I OVERVIEW OF GOVERNANCE REGIME
The corporate governance of German stock corporations, the legal form most common among listed companies in Germany, is determined by both statutory law and non-binding best practice rules.
The statutory laws most relevant for the corporate governance of German stock corporations are:
- a the Stock Corporation Act, which sets out the – largely mandatory – framework for the organisation of a stock corporation as well as the rights and duties of the corporate bodies, the management board, the supervisory board and shareholders’ meeting, as well as the shareholders;
- b the EU Market Abuse Regulation (MAR), which entered into force on 3 July 2016 and replaces the existing Market Abuse Directive (MAD) and the national laws implementing the MAD, including large parts of the Securities Trading Act. The MAR, inter alia, governs market abuse and market manipulation, disclosure of non-public information and directors’ dealings;
- c the Securities Trading Act, which still contains provisions on the enforcement of violations of the MAR under German law;
- d the Securities Acquisition and Takeover Act, which contains rules on mandatory and voluntary takeover offers and defensive measures;
- e the Commercial Code, which, inter alia, sets out the accounting rules applicable to German companies; and
- f the Co-Determination Act and the One-Third Participation Act, granting employees co-determination rights on a supervisory board level.
In addition, the German Corporate Governance Code, a collection of best practice rules and non-binding recommendations for the corporate governance of stock corporations, has a growing influence over how corporate governance is practised in Germany. The Corporate Governance Code was first adopted on 26 February 2002 by an expert commission appointed by the German federal government. It has since been revised several times, most recently on 24 June 2014. The latest amendments aim to further improve the transparency of compensation received by members of a stock corporation’s management board by recommending that the disclosures regarding the management board members’ remuneration include information on remuneration received from third parties with a view to the services as a management board member.
Although the rules and recommendations set out in the Corporate Governance Code are not legally binding, the management board and the supervisory board must declare annually whether and to what extent their company complies with the Corporate Governance Code and in cases where it does not, explain the reasons for the non-compliance (comply or explain). A deviation from a recommendation may be justified, for example, as being in the interests of good corporate governance.
II CORPORATE LEADERSHIP
i Board structure and practices
Mandatory two-tier structure
The Stock Corporation Act provides for a mandatory two-tiered board structure of German stock corporations consisting of the management board and the supervisory board.
Composition, appointment and dismissal
The management board must have one or more members. If the registered share capital of the stock corporation amounts to more than €3 million, or where the Co-Determination Act requires that the management board must include a labour director, the management board must consist of at least two members.
Members of the management board are appointed by the supervisory board. The Corporate Governance Code requires that, when appointing management board members, the supervisory board must pay attention to diversity and shall, in particular, aim for an appropriate representation of women on the management board.
Members of the management board may not be appointed for a period exceeding five years. For first-time appointments, the Corporate Governance Code recommends that an appointment for a full period of five years should not be the rule. The appointment may be renewed or the term of office may be extended, provided that the term of each such renewal or extension shall not exceed five years. Under the Stock Corporation Act, a management board member’s term of office may be renewed or extended, at the earliest, one year before the expiration of the term. A common practice to circumvent this prohibition against premature extension of the term of office is to dismiss and immediately reappoint a management board member for a new term of office. The Federal Court of Justice recently held that this practice does not constitute a violation of the statutory prohibition.
The supervisory board may only dismiss members of the management board for good cause. Good cause is, in particular, deemed to exist in the event of material breaches of duty, a management board member’s inability to properly discharge his or her duties (e.g., owing to long-lasting illness or a lack of required skills or knowledge) or where the general meeting has adopted a vote of no confidence, provided that the vote has not been adopted for apparently inappropriate reasons.
The supervisory board must consist of at least three members. The maximum number of supervisory board members permitted by law increases depending on the amount of the stock corporation’s registered share capital from nine members for stock corporations with a registered share capital of up to €1.5 million to 21 members for stock corporations with a registered share capital of more than €10 million. In any event, the total number of supervisory board members must be divisible by three.
Members of the supervisory board are generally elected by the shareholders’ meeting. The articles of incorporation may provide that certain shareholders or the respective holders of certain shares shall have a right to designate members of the supervisory board. Such designation rights may only be granted in respect of up to one-third of the number of members of the supervisory board to be elected by the shareholders.
Where a stock corporation generally has more than 500 employees, the One-Third Participation Act provides that one-third of the supervisory board members must be employee representatives. In companies with more than 2,000 employees, the Co-Determination Act requires that half of the supervisory board members be employee representatives.
