeting. Further approval requirements of the shareholders’ meeting may be stipulated in the articles of association. Apart from such approval requirements fundamental decisions also require the approval of the shareholders’ meeting of a stock corporation according to the Holzmüller/Gelatine-judgements of the German Federal Court of Justice (Bundesgerichtshof). A similar concept applies to the limited liability company in which unusual management measures (außergewöhnliche Geschäftsführungsmaßnahmen) require the shareholders’ approval.

  9. What are the duties of the directors and controlling shareholders of a target company?

    The managing directors have to apply the duty of care of a prudent business man and have to act in the interest of the company. The controlling shareholders have certain fiduciary duties towards the target company.

    The executive board and the supervisory board of a stock corporation are far more independent of the shareholders’ meeting than their counterparts in a limited liability company. In particular, they are not subject to a shareholders’ authority to issue directives unless the company has entered into a domination agreement.

    In the context of a public takeover, the boards of a listed stock corporation or SE must refrain from any actions that might frustrate the success of the tender offer. The Takeover Act does, however not prevent the executive board or the supervisory board from taking actions that would also have been taken by a diligent manager of a company not subject to a takeover bid. Moreover, the executive board is allowed to take actions either authorised by the supervisory board or the shareholders’ meeting. Finally, the executive board is free to explore and identify other bidders prepared to launch an alternative and better offer (white knight).

    Furthermore, as a general principle, the members of both the executive board and the supervisory board always have to act in the best interest of the company, taking into account the interest of the shareholders and the other stakeholders. Therefore, the boards have to duly evaluate the merits of an offer as well as the chances and risks associated with the strategy pursued by the bidder and its consequences for the current strategy of the company. In particular, both boards have to assess whether or not (i) the offer properly values the target and its prospects and (ii) if it includes a sufficient premium for the transfer of control, taking into account the synergies raised in the event of a business combination. Based on this analysis, the boards have to decide whether or not they support or reject the offer. If a takeover bid is launched, the boards have to issue a response statement within a certain period of time.

  10. Do employees/other stakeholders have any specific approval, consultation or other rights?

    In case an M&A transaction results in restructuring measures, consultation and co-determination rights may be triggered. In particular, a major restructuring and/or mass redundancies requires the employing entity to enter into negotiations with the competent works council (Betriebsrat) – if any is established – in order to conclude a reconciliation of interest (Interessenausgleich) about what restructuring measures shall be executed. If no agreement is reached, both the employer and the works council can refer the case to a conciliation committee (Einigungsstelle), consisting of members appointed by both parties and a neutral president appointed by both parties or, if the parties cannot come to an agreement regarding the person, by the competent labor court. Even though the conciliation committee cannot decide to execute or to refrain from any restructuring measures against the employer’s will, the non-compliance with this reconciliation process may entitle the works council to an injunctive relief, which orders the employer to stop any restructuring measures until the reconciliation process is formally closed, and affected employees to a compensation for any disadvantages resulting from the premature starting with restructuring measures (Nachteilsausgleich). Moreover, in the case of mass redundancies the works council can demand a social plan (Sozialplan) to minimize the financial impact on the employees. If the employer and the works council do not reach an agreement, the conciliation committee can establish a social plan even against the will of the employees. Therefore, unlike the situation concerning the reconciliation of interest, where the restructuring measures are in question, the compensation for disadvantages such as the loss of employment can be decided by the conciliation committee against the employer’s will. Eventually, the works council has to be consulted prior to the execution of mass redundancies, however, this consultation process may be combined with the negotiations regarding a reconciliation of interest.

    If a business unit or part of a business unit is transferred in an asset deal or a statutory spin-off employees have the right to contradict the transfer of their employment.

    The executive board of the target company is obliged to inform the competent works council and – in the absence of a works council – all its employees when it receives the announcement of a takeover bid. In the same way, the executive board of the bidder has to inform its own works council and employees respectively about its decision to submit an offer. If an economic committee (Wirtschaftsausschuss) is established at the target company – which is basically the case if the target company employs more than 100 employees –, this committee has to be informed about the takeover bid as well.

