I OVERVIEW OF GOVERNANCE REGIME
Germany has one of the most solid corporate governance systems in the world owing to its well-balanced control mechanisms, capital preservation and market transparency rules as well as equal opportunities for women and men.
The German stock corporation is the common legal form among listed companies in Germany. Its corporate governance regime is determined by the following statutory provisions and non-binding best practice rules:
- 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 corporate bodies, management boards, supervisory boards and shareholders' meetings, as well as shareholders, and which will be amended not later than 10 June 2019 by an implementing act that transposes the revised Shareholder Rights Directive2 (SRD II) into German law;
- the EU Market Abuse Regulation (MAR), which governs market abuse and market manipulation, disclosure of non-public information and directors' dealings;
- the Securities Trading Act, containing provisions on the enforcement of violations of the MAR under German law;
- the Securities Acquisition and Takeover Act, which provides for rules on mandatory and voluntary takeover offers and defensive measures;
- the Co-Determination Act and the One-Third Participation Act, granting employees co-determination rights at the supervisory board level;
- the Commercial Code, which stipulates the general accounting rules for German companies, and which was amended in March 2017 by the German implementation of the Corporate Social Responsibility Directive;3 the new rules require the disclosure of non-financial information that is deemed to be vital for a change towards a sustainable global economy by combining long-term profitability with social justice and environmental protection; and
- non-binding guidelines on non-financial reporting, which were published by the European Commission in June 2017.
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 growing influence on how corporate governance is practised in Germany. It has been revised several times, most recently on 7 February 2017. A draft of an amended Corporate Governance Code was published on 25 October 2018. The most important proposed modifications concern remuneration of management board and supervisory board members as well as the independence of supervisory board members and how to assess it. The planned changes to the Corporate Governance Code with regard to remuneration are accompanied by changes to the German Stock Corporation Act, brought about by SRD II. Finally, the Corporate Governance Code requires that the chair of the supervisory board should be available – within reasonable limits – to discuss supervisory board-related issues with investors.
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 the company complies with the Corporate Governance Code. To the extent it decides not to comply, the company must explain the reasons for the non-compliance (the comply or explain principle). A deviation from a recommendation may be justified, for example, as being in the interests of good corporate governance. The proposed amendments of the Corporate Governance Code include a number of principles reflecting both significant legal requirements and fundamental standards of good and responsible governance. With respect to these principles, the comply or explain principle is to be supplemented by an apply and explain approach. The management board and the supervisory board must explain how they apply these principles to enable shareholders and other stakeholders to assess the corporation's governance structure and culture.
II CORPORATE LEADERSHIP
i Board structure and practices
Mandatory two-tier structure
The two-tiered board structure of German stock corporations must have a management board and a supervisory board.
Composition of the management board
The management board must have one or more members that must be natural persons. 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 does not exceed five years. In the draft amended Corporate Governance Code, the recommendation is made that the initial appointment of members of the management board should be for a maximum of three years. A management board member's term of office may be renewed or extended, at the earliest, one year before the expiration of the term.
However, it is feasible and common practice to dismiss and immediately reappoint a management board member for a new term of office. The Federal Court of Justice 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: for example, 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 and provided that the vote has not been adopted for apparently inappropriate reasons.
Composition of the supervisory board
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 to a maximum of nine members for stock corporations with a registered share capital of up to €1.5 million, to a maximum of 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.
On 9 October 2018, the Federal Court of Justice ruled that a resolution of the supervisory board on the nomination of a candidate for the board and its announcement in advance of a general meeting does not become void if the candidate nominated by the supervisory board does not comply with the recommendations of the Corporate Governance Code regarding membership in multiple boards. Since the Corporate Governance Code is not a binding statute, a deviation from its recommendations has no effect on the validity of the candidate's nomination or eventual election in the general meeting. The Court also held that there is no legal obligation to inform shareholders about the fact that a nominee does not comply with the recommendations of the Corporate Governance Code.