On 6 March 2015, the German parliament adopted the Act for the Equal Participation of Women and Men in Leadership Positions in the Private and Public Sectors. The Act provides for a mandatory 30 per cent quota for the representation of women on supervisory boards of listed companies with more than 2,000 employees, as well as certain target ratios for the representation of female members in their management boards and senior management. These requirements will apply from 1 January 2016. In addition, companies with more than 500 employees must, by 30 June 2015, adopt certain target ratios regarding the representation of female members on their supervisory and management boards as well as in their senior management. The Act will enter into force shortly after it has passed the second chamber of the German parliament, the Federal Council representing the federal states. The Federal Council approved the act on 27 March 2015 and it was entered into force on 1 May 2015.
According to the Corporate Governance Code, the supervisory board must be composed such that its members jointly have the knowledge, ability and experience to properly carry out its tasks and shall include an adequate number of independent members. There is an ongoing debate in Germany regarding the required experience and expertise of supervisory board members. Many commentators call for a further ‘professionalisation’ of the supervisory boards of German stock corporations. For example, there have been demands that supervisory board members should not only jointly, but individually, have the necessary knowledge, ability and experience.
The Corporate Governance Code defines an independent member as someone who has no business or personal relations with the stock corporation, its executive bodies (which include the management board and the supervisory board), or any controlling shareholder or enterprise associated with the latter that could cause a substantial and ‘material’ conflict of interests. Regrettably, the Corporate Governance Code does not explain when a conflict of interest would be deemed material, but rather has deliberately refrained from including a catalogue of cases in which there is a presumption of a material conflict of interest in favour of a more flexible case-by-case assessment.
The Corporate Governance Code recommends that, in its report to the general meeting, the supervisory board should inform the general meeting of conflicts of interest supervisory board members have and how they have been dealt with. According to a recent decision by the Federal Court of Justice, the Corporate Governance Code does not require that the report to the general meeting describe the conflicts of interest in detail. In the case before it, the court considered it sufficient that the report named the supervisory board members with respect to whom conflicts of interest had arisen, the topics of the supervisory board’s agenda to which the respective conflicts related and how the conflicts had been dealt with.
The Corporate Governance Code further recommends that supervisory board members should not hold directorships or similar positions or advisory roles for important competitors of the stock corporation. Moreover, not more than two former members of the stock corporation’s management board should be members of the supervisory board at any time.
Former members of the management board of a listed company may not be elected to the company’s supervisory board for two years following their resignation or dismissal as members of the management board. In addition, it is not permitted for anyone to be a member of the supervisory boards of more than 10 companies at the same time.
In practice, the term of office of supervisory board members is about five years. Renewed appointments are permissible.
ii Legal responsibilities and representation
The management board is responsible for managing the business of the stock corporation and legally represents the corporation in relation to third parties. Under the statutory concept, all members of the management board manage and represent the corporation jointly. However, in practice, the rule is that the corporation is represented by each member of the management board acting individually or by two members of the management board acting jointly.
In managing the business of the corporation, the members of the management board must apply the care of a prudent and diligent businessperson. Failure by a member of the management board to meet this standard of care will render him or her personally liable for damages incurred by the corporation as a result.
The fiduciary duties that they owe to the stock corporation require members of the management board to give the stock corporation’s interests priority over their own when concluding transactions with the corporation. Failure to do so may lead to a management board member’s personal liability for any damages suffered by the corporation in connection with the transaction.
In the ARAG/Garmenbeck decision of 1997, the German Federal Supreme Court held that a member of the management board could not be held personally liable if, in making an entrepreneurial decision, he or she had adequate information and believed they were acting in the best interests of the stock corporation. This ‘business judgement rule’ was codified in the Stock Corporation Act in 2005.
The management board is obligated to manage the stock corporation independently; accordingly, it is not subject to instructions by the supervisory board or the general meeting. However, the shareholders may determine in the stock corporation’s articles of incorporation that certain transactions require the consent of the supervisory board. Where the articles of incorporation do not contain a catalogue of transactions requiring supervisory board consent, the supervisory board may set forth such a catalogue in the by-laws of the management board.
The management board may ask the general meeting for instructions on certain transactions. Pursuant to the Federal Supreme Court’s Holzmüller decision of 1982, the management board is obligated to obtain the general meeting’s approval where the proposed transaction is of outstanding importance and could substantially affect the shareholders’ rights.
The supervisory board is responsible for supervising and controlling the management of the stock corporation’s business by the management board. To this end, the supervisory board is entitled to inspect the corporation’s books and records and may, at any time, request the management board to report to it about the corporation’s affairs. The right to request reports from the management board extends to the corporation’s legal and business relationships with affiliated companies as well as to the affairs of the corporation’s affiliates if they could have a significant impact on the corporation.
