Author: | Published: 9 Oct 2003
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The topic of corporate governance was given high priority in Germany last year. In the spring of 2002, the German Corporate Governance Code (or GCGC) was enacted by the Government Commission, which was established for that purpose. On July 26 2002, an amendment to the German Stock Corporation Act took effect, which provided a statutory basis for the German Corporate Governance Code and obliged publicly traded companies to provide on a yearly basis a declaration of compliance and/or an explanation of any noncompliance (comply or explain). Thus, publicly traded companies had to come to grips with the recommendations and suggestions of the German Corporate Governance Code. This was accompanied by a wide-reaching discussion on the topic of corporate governance in Germany among the parts of the public interested in the law. In the meantime, numerous essays and other articles and the first commentaries on the German Corporate Governance Code appeared.


In any case, the introduction of the German Corporate Governance Code can be considered a success. In form, the code presents a transparent and comprehensible image of the German corporate governance system, which can serve to strengthen the confidence of national and international investors in the management and supervision of German publicly traded companies. In addition, the comply or explain system clarifies which companies are following the stricter requirements of the German Corporate Governance Code, represented by its recommendations, and to what extent there are divergences. A company that wishes to instil confidence in its corporate governance system will strive to keep the list of divergences as short as possible or even to report it is in full conformity with the recommendations of the German Corporate Governance Code. This creates pressure in the direction of the broadest acknowledgement of compliance.


The first empirical investigations show that about half the Dax 30 companies intend to comply with all the GCGC recommendations, at least prospectively. The remaining companies generally restrict their divergences to a few points. The degree of acknowledged compliance is also broad among the 50 companies listed on the MDax. Of course, some German MDax companies have a Mittelstand background, so the tendency to diverge from the GCGC is greater than with the Dax 30. The more a company is dependent on the confidence of the capital markets, the stronger the tendency to acknowledge compliance with the recommendations of the GCGC. A high degree of compliance was also detected among TecDax companies due to their stronger capital market orientation.

The GCGC does full justice to its intended function of fostering greater transparency. Moreover, another goal - which is the code's real aim - can also be gradually attained, namely, the broad dissemination of an internationally competitive standard of corporate governance in Germany.


Another advantage of the German Corporate Governance Code is that it is not in statutory form and can, therefore, be adapted and updated more quickly and flexibly. Revised versions of the GCGC have already been published on November 142002 and July 42003. The companies' next comply or explain declaration will have to make reference to this new version of the GCGC. Changing the GCGC does not modify any law. Nevertheless, the content of the statutory obligation to make a comply or explain declaration changes. This fact clarifies the far-reaching influence of the Government Commission, which regularly discusses revisions to the GCGC.


The recently published revision of the GCGC reflects the current discussion over the amount and structure of the salaries that members of the management and supervisory boards of publicly traded German companies receive. There was even a call for legislation. Some representatives of academia insisted that the maximum salary for a management board member in a publicly traded company should not be more than four times the compensation received by the German Chancellor. However, representatives of the German government - thank God - refrained from enacting a mandatory provision and declared themselves in favor of stronger transparency under the provisions of the German Corporate Governance Code. Accordingly, the Government Commission made some additions to the code. The aim of the revision is to recommend more transparency with respect to the extent and components of such compensation and the system for arriving at it, and fair reference standards particularly in the area of stock options. Among others, the GCGC contains the following new or revised provisions on this topic:

A plenary session of the supervisory board (and not just a committee) shall discuss the structure of the compensation system for the management board and review it regularly. Traditionally, compensation questions and the compensation system were handled by the so-called presidium or personnel committee of the supervisory board, which generally consisted of three or four members. Now there will be more transparency in that the entire board will concern itself with the structure of the compensation system.

The revised code makes it clear that all components of compensation should be reasonable in themselves and as a whole.

Stock options and comparable structures should be related to demanding reference standards. This means industry indexes. Performance that merely reflects the overall market (but is worse than the industry) should not be sufficient. After-the-fact alteration of the targets or reference standards should not be permitted. This is linked to some practical cases in which there were after-the-fact adjustments when the original reference standards were not reached. The supervisory board should agree on a cap for extraordinary, unforeseeable developments.

Finally, the revised code recommends that the essential features of the compensation system and the specific terms of any stock option plan or comparable structure be made public on the company's website in a generally understandable form and explained in the annual report. This should include information on the cash value of stock options. The chairman of the supervisory board should inform the general shareholders' meeting of the basic features of the compensation system and any changes to it. This heads in the same direction as the 2002 Directors' Remuneration Report Regulations, which recently took effect in the UK. According to the regulations, the management board must make and publish a comprehensive report on its compensation. In addition, these regulations demand that the general meeting vote on the report. The GCGC does not require such a vote by the general shareholders' meeting. Of course, under the German Stock Corporation Act shareholders have an opportunity to exert influence when called upon to approve a conditional capital increase for stock option plans. In addition, compensation questions can be addressed in the course of adopting discharge resolutions for supervisory board members, since the supervisory board is responsible for compensating the management board.