    However, these information obligations do not trigger any co-determination rights and therefore neither the approval of the target’s works council, economic committee and employees nor the approval of the bidder’s works council and employees is required. The works council of the target company and its employees respectively are entitled to be informed about the details of the offer, though. Further, they have the right to submit their opinion on the offer to the executive board of the target company. The executive board is obliged to attach any submitted opinion to its own reasoned opinion. Whilst the works council’s and, respectively, employees’ opinion may have effects on how the takeover is perceived by the public, it does not legally bind the target company in any way.

  11. What regulatory/third party approvals are required and what waiting periods do these impose, if any?

    The timetable for M&A transactions depends on various prerequisites, which usually differ from case to case. However, from a general experience it is fair to say that a private transaction usually requires a minimum period of three to six months. The average duration from kick-off to closing (including merger control) should be nine to twelve months. Public transactions usually take a minimum period of three to six months from the announcement of the offer to closing (four weeks for the preparation of the offer, ten days for the approval by BaFin of the offer, followed by a minimum acceptance period of the offer of four weeks during which the executive board and the supervisory board of the target will also prepare and publish a statement that includes a recommendation for the shareholders as to accept or reject the offer, extended acceptance period of two weeks if offer is successful and approximately two weeks for the closing of the offer).

    In a public takeover prior to the bid’s commencement and publication, the offer document must be approved by the BaFin. Furthermore, approval from the competent competition authorities may be needed. Other consent requirements depend largely on the nature of the offer. If shares are to be offered as consideration, the approval of the bidder’s shareholders is often required depending on the nature of the bidder’s company statutes in the course of a necessary capital increase, etc. As mentioned in the answers to questions 2.10 and 2.11, employee approval at the target company level is not required.

    With respect to merger clearance below the thresholds of a European merger clearance procedure, the following applies: After submission of a complete notification, the German Federal Cartel Office (FCO) must decide within one month whether to clear the merger (phase I) or, if the transaction raises competition concerns, whether to commence an in-depth investigation (phase II). Decisions in phase II proceedings must be issued within four months from the notification date. In the event that the notifying parties propose commitments in Phase II to mitigate concerns of the FCO, phase II is automatically extended by one month (i.e. five months from date of notification) to allow the FCO to market test the commitments. With the consent of the notifying parties, further extensions of the review period are possible.

    With respect to certain key sectors (such as defence, energy, aviation) specific procedures apply that can also result in approval requirements of regulatory bodies.

  12. To what degree is conditionality an accepted market feature on acquisitions?

    Except for conditions regarding regulatory approvals only board approvals are customary conditions in private M&A transactions. In public M&A deals in general, conditions may be placed on an offer (not, however, regarding financing or a bidder’s general right to withdraw in the bidder’s discretion), as long as they are objectively detailed (such as competition clearance, crossing of minimum acceptance thresholds) and not subject to potential subjective conclusions by the bidder.

  13. What steps can an acquirer of a target company take to secure deal exclusivity?

    In private M&A exclusivity agreements are a common feature. However, in a public M&A deal the target company’s board is obliged to act in the best interests of the target company. This may prevent the target from tying up a deal with a bidder. Break-up fees and certain non-shop agreements are usually not considered to be an inhibitive factor for competitive bidders, and are therefore in principle allowed.

    Break-up fees payable by the target are nevertheless rare in Germany. As a general rule, the target must be able to show that the offer is beneficial to the target and its shareholders, and that the bidder would not be prepared to launch its bid without a break-up fee arrangement. The amount of the fee should be reasonable, and should not put undue pressure on the shareholders and supervisory board of the target to approve the bid. It should therefore be limited to compensating the bidder for its costs and expenses, rather than serving as a penalty for the target.

  14. What other deal protection and costs coverage mechanisms are most frequently used by acquirers?

    Matching rights are conceivable, i.e. the Business Combination Agreement can stipulate that the obligation to support a bidder continues even in case of a superior competing offer for a certain period of time in which the bidder has the possibility to match the superior offer. While ‘no talk’ clauses would not be permitted, non-solicitation (‘no shop’) clauses are customary.

  15. Which forms of consideration are most commonly used?

    The most common consideration in a private M&A transaction is cash. Shares in the acquiring company are also often used as consideration. In public M&A the Takeover Act allows cash or share offers (or combinations of both). In the case of a takeover or a mandatory offer, the offered shares have to be liquid, which means that they are easily tradable, and they must be listed on a regulated market in the EEA. In Germany, cash offers are more common than share-for-share offers (or a consideration consisting of a combination of cash and shares). In the case of either a voluntary or a mandatory bid intended to acquire control, a cash consideration (or a cash alternative) must be offered if the bidder (including any of its subsidiaries or any concert party) has acquired at least 5% of the shares or voting rights in the target against a cash consideration during the six months prior to the announcement of the decision to make an offer and ending at the end of the offer period.