Like members of the management board, members of the supervisory board must act in the best interests of the stock corporation and must demonstrate the care of a prudent and diligent businessperson. One of the notable responsibilities of the supervisory board is enforcing damage claims of the stock corporation against members of the management board. In the ARAG/Garmenbeck decision, the Federal Supreme Court held that, as a general rule, the supervisory board is obligated to assess the existence and enforceability of possible claims against members of the management board and, if its assessment reaches the conclusion that they exist and are enforceable, to pursue the claims. The supervisory board may only refrain from doing so in exceptional cases, where pursuing the claims would entail significant disadvantages for the corporation that outweigh the possibility of recovering the corporation’s damages from the management board members. In recent years, in particular in the wake of the financial and economic crisis of 2008, this has led to a significant increase in the number of lawsuits brought by corporations against former members of the management board.
Members of the supervisory board are obligated to keep confidential any non-public information that they receive in their capacity as supervisory board members. This obligation prohibits the disclosure of information to any person who is not a member of the supervisory board or management board. In 2016, the Federal Supreme Court clarified the scope of a supervisory board member’s confidentiality obligation. The decision concerned the question whether knowledge that a person acquires in his or her capacity as a supervisory board member of a bank may be attributed to that person’s employer, another bank. The court made clear that the confidentiality obligation prohibits the disclosure of confidential information to the supervisory board member’s employer. Moreover, the obligation may not be waived by the general meeting or the supervisory board in advance. As a consequence, knowledge acquired by a person in his or her capacity as a supervisory board member may not be attributed to that person’s employer.
In its Nürburgring decision of 2016, the Federal Supreme Court clarified that the supervisory board’s responsibility to supervise the management imposes a duty on the members of the supervisory board to avert actions by the management that may be detrimental to the company and that do not fall within the ambit of the business judgement rule. Accordingly, a supervisory board member may be subject to criminal liability if, by consenting to certain transactions, the supervisory board member enables behaviour of the management that is not covered by the business judgement rule. The decision concerned a limited liability company with an optional supervisory board. However, the Federal Supreme Court refers to its jurisprudence on the duties of supervisory board members of stock corporations. It, therefore, appears likely that the Federal Supreme Court would apply the same principles in the case of a stock corporation.
iii Delegation of board responsibilities
The Stock Corporation Act contemplates that all members of the management board manage the stock corporation collectively and are also collectively responsible for their actions.
However, in practice, responsibility for the management of certain business divisions or certain functions (e.g., finances, accounting, controlling, human resources, tax, legal, compliance) is delegated to individual members of the management board. The effect of this delegation is that the respective members of the management board become primarily responsible for the delegated tasks. However, delegation does not fully relieve the other members of the management board from all responsibilities with respect to the delegated tasks. They remain responsible for monitoring and controlling the discharge of the delegated tasks by the delegate.
iv Roles of the chair of the management board and the chair of the supervisory board
Where the management board consists of more than one person, the supervisory board may appoint one of them as chair. The chair is responsible for administrative tasks relating to the work of the management board, such as preparing and chairing meetings and keeping minutes, as well as for coordinating and supervising the work of the management board. He or she typically is in charge of liaising with the supervisory board and represents the management board in public, and thus has a prominent position among the other members of the management board. The manner in which many chairs of management boards discharge these responsibilities in practice has given rise to the perception that the position is comparable to that of the chief executive officer of a US corporation. However, from a legal perspective, this is not the case. In particular, the chair has no right to give instructions to other management board members and is not entitled to decide matters against a majority of the other members of the management board.
The members of the supervisory board must elect a chair and a deputy chair. The chair of the supervisory board is a largely administrative role that is not endowed with any particular powers. The chair calls, prepares and chairs meetings of the supervisory board. Typically, the articles of incorporation provide that the chair of the supervisory board also chairs the general meeting.
In a German stock corporation, it is not possible for the chair of the management board to also be chair of the supervisory board. The Stock Corporation Act provides that, with very limited exceptions, membership of both the supervisory board and the management board of the same corporation is incompatible.
v Compensation of members of the management board and the supervisory board
As part of the German legislature’s response to the financial crisis, the principles governing the compensation of members of the management board were fundamentally revised in 2009. In the legislature’s view, the structure of management compensation, particularly in regards to variable compensation components, was at least partly responsible for the perceived focus of management decisions and business strategies on short-term profits, rather than on long-term growth.
Accordingly, the total compensation of each member of the management board (e.g., fixed salary, variable salary components and pensions) as well as each of its individual components, must be reasonable in light of both the duties and responsibilities and the individual performance of that management board member as well as the situation of the company. In listed companies, the compensation must be geared towards a sustainable development of the company. This means, in particular, that the basis of assessment for variable components must be a period of several years. There is a controversial debate among German legal scholars and practitioners as to whether it suffices to assess variable compensation components on the basis of a two-year period or whether a longer assessment period is required.