Where a stock corporation generally has more than 500 employees, one-third of the supervisory board members must be employee representatives. In companies with more than 2,000 employees, half of the supervisory board members must be employee representatives. At least 30 per cent of the supervisory board members of listed companies with more than 2,000 employees must be women. In addition, companies with more than 500 employees must adopt certain target ratios regarding the representation of female members on their supervisory and management boards as well as in their senior management.
According to the Corporate Governance Code, the supervisory board should be composed in such a way 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. The new Corporate Governance Code recommends that, except in cases where the supervisory board only consists of three members, at least two representatives of the shareholders shall be independent from the controlling shareholder.
The Corporate Governance Code defines an independent member as a person 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. The draft amended Corporate Governance Code foresees a catalogue of criteria for assessing independence. In particular, it ought to be taken into account whether the supervisory board member (or a person having a close family relationship with him or her):
- was a member of the company's management board in the two years prior to his or her appointment;
- currently is maintaining (or has maintained) a material business relationship with the company or one of the entities controlled by the company (e.g., as a customer, supplier, lender or adviser) in the year prior to the appointment, directly or as a shareholder, or in a leading position of a third-party entity;
- along with the remuneration as a member of the supervisory board, receives other material variable remuneration from the company, or one of the entities controlled by the company;
- is in a close relationship with a member of the management board;
- is a controlling shareholder or a member of the executive governing body of the controlling shareholder, or maintains a personal or business relationship with a controlling shareholder; and
- has been a member of the supervisory board for more than 12 years.
The Corporate Governance Code recommends that the supervisory board should inform the general meeting about conflicts of interest and how they have been dealt with. Such report to the general meeting must mention the relevant supervisory board members, the topics of the supervisory board's agenda to which the respective conflict is related and how the conflict was dealt with.
Supervisory board members should not hold directorships or similar positions or advisory roles for important competitors of the stock corporation, and should not have any personal relationship with a significant competitor. 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.
A member of the management board cannot be held personally liable if, in making an entrepreneurial decision, he or she had adequate information and believed he or she was acting in the best interests of the stock corporation. This business judgement rule applies in the context of decisions that are not predetermined by the law, the articles of association or resolutions of the shareholders' meeting. The management board is considered to have had adequate information for making a decision if it has consulted all sources of factual and legal information reasonably available to it in the specific situation, and on that basis has weighed the advantages and disadvantages of its decision against each other. However, it is not required that all conceivable information is obtained and every conceivable impact is quantified before making a decision. The necessary depth of information is determined by parameters such as the potential risk to the company, the cost of obtaining information and the period of time available for decision-making.
The management board is subject to a duty of legality. This means that the management board may not itself commit, and may not order third parties to commit on behalf of the company, any violations of the law. In an unclear legal situation, the board members may also obtain the advice of a third-party expert. The members of the management board may rely on the third-party expert's advice if they have provided the expert with the necessary documents and a comprehensive description of the facts to be examined; the expert is independent and professionally qualified to advise on the issue; and they carry out a careful plausibility check of the advice provided by the expert.
The management board must ensure that all employees of the company, when acting within the scope of their operational activities, act in compliance with the law. This presumes that the management board must establish an appropriate system of organisation and control to prevent violations of law from within the company.
While compliance with the law itself is not subject to the management board's discretion, the management board is entitled to wide discretion when designing and implementing the organisation and control measures intended to ensure compliance. On 23 April 2018, the European Commission published its proposal for a directive on the protection of persons who report violations of EU law. According to this proposal, legal entities will be obliged to set up suitable reporting systems.
The management board is obligated to manage the stock corporation independently. 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 prior 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 catalogue in the by-laws of the management board. In addition, 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: for example, a spin-off of the most valuable part of a company's business.
Further, one of the principles set out in the draft amended Corporate Governance Code stipulates that material transactions with related parties are subject to the prior approval of the supervisory board.
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. 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 particular in the wake of the global 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 management boards.
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. For example, the knowledge that a person acquires in his or her capacity as a supervisory board member of a bank must not be disclosed 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.