Up until now, there has been no requirement that the individual salaries of management board members be disclosed in the annual financial statements. It was sufficient that the amount paid to the entire management board be disclosed. The revised version of the GCGC now recommends that individualized information be provided.

It remains to be seen whether German companies will follow the GCGC's recommendations in this area as well and give up their reluctance to disclose information on the compensation received by individual management board members. The aforementioned regulations limiting disproportionate excesses in the area of stock options are certainly sensible. These recommendations will increase transparency in the area of management board compensation.


It does not always make sense for a company to continue its stock market listing. And delisting frees the company from the requirements of the GCGC. The crisis in the capital markets has already caused many companies to seek delisting in Germany. As part of their reform of laws relating to the financial markets, German lawmakers intended to lower the requirements for delisting. Nevertheless, in practice, delisting procedures have been difficult primarily because the shareholders can seek judicial review of the stock exchange's decision to revoke the company's listing. Thus, there has been no legal certainty about the duration and outcome of the delisting proceeding.

In a decision that has drawn much attention and a great deal of criticism, the German Supreme Court held in November 2002 that the legal requirements for a regular delisting proceeding would be tightened henceforth. Whenever a company is seeking to be delisted from all stock exchanges, the company's general shareholders' meeting must adopt a resolution to this effect. This is understandable. Moreover, the resolution requires only a simple majority. However, the German Supreme Court also demanded that, in such cases, the company or the major shareholder offer to purchase the shares held by minority shareholders. A mandatory offer is required. The reasonableness of the compensation is subject to review in a special judicial review procedure (Spruchverfahren).

The criticism of the decision focuses mainly on the mandatory offer requirement. It is unclear whether this is intended to be a mandatory offer under the new German Takeover Act. The Financial Services Agency (BaFin) does not appear to assume so. The Supreme Court's decision does not set forth the requirements for such an offer in detail. Lawmakers are responsible for this. Due to the lack of clarity, future delisting proceedings have now been made more difficult under corporate law. Accordingly, all pending delisting proceedings on German stock exchanges had been suspended. This also makes it more difficult to flee the GCGC.


Recently, the new squeeze-out procedure has emerged as the most elegant way to delist a company. A successful squeeze-out also significantly alters the corporate governance of a company, since the interests of minority shareholders need no longer be taken into account in managing the company. Getting rid of minority shareholders does not change the management board's obligation to manage in the interests of the company. However, in practice, it is easier to manage a wholly owned German company than to deal with minority shareholders. Since its introduction on January 1 2002, numerous German stock corporations have used the squeeze-out procedure. However, only a few stock corporations have been able to utilize this procedure without being confronted by an action to rescind, which can (temporarily) stop the squeeze-out from taking effect. In all cases, one can count on the introduction of a so-called In Spruchverfahren, which relates only to the size of the settlement compensation. The main prerequisites for a squeeze-out are as follows:

  • the existence of a 95% interest in the company;
  • the performance of a valuation and the determination of a reasonable cash settlement;
  • a bank guaranty that the settlement will be paid; and
  • the preparation of a report and a resolution by the general shareholders' meeting.

The squeeze-out takes effect when it is entered into the commercial register. At that point, all the shares of the minority shareholders pass automatically to the principal shareholder. For companies listed on the stock exchange, this results in an automatic delisting. In such cases, the company's duty to follow the GCGC ends with delisting.

Overall - despite some uncertainties and various pending challenges - the squeeze-out procedure has proven itself to be a practical way to exclude minority shareholders and achieve delisting.


Changes can be expected in the future, in two other areas especially, which will also affect the corporate governance of German companies. These changes are associated with the German government's efforts to restore investor confidence in the capital markets, particularly in the reliability of company financial statements and the accuracy of balance sheets. A so-called Enforcement Office is to be established for this purpose. The plan is to set up an investigative committee under private law, which will be subject to state supervision. The Financial Services Authority could then impose sanctions. These plans on the national level are related to pan-European developments. There is a plan to set up a European structure to monitor corporate financial statements. The German government views this as part of a European financial market, planned for 2005.

The responsibilities of members of supervisory boards of German stock corporations have been increased in recent times. This is based on amendments to the Stock Corporation Act since 1998 and various provisions of the GCGC. To win back investors' confidence in the capital markets, the personal responsibility of members of the management and supervisory boards are to be further increased when it comes to the dissemination of false ad-hoc reports. Until now, shareholders could only sue the company in such cases. However, the German Finance Minister now plans to also hold the members of the management and supervisory boards personally liable in such cases. In addition, consideration is being given to imposing personal liability for disseminating false market-relevant information in speeches and interviews. However, one must await legislative developments on this matter. Nevertheless, it is clear that the requirements on all the participants in corporate governance in Germany are going to increase.

Haarmann Hemmelrath
Neue Mainzer Straße 75
D-60311 Frankfurt / Main
Tel: +49 69 9 20 59-0
Fax: +49 69 9 20 59-133