The compensation of members of the management board is determined by the full body of the supervisory board, usually following a recommendation by a committee established for that purpose. In the absence of any particular circumstances, the compensation may not exceed usual compensation levels. When determining the compensation of a member of the management board, the supervisory board must therefore compare the proposed compensation both with the compensation structure of peer companies (horizontal comparison) and with the company’s own compensation structure (vertical comparison). Under the Corporate Governance Code as amended by the Corporate Governance Commission on 13 May 2013, the supervisory board should also consider the relationship between the compensation of the management board and that of senior managers with the total staff, including the development of the compensation over time. The supervisory board should also place caps on compensation in terms of the aggregate amount and in terms of individual components.
If, after the compensation has been determined, the situation of the company changes for the worse because of circumstances that can be attributed to the management board, and continuing to pay the compensation as originally determined would be unreasonable, the supervisory board is not only entitled but, in the absence of any particular circumstances, also obligated to reduce the compensation (including pensions) to an appropriate level.
The 2009 reform of the provisions governing compensation of management board members also introduced a ‘say on pay’. The general meeting may pass a non-binding resolution regarding the approval of the structure for the management board members’ compensation. A draft bill that provided for a mandatory and binding vote of the general meeting on the company’s compensation structure did not pass the German legislature before the general elections on 22 September 2013. It is widely expected that Germany’s grand coalition government will re-introduce the bill during the current parliamentary term.
The German Corporate Governance Code recommends that severance payments to members of the management board should not exceed an amount of two times the annual compensation, and that severance payments in the event of a change of control of the company should not exceed 150 per cent of that amount.
The supervisory board members’ compensation is determined in the articles of incorporation or by the general meeting. Like the management board members’ compensation, it must bear a reasonable relationship to the duties of the supervisory board members and to the condition of the company.
The supervisory board members’ compensation may also comprise variable components. The Corporate Governance Code recommends that variable components should be based on the corporation’s long-term performance. The details of how supervisory board members’ variable compensation may be structured are the subject of debate among legal scholars and practitioners. In 2004, the Federal Supreme Court held that stock options do not constitute permissible components of supervisory board members’ compensation.
Under the Stock Corporation Act, contracts between a member of the supervisory board and the stock corporation relating to services outside the scope of the supervisory board member’s statutory duties require the consent of the supervisory board. In a widely noted decision, the Federal Court of Justice held that the management board will act in breach of its duties if payments are made to a supervisory board member without the supervisory board’s prior consent to the contract. Although the supervisory board may approve the contract and the payments owed to the supervisory board member thereunder after the services have been performed, the management board will breach its duties if payments are made in mere anticipation of the approval. The Court held that, in the absence of the prior consent by the supervisory board, the contract gives rise to a conflict of interest of the supervisory board member.
Stock corporations must disclose the aggregate remuneration granted to members of the management board and the supervisory board, respectively, in their financial statements. In addition, listed companies must disclose the remuneration of each individual member of the management board. According to the Corporate Governance Code, for financial years beginning after 31 December 2013, the information to be disclosed with respect to each member of the management board should, among other things, set out the benefits (including fringe benefits) actually achieved by the management board member in the relevant financial year, as well as the maximum and minimum amounts of the variable compensation that would have been achievable in that year. The general meeting may opt out of these disclosure requirements for a period of not more than five years by passing a resolution with a majority of 75 per cent of the capital represented. To improve the ease of comparison over time and with other companies, the Corporate Governance Code recommends that important facts and figures regarding the management board’s compensation should be prepared and presented using a standardised table format, the template for which is set out in an annex to the Corporate Governance Code.
The Stock Corporation Act does not require the supervisory board to form any particular committee, but it provides for the ability of the supervisory board to form committees, in particular for the purpose of preparing its deliberations and supervising the executions of its resolutions.
Where the supervisory board is composed of both shareholder and employee representatives, the Co-Determination Act requires that the supervisory board form a reconciliation committee composed of the chair of the supervisory board, his or her deputy and one member of the supervisory board elected by the shareholder and the employees, respectively.
Mirroring a recommendation contained in the Corporate Governance Code, the Stock Corporation Act provides since 2008 that the supervisory board may form an audit committee to deal with matters relating to the preparation of the corporation’s financial statements, the effectiveness of the internal audit and risk management systems as well as the conduct of audits and ensuring the auditor’s independence. According to the corresponding provision of the Stock Corporation Act, the responsibilities of the audit committee comprise monitoring the accounting process and the efficacy of the internal control system, the risk management system and the internal audit system as well as additional services provided by the stock corporation’s auditor. The Corporate Governance Code mirrors the statutory description of the audit committee’s responsibilities. Where the supervisory board of a corporation whose securities are traded or that has applied for its securities to be admitted to trading in an organised market has elected to form an audit committee, at least one member of the committee must have expertise in the areas of accounting and auditing. However, the Corporate Governance Code recommends that the chairman of the audit committee should have specialist knowledge and expertise in the application of accounting principles and internal control processes. Additionally, the chairman shall be independent and may not have been a member of the company’s management board in the past two years. The chairman of the supervisory board should not at the same time be the chairman of the audit committee.