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. A supervisory board member may even be subject to criminal liability if, by consenting to certain transactions, the supervisory board member allows behaviour of the management that is not covered by the business judgement rule.
iii Delegation of board responsibilities
All members of the management board manage the stock corporation collectively and are collectively responsible for their actions.
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 member of the management board is excluded from the management of the other divisions or functions and becomes 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 performance of the delegated tasks by the delegate. The extent of specific monitoring measures is at the discretion of the individual management board member. In general, it is deemed to be sufficient to carefully, continuously and appropriately observe developments in the delegated divisions or functions and the performance by the other management board members of their duties. A general mistrust of other members of the management board is neither appropriate nor necessary.
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 leads 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. With few 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
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 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. In this context, short-term elements of variable remuneration must be distinguished from long-term elements. The short-term variable remuneration shall be disbursed in cash, whereas the draft amended Corporate Governance Code recommends for long-term variable remuneration to be granted in the form of shares in the company that may not be sold for a period of at least four years. The proposed amendments to the Stock Corporation Act and the Corporate Governance Code will likely require changes to currently employed remuneration systems for the management board and the supervisory board. 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, 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, absent any particular circumstances, also obligated, to reduce the compensation (including pensions) to an appropriate level.
The 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.
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. 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.
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. 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. Absent such 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. Listed companies must also disclose the remuneration of each individual member of the management board. According to the Corporate Governance Code, 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 supervisory board is not required to, but may, form committees, in particular for the purpose of preparing its deliberations and supervising the execution of its resolutions.
Where the supervisory board is composed of both shareholder and employee representatives, the supervisory board must 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.
The supervisory board may establish 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. The audit committee is responsible for 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. 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 chair of the audit committee should have specialist knowledge and expertise in the application of accounting principles and internal control processes. Additionally, the chair shall be independent and may not have been a member of the company's management board in the past two years. The chair of the supervisory board should not at the same time be the chair of the audit committee.
Moreover, the draft amended Corporate Governance Code recommends that the supervisory board reports on how many meetings of the supervisory board, and of the committees, individual members attended.
The Corporate Governance Code further recommends forming a nomination committee that is composed exclusively of shareholder representatives and that is tasked with proposing suitable candidates that the supervisory board may recommend to the general meeting for election to the supervisory board.
vii Board and company practice in takeovers
In the event a company becomes the target of a takeover offer, the management board and the supervisory board must publish a reasoned statement regarding the offer on the internet. 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. In relation to this, the draft amended Corporate Governance Code newly introduces the apply and explain concept, which is already practiced in many other countries. Accordingly, the supervisory board and the management board must explain in which way they apply the principles set out in the Corporate Governance Code. They have to disclose specifically how the Corporate Governance Code is applied and implemented within the company, or give specific reasons for not doing so. If the company's statement turns out to be incorrect, this will 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 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 corporate governance statement. This includes the following:
- a statement by the management board and the supervisory board regarding compliance with the Corporate Governance Code;
- 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
- 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.
In addition, as of the fiscal year 2017, the corporate governance statement must describe the concept of diversity that is pursued with regard to the composition of the management and the supervisory board. The description must address specific aspects such as age, gender, educational or professional background, as well as the objectives of the diversity concept, the manner in which it is implemented and the results achieved during the financial year.
As part of the management report, large capital market-oriented corporations as well as certain credit institutions and insurance companies are also obligated to submit a non-financial declaration. This includes information on the approach adopted by the company to improve environmental, employee and social issues, respect for human rights and the fight against corruption, as well as information on the result of the measures taken to date. If no particular approach is pursued for one of these matters, this is to be justified in sense of the comply or explain principle.
Companies are free to decide whether to integrate the non-financial statement into the (group) management report or whether to prepare a separate non-financial (group) report. Exemptions from the reporting obligation exist, among other things, for those companies that are included in the consolidated financial statements of a parent company.
The supervisory board must review and monitor the compliance with these reporting obligations within the framework of standard publicity.