  16. At what stages of an acquisition is public disclosure required (whether acquiring a target company as a whole or a minority stake)?

    Disclosure pursuant to Section 20 para 1 of the German Stock Corporation Act is required, as soon as an enterprise holds more than one fourth of the shares of a stock corporation. In that case, it shall promptly inform such company thereof in writing. As soon as any enterprise acquires a majority holding, it shall promptly inform such company thereof in writing according to Section 20 para 4 of the German Stock Corporation Act. Pursuant to Section 20 para 7 of the German Stock Corporation Act, rights arising from shares that are held by an enterprise that is required to make disclosure pursuant to Section 20 para 1 or 4 may not, for as long as such enterprise has not made such disclosure, be exercised by such enterprise, by an enterprise controlled by it or by any other person on behalf of such enterprise or an enterprise controlled by it.

    Under the Securities Trading Act, any natural or legal person must notify both the target and BaFin as soon as such person’s direct or indirect shareholding in a listed target reaches, exceeds or falls below the thresholds of 3%, 5%, 10%, 15%, 20%, 25%, 30%, 50% or 75% of the voting rights. It should be noted that preference shares with no voting rights are not to be reflected in the calculation of these thresholds. The notification obligation is triggered not only if the relevant thresholds are reached or crossed as a result of a sale or purchase of shares, but also for any other reasons, including changes in the total number of voting shares or mergers. In calculating the thresholds, a person must include, among other things, voting rights stemming from: (i) shares owned by a subsidiary; (ii) shares owned by a third party but held for the account of the relevant person; (iii) shares held by a third party as collateral, unless the third party is entitled to exercise the voting rights attached to those shares; (iv) shares held by a third party who has granted the relevant person an usufruct (Nießbrauch), i.e. a specific charge giving the relevant person the economic benefit of the shares; (v) shares for which the relevant person has the power to unilaterally acquire title to shares (dingliche Option); (vi) shares for which the relevant person has obtained proxies from other shareholders, unless it has received specific instructions on how to exercise voting rights; and (vii) shares held by or attributed to others with whom the relevant person is acting in concert.

    Furthermore, the ad hoc disclosure of inside information is important if the purchaser, seller or target is listed company or has listed securities. According the applicable Market Abuse Regulation (MAR) the disclosure requirement of insider information arises once the M&A transaction becomes probable (überwiegend wahrscheinlich) provided that the stock exchange price of the listed company can potentially be influenced in a relevant manner if the inside information becomes public. In a M&A process this is usually the case if the parties sign a letter of intent or memorandum of understanding. In such case the issuer usually postpones the disclosure until the signing of the Sale and Purchase Agreement (SPA). The issuer may take such decision if the postponement is in its legitimate interest because e. g. the negotiations would be negatively influenced by the disclosure and as long as he can secure that the inside information is kept confidential.

    If a purchaser receives knowledge of an inside information regarding the target in a due diligence process it may in principal continue with the acquisition of shares in the target as long as he merely follows to its original plan.

    In a public takeover the decision of the bidder to launch a takeover bid has to be disclosed under the Takeover Act. The same applies if a bidder has obtained control of a listed company and is therefore obliged to launch a mandatory takeover bid under the takeover act.

  17. Are there any circumstances where a minimum price may be set for the shares in a target company?

    With respect to consideration, the Takeover Act applies stricter regulations to takeover offers (as well as to mandatory offers) than to voluntary public offers. If the bidder seeks to obtain 30% or more of the target company’s voting rights, the bid is considered to be a takeover offer. The consideration must be appropriate, meaning that it must comply with both, (i) the average share price as quoted by a German or EEA exchange within a three-month period prior to the announcement of the offer (the volume-weighted average price) (ii) and the market value evaluation of the company (in principle supported by an evaluation by a professional accountant firm). Additionally, the consideration cannot be lower than the bidder’s highest consideration offered or paid for any target share in the six months prior to the release of the offer document.