The Corporate Governance Code further recommends the formation of a nomination committee that is composed exclusively of shareholder representatives and whose task is to propose suitable candidates that the supervisory board may recommend to the general meeting for election to the supervisory board. In the most recent amendments to the Corporate Governance Code, the corporate governance commission set aside its previous recommendation that the chairman of the supervisory board should also chair committees competent for agreements with members of the management board, such as a nomination or compensation committee.
vii Board and company practice in takeovers
In the event the company becomes the target of a takeover offer, the management board and the supervisory board must publish, inter alia, on the internet, a reasoned statement regarding the offer. The statement is intended to enable the shareholders to make an informed decision on the offer and must, in particular, contain the management board and the supervisory board’s assessment of the consideration offered by the bidder, the expected consequences of a successful takeover offer for the company, its employees, the employee representatives (i.e., the works council), the terms and conditions of employment and the company’s production and other sites, the goals pursued by the bidder, and information on whether the members of the management board and the supervisory board intend to accept the offer.
i Regular reporting and disclosure requirements
The management board and the supervisory board of a listed company must publish annually a statement on the company’s website regarding the company’s compliance with the recommendations of the Corporate Governance Code. To the extent the company does not comply, the statement must explain the reasons for the non-compliance (comply or explain). If the company’s statement turns out to be incorrect, this will – according to a recent decision of the Federal Court of Justice – only give rise to a shareholder’s right to challenge the general meeting’s vote approving the management board’s and the supervisory board’s conduct of the company’s affairs where the incorrectness of the statement amounts to more than a mere formality because it is significant in the circumstances of the individual case and a reasonable shareholder would have required the correct information to appropriately exercise his or her rights.
Stock corporations must disclose their annual financial statements (consisting of the corporation’s balance sheet and profit and loss statement as well as the notes thereto) by publishing them electronically in the German Federal Gazette.
Together with the annual financial statements, the stock corporation must publish, inter alia, the management report and the statement regarding compliance with the Corporate Governance Code.
The management report of listed stock corporations and stock corporations that have only issued securities other than shares for trading in an organised market and whose shares are traded in a multilateral trading system must contain a separate corporate governance statement. The corporate governance statement must contain:
- a the statement by the management board and the supervisory board regarding compliance with the Corporate Governance Code;
- b information regarding any practices and standards applied by the corporation in addition to statutory requirements, such as codes of conduct or codes of ethics, as well as information on where these practices and standards have been made publicly available; and
- c information regarding the composition of the corporation’s management board, supervisory board and any committees formed by them as well as the manner in which they conduct their affairs, for example, by summarising the content of or referring to the by-laws of the management board or supervisory board.
The Corporate Governance Code requires the management board and the supervisory board to report each year in the corporation’s annual report on the corporation’s corporate governance, including on any deviations from the recommendations of the Corporate Governance Code. The relationship between the corporate governance report on the one hand and the statutory obligations to deliver a corporate governance statement and to make a declaration regarding compliance with the Corporate Governance Code on the other is not entirely clear. In practice, the significant overlap between the contents of each of the three statements has led to the same information being published several times in different contexts, forms and media. It appears doubtful whether this multiplication of information is conducive to the goal of increasing the transparency of corporate governance structures.
The management board of a stock corporation over which another enterprise can exercise a dominating influence must, within the first three months of each financial year, prepare a report on the corporation’s relations with affiliated companies. This report must specify, inter alia, all transactions the corporation has conducted with its dominating enterprise or with companies affiliated with the dominating enterprise, any consideration given or received in connection with these transactions as well as any acts taken or not taken by the reporting corporation on the instructions or in the interests of the dominating enterprise or its affiliated companies and, if any such acts or omissions were disadvantageous to the reporting corporation, whether it has received compensation for any disadvantage caused by the acts or omissions.
Disclosure of inside information
On 3 July 2016, the MAR entered into force, replacing the MAD and the provisions of German law implementing the MAD, including, for example, certain provisions of the Securities Trading Act. The MAR maintains the general features of the previous regulations but provides for changes in important details. Most notably, the new rules also apply to issues with financial instruments, including debt instruments, admitted to trading on a multilateral trading facility (MTF). As of 3 July 2017, the MAR will also apply to financial instruments admitted to trading on an organised trading facility, a new category of trading facilities introduced by the recast Directive on Markets in Financial Instruments.
As a general rule, any issuer of securities admitted to trading on an organised market or an MTF in Germany (or for which a request for admission to trading has been made) is obligated to disclose, without undue delay, any information directly relating to the issuer that is not publicly known, if the information could have a material impact on the market price of the relevant securities.