Within the first three months of each financial year, the management board of a stock corporation on which another enterprise can exercise a dominating influence must prepare a report on the corporation's relations with affiliated companies. This report must specify 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 such transactions; and 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
As a general rule, any issuer of securities that are admitted or requested for admission to trading on an organised market or multilateral trading facility in Germany must 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. As of 3 January 2018, these disclosure requirements also apply to organised trading facilities as well as participants in the emissions certificates market.
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 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, for example during ongoing contract negotiations concerning material assets of the company or in restructuring situations; 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 Supervisory Authority of this, and of why disclosure was delayed.
ii Directors' dealings
Members of the management board and the supervisory board of an issuer as well as all other senior executives with regular access to inside information are obligated to notify both the issuer and the Federal Financial Supervisory Authority, within three business days, about transactions conducted on their own account relating to shares or debt instruments of the issuer that are traded on the financial markets, or financial instruments linked thereto (e.g., derivatives). The disclosure obligation also relates to transactions for the account of legal entities, trusts or persons closely associated with the issuer's board members or senior executives, such as spouses, registered partners or dependent children. Relevant transactions include the purchase and sale, as well as the pledging and lending, of the relevant financial instruments. Disclosure must be made in writing and must contain, with respect to each transaction:
- the names of the issuer and of the person for whose account the transaction was conducted;
- the reason for the disclosure;
- the nature of the transaction;
- the designation and identification number of the financial instruments;
- the date of the conclusion of the transaction; and
- the price, number and nominal value of the financial instruments.
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 responsible for ensuring that information regarding the transactions that are subject to the disclosure requirement is published without delay, at the latest three days after the transaction, in media suitable for its dissemination throughout the European Union. In addition, the issuer is required to submit the published information to the German company register.
During a closed period of 30 days before the public announcement of an interim or year-end report, transactions by or for the account of a person with access to inside information are prohibited. 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 Supervisory Authority and to the company without undue delay, but in no event later than four trading days thereafter. The company must then pass on the information without undue delay, namely within three trading days, to a combination of media for Europe-wide dissemination as well as to the German company register.
For the purpose of calculating the relevant threshold amounts, 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 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. The person obligated to disclose the shareholding and a third party are considered to be acting in concert if together they strive to effect a fundamental and sustained change of the strategic direction of the company. By contrast, agreements by shareholders on individual matters do not constitute acting in concert. In 2018, the Federal Court of Justice ruled that formal aspects determine whether the shareholders' coordination is considered to only relate to an individual case, and thus not to constitute acting in concert. Accordingly, coordination with respect to an individual vote (such as the re-election of supervisory board members) in the general meeting will not be regarded as acting in concert even if the vote may have fundamental or sustained consequences for the strategic direction of the company. As a result of the broad attribution of voting rights, and because a direct shareholding in a 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.
IV CORPORATE RESPONSIBILITY
All publicly listed companies and other German companies have adopted modern compliance programmes and created a compliance organisation that is headed by a chief compliance office or a member of the management board to whom responsibility for compliance has been delegated.
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 where employees can report misconduct anonymously.
The compliance framework in Germany is decisively influenced by case law: on 9 May 2017, the Federal Court of Justice ruled that for the purpose of determining the amount of a fine imposed on a company for violations of law committed from within the company, the effectiveness and efficiency of the company's compliance management system must be taken into account. The amount of the fine also depends on whether the company has improved its compliance management system as a response to the administrative or criminal proceedings against it, and whether it has revised its internal policies and procedures in such a way that comparable violations will become less likely in the future. The Court's decision, thus, encourages management boards to investigate indications of wrongdoing and to eliminate systematic deficits as quickly as possible. Conversely, the decision leads to an increased liability risk for members of the management board in cases where they fail to take appropriate compliance measures.
The 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.
Since 25 May 2018, employers conducting internal investigations must observe the data protection principles set out in the General Data Protection Regulation4 (GDPR) such as data minimisation, purpose limitation, integrity, confidentiality and the requirement to process personal data lawfully, fairly and in a transparent manner in relation to the data subject. Employers have to take the GDPR and the Federal Data Protection Act into account, for example, when conducting internal investigations. The GDPR requires companies to inform shareholders about the processing of their personal data that occurs in connection with the preparation or the holding of the general meeting.
i Shareholder rights and powers
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.