    Voluntary public offers and private M&A transactions are not subject to minimum consideration requirements in Germany. By law, the bidder or the buyer respectively is free to decide on the amount of the consideration.

  18. Is it possible for target companies to provide financial assistance?

    If the assets of the target are used to finance the acquisition of the target the principal of capital maintenance (Grundsatz der Kapitalerhaltung) under the stock corporation act or the limited liability company act have to be respected. According to the principal of capital maintenance under stock corporation law stipulated in Sections 57, 58 et seq of the German Stock Corporation Act , the entire capital (Eigenkapital) may in principle not be repaid to the shareholders. For limited liability companies, the rules are not as strict: Pursuant to Sections 30, 31 of the Limited Liability Companies Act only the sated capital (Nominalwert) is protected.

    It is common opinion that the provision of collateral in the target can be regarded as a repayment pursuant to Section 57 of the German Stock Corporation Act and Section 30, 31 of the Limited Liability Companies Act. Nevertheless, pursuant to Section 57 para 1 subpara 2 of the German Stock Corporation Act and Section 30 para 1 subpara 2 of the Limited Liability Companies Act repayment is legitimated if it is covered by an entitlement (e.g. a claim for dividend payments) or if a domination or profit transfer agreement has been entered into. Under such circumstances, provision of credit as well as collateral is allowed. Legal risks may be reduced by incorporation of so called limitation language into the collateral agreements, limiting the enforcement of collateral to any free assets beyond the protected capital.

  19. Which governing law is customarily used on acquisitions?

    The governing law of a share purchase agreement regarding the acquisition of a German target is usually German law. However, it is in principle possible to have a non-German share purchase agreement and only the separate transfer of shares governed under German law. According to German law of conflicts assets are in principal transferred according to the law of the country in which the asset is located in an asset deal transaction. The asset deal agreement itself can, however, be governed by a different law. Company law questions such as transfer restrictions are mandatorily governed by German law if the target is a German stock corporation or limited liability company and has its seat in Germany.

  20. What public-facing documentation is it necessary for a buyer to produce in connection with the acquisition of a listed company?

    An offer process requires first of all an announcement document. This document should contain: the bidder’s decision to launch a public offer, the offer price, the nature of the offer and the necessary information to access the published offer (such as a URL under which the offer document can be viewed). Shortly thereafter, an actual offer document is needed. This document is crucial for the target company’s shareholders to make their decision regarding the acceptance of the offer. Therefore, all relevant details which could affect the shareholders’ decision should be contained therein. German takeover law provides detailed information on the necessary elements of this offer document. Further disclosure is essential if the bidder submits an exchange offer rather than a cash offer. Additionally, the bidder’s ability to meet payment obligations in the offers must be confirmed by a securities services provider (usually a bank). A statement on the offer from the target company’s board and supervisory board will be issued following the publication of the offer document. This statement provides the target company’s shareholders with an opinion on the offer. The statement has to deal with the kind and amount of the consideration, the consequences for the target company, its employees and representatives, the conditions of employment and the sites of the target company, the goals pursued by the bidder, and the intention of the board and supervisory board members, who are shareholders of the target company, to accept the offer. During the following acceptance period the shareholders have the opportunity to accept the offer via acceptance forms from their depositary banks. The bidder is required to continuously state its total shareholdings in the target company during this period either weekly or daily during the last week of the offer period. The bidder is obliged to disclose the final results of the offer. Additional statements are required by the bidder in particular regarding all future acquisitions within one year as of the publication of the final results of the offer.

  21. What formalities are required in order to document a transfer of shares, including any local transfer taxes or duties?

    The acquisition and the transfer of shares in a German limited liability company require a notarisation by a German notary public. The (cost-saving) notarisation by a Swiss notary public bears legal risks. Whereas a share purchase agreement regarding shares in a German limited liability company has to be notarised, the transfer of shares in a German stock corporation does on the other hand not require a notarisation. If the target owns real estate properties, real estate transfer taxes (RETT) may become due in the contexts of the transfer of the shares. There are however in principal no stamp duties under German law on the transfer of shares.

  22. Are hostile acquisitions a common feature?

    Generally, hostile takeovers are not typical for the German M&A market. However, the number of hostile takeovers in Germany increased in 2015, especially in the real estate and the chemical sector.