Disclosure of this information must be made in the German language in at least one mandatory stock exchange newspaper of nationwide circulation or through a system for the electronic dissemination of information, as well as on the issuer’s website. Prior to disclosing it to the public, the issuer must inform the management of each stock exchange on which the securities or derivatives thereof are traded and the Federal Financial Services Supervisory Authority of the information.
An issuer may, on its own responsibility, delay disclosure of inside information if disclosure is likely to prejudice the issuer’s legitimate interests, the delay is not likely to mislead the public and the issuer ensures the confidentiality of the inside information. Upon disclosure, the issuer must inform the Federal Financial Services Supervisory Authority that disclosure was delayed, and why.
ii Directors’ dealings
The MAR also governs the disclosure of directors’ dealings, extending the scope of application to persons discharging managerial responsibilities (PDMR) within an issuer, as well as persons closely associated with them, such as spouses, registered partners or dependent children. In addition to the members of the management board and the supervisory body of a stock corporation, PDMR comprise senior executives who have regular access to inside information and the power to make decisions that affect the issuer’s developments and business prospects. PDMR must immediately disclose in writing to the Federal Financial Services Supervisory Authority any transaction regarding shares, debt instruments or related derivatives conducted on their own account. Relevant transactions now include purchase and sale, as well as pledging and lending. The written disclosure notice must contain, with respect to each transaction in the securities, the names of the person and the issuer; the reason for the notification; the nature of the transaction; the designation and identification number of the securities; the date of the conclusion of the transaction; and the price, number and nominal value of the securities.
The disclosure obligation does not apply if the total value of all transactions conducted by a single person within a calendar year does not exceed €5,000.
The issuer is obligated to publish a transaction notified to it without undue delay on the internet or in a mandatory stock exchange newspaper with nationwide circulation.
Where previously none existed in German law, the MAR introduced a prohibition on transactions by or for the account of a person with access to inside information during a ‘closed period’ of 30 days before the public announcement of an interim or year-end report. However, the issuer may exempt the person for individual transactions under exceptional circumstances, such as severe financial difficulty, or for transactions under employee share or saving schemes and similar transactions.
iii Disclosure of shareholdings in listed companies
Any person whose shareholdings in shares of a company with its corporate seat in Germany admitted to trading on the organised market on a stock exchange of a Member State of the European Union reach, exceed or fall below the thresholds of 3, 5, 10, 15, 20, 25, 30, 50 or 75 per cent of the voting rights in the company, by way of an acquisition, a disposal or otherwise, is obligated to disclose this circumstance to the Federal Financial Services Supervisory Authority and the company without undue delay, but in any event no later than four trading days thereafter.
For the purpose of calculating the relevant threshold amounts, the Securities Trading Act provides that voting rights arising from shares held by a third party may be attributed to the person obligated to disclose the shareholding. Voting rights will, for example, be attributed if the third party is a subsidiary of the person obligated to disclose the shareholding, or if the person obligated to disclose the shareholding, by other means set forth in the Securities Trading Act, has a controlling influence on the exercising of the voting rights arising from the shares. The same holds true for shares held by third parties who act in concert with the person obligated to disclose the shareholding. As a result of the broad attribution provisions of the Securities Trading Act, and because a direct shareholding in the listed company is not a prerequisite for triggering the disclosure obligation, indirect holders of relevant shareholdings may also be subject to these disclosure requirements. The disclosure obligation may, therefore, apply even to remote indirect holders whose relevant shareholding results only from the attribution of shares held by third parties.
The company must publish the disclosure notice in a mandatory stock exchange newspaper with nationwide circulation without undue delay, but in no event later than nine calendar days after receipt thereof.
IV CORPORATE RESPONSIBILITY
The concepts of corporate responsibility and corporate compliance have gained a lot of importance in Germany over the past couple of years. This development has been accelerated by a number of corporate scandals regarding corruption, violation of antitrust or data protection and privacy laws that have attracted a lot of publicity and have led to various reactions by the courts and the legislature.
All DAX30 companies and most other German listed companies have in the meantime adopted compliance programmes and have created a compliance organisation headed by a chief compliance office or a member of the management board to whom responsibility for compliance has been delegated. The role and responsibilities of a compliance officer must be taken seriously. This was emphasised by a recent decision of the German Federal Court of Justice in which the Court found a compliance officer personally liable and responsible pursuant to criminal law for failing to take action to stop fraudulent billing practices of which he had become aware.
Nearly all compliance programmes emphasise the importance of the ‘tone from the top’ for a corporation’s compliance culture, and measures are taken to ensure compliance manuals are distributed and employees are trained with respect to compliance-related issues. Many companies have established whistle-blowing hotlines.