The shareholders of a stock corporation, unlike shareholders of German limited companies, 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 corporations. Their influence is limited to electing the members of the supervisory board, who in turn appoint and remove the members of the management board.
Since a shareholder representing a majority of the voting rights or the share capital of a corporation may de facto have a controlling influence on the stock corporation's management because of its ability to elect and dismiss the shareholder representatives on the corporation's supervisory board, the Stock Corporation Act provides for a set of rules regarding the influence of controlling shareholders on a stock corporation's management and business: a controlling shareholder must compensate any disadvantage suffered by the corporation as a result of any exercises by the controlling shareholder of its influence. Any such disadvantage must be compensated, at the latest, by the end of the fiscal year during which it was caused.
The controlling 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. The controlling shareholder is obligated to compensate any loss incurred by the controlled company during the term of the domination agreement and to acquire, at a minority shareholder's request, that shareholder's shares against adequate compensation.
Certain decisions are reserved for the shareholders' meeting by statutory law. This includes 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 significant assets of the company.
In addition, the shareholders' meeting must approve management decisions 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. Apart from these exceptional cases, the management board can make business decisions autonomously without the shareholders' consent. Accordingly, the Federal Court of Justice ruled that the management board can decide to delist a company from the stock exchange without the consent of the general meeting.
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.
ii Shareholders' duties and responsibilities
All shareholders are subject to the duty of loyalty in relation to the company and other shareholders. In particular, shareholders are prohibited from causing harm to the company.
In principle, the duty of loyalty is defined by the articles of association and the company's purpose. However, in exceptional circumstances, a shareholder may even be obligated to exercise his or her voting rights in favour of a specific measure that is deemed to be necessary for the avoidance of the collapse of the company.
The Federal Court of Justice ruled on 9 October 2018 that allowing shareholders to participate in a general meeting and to exercise their voting right violates the principle of equal treatment if they did not register within the registration period provided for in the invitation to the general meeting. In the case decided by the Court, the votes of a shareholder who did not register in time were taken into account in the election of a new supervisory board member. Because it could not be ruled out that these votes had an influence on the outcome of the election, the Federal Court of Justice nullified the election.
iii Shareholder activism
Germany has experienced several waves of shareholder activism. Owing to recent changes of the law and restrictive court decisions, the practice of 'greenmailing' companies through lawsuits by individual minority shareholders seeking to set aside shareholder resolutions or to delay corporate transactions is largely a thing of the past. Nowadays, activist shareholders are often hedge funds that seek to influence the strategy and the share price of a company even though they only hold a minority stake in the company. They typically do this through the exercise of minority rights, for example the right of a 5 per cent minority to request the appointment of a special auditor or the dismissal of a supervisory board member, or to convene a shareholders' meeting, or through informal means, such as discussions with the company's management. Often, these attempts are accompanied by aggressive publicity and media campaigns designed to pressure the company's management into adopting the measures proposed by the activist shareholder. Another means for activist minority shareholders to exercise a disproportionate influence on a company is through proxy fights. Foreign and institutional investors especially increasingly follow the voting recommendations of proxy advisers. If an activist shareholder succeeds in persuading a proxy adviser to favour the measures proposed by the activist shareholder, this will result in a significant increase in the activist shareholder's factual voting power.
A much publicised recent example of shareholder activism in Germany was the STADA Arzneimittel AG case. The activist shareholder Active Ownership Capital (AOC) acquired more than 5 per cent of the voting rights in STADA, a publicly listed pharmaceutical company. When this was made public pursuant to the Securities Trading Act, AOC used the public attention to promote its own agenda, which included the replacement of nearly the entire supervisory board of STADA. A proxy fight ensued between the management of STADA and AOC. As a result, among other things, the chair of the supervisory board was dismissed in a heated shareholders' meeting, resolutions of the supervisory board were judicially contested and the chair of the management board resigned.
iv Takeover defences
Once a 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 that 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.
The management board may also take defensive measures that are authorised by the general meeting before the takeover offer was announced and approved by the supervisory board. These include:
- 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.