  23. What protections do directors of a target company have against a hostile approach?

    The protection of directors of a target company (stock corporation) against the hostile approach is rather limited under German law. A bidder may after a successful hostile takeover adopt a shareholders’ resolution stating the lack confidence in the directors. The requirements for such a resolution are relatively low and in particular, do not require a special cause. However, a resolution may constitute a misuse of its rights and in such case may be challenged in court. After the adoption of such a resolution the supervisory board can remove a director from its office. Economically, the director remains protected under his service agreement. This contract cannot be terminated simply by the fact that a hostile takeover has taken place or because the new majority shareholder has no confidence in the directors. Therefore, in principal the managing director’s service agreement has to be fulfilled or paid out. However, a managing director’s service agreement may contain change of control clauses in case of a hostile approach. The ability to provide for golden parachutes in service agreements of board members is restricted.

    With respect to limited liability companies, the removal of managing directors from their office is even easier and can be done by simple shareholders’ resolution. With respect to the service agreement, similar restrictions apply.

  24. Are there circumstances where a buyer may have to make a mandatory or compulsory offer for a target company?

    A mandatory offer and a related disclosure obligation are triggered, according to the Takeover Act, if 30% of the voting rights have been acquired or attributed (this is considered as the acquisition of control); however, this is not the case if the bidder acquired control through a takeover offer.

    There are various instances in which voting rights are attributed to the bidder although they are not directly held by it. This is e.g. the case for voting rights held by a subsidiary of the bidder, by a third person which holds it for the account of the bidder or which are held by parties acting in concert with the bidder (Section 30 of the Takeover Act).

  25. If an acquirer does not obtain full control of a target company, what rights do minority shareholders enjoy?

    Minority shareholders can make use of their standard rights arising out of the ownership of the share, such as the participation right in the general meeting, voting rights (not for shareholders of preference shares), information rights, dividend rights etc. Minority shareholders may vote for auditing of management measures in the shareholders’ meeting. Minority shareholders with 10% of the voting rights in a stock corporation may adopt a resolution of the shareholders’ meeting according to which a special representative is appointed to exercise damaged claims against the board of directors for a violation of their duties.

  26. Is a mechanism available to compulsorily acquire minority stakes?

    Any majority shareholder owning 95% or more of the share capital in a German stock corporation has the statutory right to acquire minority shareholdings on a compulsory basis. The shareholders’ meeting of the target has to approve the squeeze out by a majority of the votes cast. The principal shareholder is allowed to vote on such a resolution. Prior to calling the meeting, the principal shareholder must prepare a detailed written report demonstrating that the conditions for a squeeze out have been met (i.e., that the principal shareholder owns 95% of the target) and detailing the evaluation methods that have been used to determine the cash compensation to be paid to the minority shareholders. This report must include an auditor's fairness opinion on the appropriateness of the evaluation methods and the adequacy of the compensation. The auditor is appointed by the court on the application of the principal shareholder. The compensation has to be paid in cash and must be "adequate" (according to the discounted future earnings analysis under the principles of the institute of German chartered accountants (IDW S1)); however, if the target is listed, the compensation must in principle not be less than the average weighted stock price in the three months immediately preceding the shareholder meeting resolving on the squeeze out. Following the approval by the shareholder meeting, the squeeze out is implemented by the registration of the resolution in the Commercial Register of the target, unless an action to set aside the resolution is filed by a minority shareholder (Anfechtungsklage).

    Furthermore the adequacy of the compensation may be challenged in a special proceeding (Spruchverfahren). This proceeding does not prevent the registration in the commercial register and thus the effectiveness of the resolution.

    Based on the European Takeover Directive, German law provides for another specific squeeze out procedure for listed companies following a successful takeover bid (in addition to the general squeeze out procedure). If the bidder holds at least 95% of the voting shares, it may apply for the transfer of the remaining voting shares by means of a court order. The application for the transfer by court order has to be filed within three months of the end of the acceptance period with the regional court of Frankfurt am Main.

    If the controlling shareholder is organised as a stock corporation, partnership limited by shares (KGaA) or SE, a squeeze out procedure may also be initiated in a connection with a merger if the controlling shareholder owns 90% of the shares in the target. The squeeze out needs to be immediately followed by an upstream merger of the target into the controlling shareholder.