The increased significance of corporate compliance has also led to an increase in measures taken by companies to address and sanction non-compliance. Where a suspicion of non-compliance arises, companies conduct internal investigations, often with the assistance of external lawyers or auditors, to determine the nature and magnitude of the non-compliance. Most recently, the focus of the discussion on corporate compliance has, therefore, moved from the framework for establishing compliance management systems to the legal framework for, and boundaries of, the conduct of internal investigations. Conflicts arise, in particular, with respect to employee data protection, the statutory protection against self-incrimination afforded the accused in investigations by state authorities as well as the scope of attorney–client privilege. At the end of 2010, the German government introduced a bill that attempts to balance the need of companies to conduct internal investigations with the protection of employee data. The bill for the Employee Data Protection Act was heavily criticised by the parliamentary opposition as well as by experts. On 26 February 2013, the then ruling coalition decided to discontinue the legislative proceedings. A new bill is expected to be introduced by the new grand coalition government during the current parliamentary term. In November 2010, the Federal Bar Association adopted guidelines for the conduct of internal investigations. In October 2010, a court held that minutes of interviews with employees conducted in the context of internal investigations by lawyers retained by the corporation were not protected by attorney–client privilege against seizure by state prosecutors; however, the legislature has now extended the privilege against seizure to any attorney admitted to the bar. In 2012, the European Commission published a proposal for a general data protection regulation, which, inter alia, addresses processing of employee data for the purposes of compliance.
i Shareholder rights and powers
Equality of voting rights
As a general rule, all shares in a German stock corporation provide for equal rights, including equal voting rights, rights to receive dividends and information rights.
Voting rights are usually exercised per share or in proportion to the par value of the shares. The Stock Corporation Act prohibits the creation of shares with multiple voting rights.
The articles of incorporation of non-listed stock corporations may provide for limitations on a shareholder’s voting rights by way of maximum voting rights or staggered voting rights. With the approval of the general meeting, a stock corporation may issue non-voting preferred shares in a nominal amount of up to half of its registered share capital.
ii The powers of shareholders to influence the board
The shareholders of a stock corporation have no direct influence on the management board. They have no right to give instructions to the management board or to otherwise direct the management of the corporations. Their influence is limited to electing the members of the supervisory board members, who in turn appoint and remove the members of the management board.
When the Stock Corporation Act was adopted in 1965, the German legislature recognised that a shareholder whose shareholding represents a majority of the voting rights or the share capital of a corporation may de facto have a dominating influence on the stock corporation’s management because of its ability to elect and dismiss the shareholder representatives on the corporation’s supervisory board. Accordingly, the Stock Corporation Act provides for a set of rules regarding the influence of controlling shareholders on a stock corporation’s management and business.
Under these rules, a dominating shareholder must compensate any disadvantage suffered by the corporation as a result of any exercises by the controlling shareholder of its dominating influence. Any such disadvantage must be compensated, at the latest, by the end of the fiscal year during which it was caused.
The dominating shareholder may ‘legalise’ its influence on the stock corporation by concluding a domination agreement with the stock corporation. Once a domination agreement has been concluded, the Stock Corporation Act recognises the shareholder’s right to give instructions to the management board. To become effective, the domination agreement – which for tax reasons is often concluded together with a profit transfer agreement under which the corporation must transfer all of its annual profits to the dominating shareholder – must be approved by the corporation’s general meeting with a supermajority of at least 75 per cent of the share capital represented at the meeting.
In consideration of the ability to directly influence the management of the corporation, the shareholder is obligated to compensate any loss incurred by the corporation during the term of the domination agreement and to acquire, at another shareholders’ request, that shareholder’s shares against adequate compensation.
iii Decisions reserved for shareholders
Certain decisions are reserved for the shareholders’ meeting by statutory law, such as the appointment of members of the supervisory board, the appropriation of distributable profits, the appointment of the auditor, the amendment of the articles of association, measures to increase or reduce the share capital or obligations to transfer assets of the company.
In addition, certain decisions of the management board are subject to approval of the general meeting. The Federal Court of Justice has held in its Holzmüller and Gelatine decisions that certain decisions by the management board that could fundamentally affect the shareholders’ rights and economic position, such as the sale or the hive-down of a business division into a subsidiary if the division contributes a significant portion of the corporation’s revenue, require the approval of the general meeting. Another important example concerns the delisting of a company (i.e., the company’s complete withdrawal from the stock exchange). In 2002, the Federal Court of Justice held, in its high-profile Macrotron decision, that a delisting required the approval of the general meeting and that the company had to offer an adequate cash compensation to dissenting shareholders. In July 2012, the Federal Constitutional Court formally upheld this decision but emphasised that neither delisting nor downgrading affects the constitutional rights of the shareholders. In light of the Federal Constitutional Court’s decision of 2012, the Federal Court of Justice, on 8 October 2013, expressly reversed the Macrotron decision. In a case involving the ‘downgrading’ of a company (i.e., the change from trading on the regulated market to a qualified segment of the open market), the Federal Supreme Court held that not only the downgrading, but also a delisting did not require the approval of the general meeting and a cash compensation offer to dissenting shareholders.
iv Takeover defences
Once the bidder has published its decision to make a takeover offer, the management board may no longer take any actions that could prevent the success of the offer. There are, however, some statutory exceptions to this ‘prohibition of frustrating action’.