The shareholders' approval authorising defensive measures requires 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. Under the Corporate Governance Code, a shareholders' meeting should be convened whenever the company is faced with a takeover offer.
v Contact with shareholders
Each shareholder may request the management board to provide information regarding the affairs of the company. The shareholders' information right may, however, only be exercised during a shareholders' meeting, and is limited to information that is reasonably required by the shareholders to appropriately assess the topics on the agenda of the shareholders' meeting. The management board may refuse to provide the requested information only for a limited number of reasons enumerated in the Stock Corporation Act, in particular if providing the information would, in the assessment of a reasonable businessperson, be harmful to the company. To the extent the management board proactively communicates with shareholders, it must observe the principle of equal treatment of shareholders as well as the rules regarding disclosure of inside information. Some authors argue that the principle of equal treatment requires that the management board inform the other shareholders at the annual shareholders' meeting about their previous communications with individual shareholders.
While fostering investor relations and communication with (potential) investors and other stakeholders of the company generally falls within the remit of the management board, the supervisory board, and particularly its chair, may, within certain boundaries, also communicate with the company's stakeholders. As of 2017, the Corporate Governance Code even requires that the chair of the supervisory board should be available – within reasonable limits – to discuss supervisory board-related issues with investors.
The Corporate Governance Code does not limit discussions to those with shareholders, so that especially the chair of the supervisory board can exchange views with other stakeholders, including representatives of politics and the press. However, investor communication by the (chair of the) supervisory board is limited to issues that fall within the remit of the supervisory board. These do not, in particular, include issues of corporate strategy and the management of the company, which are the sole responsibility of the management board.
Despite some uncertainties regarding the allocation and scope of the competencies for communication with shareholders, investor communication is now common practice in many listed companies, and the promotion of transparent investor communication is firmly supported at a European level by the Shareholders' Rights Directive.
i SRD II
SRD II aims to further improve the corporate governance of companies listed on Europe's stock exchanges and to promote the long-term participation of shareholders. Member States are required to transpose SRD II into national law by 10 June 2019. This will significantly change the corporate governance framework for listed companies in the European Union. In order to transpose SRD II into German national law, the Federal Ministry of Justice and Consumer Protection presented a draft law on 11 October 2018. The draft law will amend and supplement existing German statutes. In practice, the following key elements of the new law are of particular importance:
- SRD II provides for more intensive monitoring of the remuneration policy by shareholders (say on pay): a general meeting must vote on the remuneration system for all a listed company's directors. Due to the two-tiered board structure of German stock corporations, the draft German implementing law provides for different rules for the determination of the remuneration of management board members on the one hand (which must be decided by the supervisory board based on the remuneration policy adopted by the general meeting) and supervisory board members on the other (which will be determined by the general meeting). The general meeting must vote on the company's remuneration policy at least once every four years and, in addition, in the event of a material change. To preserve the supervisory board's power to determine management board members' remuneration, the draft implementing law provides that the general meetings' say on pay does not create any rights or obligations.
- To ensure the corporate transparency and accountability of directors regarding the implementation of the remuneration policy, the draft implementing law foresees that the supervisory board and the management board are jointly obligated to annually draw up a clear and understandable remuneration report providing a comprehensive overview of the remuneration of individual directors. The general meeting is entitled to annually pass a (non-binding) resolution on the company's remuneration report. The draft implementing law provides for penalties in the event of a violation of the duty to publish the remuneration report and to make it accessible.
- Material transactions with related parties are to be approved by the supervisory board or, if the supervisory board refuses to grant its approval, by the general meeting. Whether a transaction is deemed to be material is determined by the following aspects: the influence that the information about the transaction may have on the economic decisions of shareholders; the risks associated with the transaction; and the financial position, revenues, assets and capitalisation of the company. SRD II obliges every Member State to further define, within the framework of the Directive, what constitutes a material related-party transaction. The German draft implementing law provides that a transaction constitutes a material related-party transaction if its economic value is at least 2.5 per cent of the total of the company's fixed and current assets. No approval is required for transactions that are concluded in the ordinary course of business and on customary market terms. In addition, the implementing law provides for exceptions from the approval requirement, for example for transactions with directly or indirectly wholly owned subsidiaries, or transactions that, for other reasons, require the consent of the general meeting or that are entered into pursuant to an authorisation by the general meeting. Companies must publicly announce related-party transactions at the latest when the transaction is concluded, namely when the transaction documents are signed.
- SRD II aims to increase transparency by providing for an obligation of institutional investors and asset managers to once a year declare their participation policy, including their policy regarding the supervision of companies and the exercise of voting rights and other shareholders' rights. Voting rights advisers (proxy advisers) are to perform their activities on the basis of a code of conduct and to disclose, inter alia, essential features of methods used and main sources of information.
- To increase the transparency regarding shareholder participation, SRD II provides for a corporation's right to identify its shareholders (know your shareholder). Financial intermediaries will be obligated to provide, at the request of the company, the information that is necessary to identify the shareholders, including names and contact details. Under the draft implementing law, in particular, securities firms, financial institutions and central securities depositories will be considered to be financial intermediaries. Intermediaries who violate their duties can be fined. In addition, they may be sanctioned under the GDPR if they do not comply with an individual person's right to correct their personal data. The implementing law does not make use of the option contemplated in SRD II to stipulate that the right of identification shall apply only to shareholders whose holdings exceed a certain percentage (a maximum of 0.5 per cent) of the total shares or voting rights. Companies may determine themselves whether they want to exercise their information right only with respect to shareholders whose holdings exceed a certain threshold.
Once implemented, SRD II will provide for significant changes to the German corporate governance framework, in particular regarding the statutory allocation of powers between the shareholders and the supervisory board of a German stock corporation. The draft implementing law aims to implement SRD II into German national law in a non-bureaucratic and systematic fashion. If the legislative process proceeds as anticipated, the new provisions will enter into effect on 10 June 2019 as planned.
ii The Company Law Package
On 25 April 2018, the European Commission presented a proposal for a directive of the European Parliament and of the Council amending Directive (EU) 2017/1132: the Company Law Package. The Company Law Package contains two different sets of proposals for amendments to the harmonised European company law.
The first set of proposals concerns the use of digital tools and processes in company law. The main goals of these amendments are to allow the establishment of a company online and online communication with the commercial register. The proposal aims to digitise the entire communication between the commercial register, a company and all its legal business partners. If implemented, the proposals would make it possible to establish new companies completely online. Moreover, companies will be able to communicate with the commercial register online for the whole period of their existence.
The second proposal concerns amendments in relation to cross-border changes of a company's legal form, mergers and divisions. The proposals aim at improving the transnational mobility of companies, and to provide a foundation for cross-border mergers, divisions and changes in legal form.
iii EU whistle-blower protection
A further draft, presented by the European Commission on 23 April 2018, is a proposal for a Directive of the European Parliament and of the Council on the protection of persons reporting on breaches of Union law.5 The proposal aims to better protect whistle-blowers as well as improve law enforcement and the protection of the freedom of speech and freedom of information.
The Directive is designed to not only protect Union citizens, but also nationals of third countries. Furthermore, the draft Directive not only includes a company's employees in the ambit of the protections envisaged by it, but also other persons who have a relation to the company, such as suppliers, interns and applicants. The draft Directive will protect reports of serious concerns regarding unlawful actions, abuses of law as well as potential breaches of law.
1 Carsten van de Sande and Sven H Schneider are partners at Hengeler Mueller Partnerschaft von Rechtsanwälten mbB. The authors thank Nadja Mooshage, associate, and Larissa Siegel, junior associate at Hengeler Mueller Partnerschaft von Rechtsanwälten mbB for their support in writing this chapter.
2 Shareholder Rights Directive (EU) 2017/828.
3 Corporate Social Responsibility Directive (2014/95/EU).
4 General Data Protection Regulation (2016/679).
5 Directive of the European Parliament and of the Council on the protection of persons reporting on breaches of Union law (2018/0160 COD).