The management board remains entitled to solicit competing offers from third parties (white knights) and to take actions approved by the supervisory board.
Moreover, the management board may take such actions as would also have been taken by the prudent and diligent managers of a company that is not the subject of a takeover offer. This means that the management board continues to be entitled to take all measures that are in the ordinary course of the company’s business or that are intended to implement a business strategy that the company has embarked on before the publication of the takeover offer.
Finally, the management board may take defensive measures (such as repurchasing shares equalling up to 10 per cent of the registered share capital, establishing increased majority requirements for shareholder votes, electing shareholder representatives in the supervisory board at different points in time to create a ‘staggered board’ and at the same time increasing the majority requirements for their dismissal, selling important assets of the corporation or acquiring a direct competitor of the bidder) authorised by the general meeting before the takeover offer was announced and approved by the supervisory board.
The vote authorising defensive measures must be adopted with a supermajority of at least 75 per cent of the share capital represented at the shareholder meeting. The authorisation to take defensive measures may not be granted for a period of more than 18 months. Previously, the Corporate Governance Code contained a suggestion that the management convene a shareholder meeting only ‘in appropriate cases’ to allow shareholders to discuss the takeover offer and decide on defensive measures. As most recently amended, the Corporate Governance Code now provides that a shareholder meeting should be convened whenever the company is faced with a takeover offer.
The German legislator has exercised the ‘opt-out’ provided for in Article 12 Paragraph 1
of the Takeover Directive (Directive 2004/25/EC). Accordingly, the rules of the Takeover Directive regarding defensive measures do not automatically apply to German target companies. However, in accordance with Article 12 Paragraph 2 of the Takeover Directive, the Securities Acquisition and Takeover Act allows companies to provide in the articles of association that, instead of the above-described rules, the company will comply with the Takeover Directive’s rules regarding defensive measures. To date, no Germany company has made use of this ‘opt-in’.
v Rights of dissenting shareholders
Any shareholder who was present during a shareholders’ meeting and objected to a resolution adopted at that meeting is entitled to file an action against the shareholders’ resolution in court with the intention to have it declared void. The plaintiff-shareholder must have been a shareholder of the corporation on the date on which the agenda of the shareholders’ meeting was published and must have entered his or her objection into the record of the shareholders’ meeting.
Shareholders representing at least 5 per cent of the stock corporation’s registered share capital are entitled to request that the management board call a shareholders’ meeting, and shareholders representing at least 5 per cent or €500,000 of the corporation’s registered share capital are entitled to request that topics are put on the agenda of the shareholders’ meeting.
vi Shareholders’ duties and responsibilities
All shareholders are subject to a duty of loyalty in relation to the corporation and the other shareholders. Under the duty of loyalty, shareholders are, in particular, prohibited from causing harm to the corporation. This means that, in certain circumstances, a shareholder may be obligated to vote in favour of a measure that is in the interests of the corporation; for example, a restructuring of the corporation’s capital structure to avoid insolvency.
On 13 October 2016, the German government’s Commission on Corporate Governance published its latest proposals for modifications of the Corporate Governance Code. While the largest part of the modifications is a reaction to previous changes in law, some of them are more far-reaching.
While the current version points out the management board’s legal obligation to ensure compliance with the laws and internal rules, the Commission proposes that the management board be obligated to implement a compliance management system and to publish its basic features online. The compliance management system is to be proportionate to the risks that the company is exposed to. Moreover, the compliance management system is to give employees and third parties the opportunity to safely report compliance violations. In the Commission’s view, this would lead to greater trust in the corporation by both investors and the general public. At the same time, a compliance management system is supposed to lead to better overall compliance and thus to mitigate the risk of legal liability.
A second proposed modification relates to variable components of the management board’s compensation. The modification, if ratified, would put a stronger emphasis on the long-term view. The proposals clarify that variable compensation components should be based on the future development of the company and should not be paid out early.
The Commission also proposes that the chairman of the supervisory board should be prepared to discuss with investors issues falling within the sole competence of the supervisory board. The proposal makes clear that such discussions are not prohibited under German law. The Commission goes on to say that discussions with investors are desirable. As the supervisory board is the only corporate body with which investors would be able to discuss issues falling exclusively within its purview, discussions between the chairman of the supervisory board and investors are in the interest of transparency and good governance.
1 Carsten van de Sande and Sven H Schneider are partners at Hengeler Mueller Partnerschaft von Rechtsanwälten mbB.