Statistical observations
The German Act on the Acquisition of Securities and on Takeovers has been in force since January 1 2002. The statute comprises guidelines to ensure that takeover procedure is fair and orderly, without encouraging or inhibiting corporate takeovers. It attempts to improve information and transparency for affected shareholders and employees involved in a takeover. The Act intends to strengthen the legal position of minority shareholders. The Federal Financial Supervisory Authority is responsible for supervising the application of the statute. It will "act to counter any irregularities that may impair the orderly execution of the procedure or that may have material adverse effects on the securities market."
The time since the Act was introduced has been a learning period. The year 2003 up until November 17 yielded the following statistics: 20 companies listed on the official market of the Frankfurt Stock Exchange were the target of public offers. Of these, six were listed in the general standard sector and six in the prime standard sector. Twenty-three targets were listed on the regulated market. The transaction volume (the maximum number of shares to be acquired multiplied by the offer price) involved in these takeover proceedings ranged from €469,000 ($574,779) for the mandatory bid by Swiss Real Estate AG for Küppersbusch AG to about €5.7 billion for the voluntary takeover bid by Procter & Gamble Germany Management GmbH for Wella AG.
For 30 bids the transaction volume was between €500,000 and €100 million , for five bids it was between €100 million and €500 million, and so far in three instances the volume was over €500 million (two of these were over €1 billion).
Up to November 15 2003 the Federal Financial Supervisory Authority permitted publication of the offer document in 38 cases. Nine of these were voluntary acquisition bids, 13 were takeover bids and 16 were mandatory bids. In three cases the publication of the offer was prohibited, one of the reasons being that confirmation of the financing arrangements was not available or inadequate.
At first glance the law appears to have proved itself. The procedure has become clearer and runs according to the rules that have been laid down. The Federal Financial Supervisory Authority is carrying out its responsibilities and the new law has been opportune for lawyers. The new German Act on the Acquisition of Securities and on Takeovers is an attorney-welfare Act.
Shortcomings in legal protection
But a series of loopholes in the law have also come to light. It has become apparent that the specific individual rights of the minority shareholders of the target, in particular, have not been fully established and that no appropriate specified legal remedies are available. This is even more regrettable when one considers the fact that one of the aims of the statute was to improve the legal position of minority shareholders of the target. The loopholes had already been pointed out in discussions surrounding the drafting of the new law. But these concerns fell on deaf ears. It was said that the Federal Financial Supervisory Authority's supervision would ensure the adherence to the norms and this would suffice. One also has to bear in mind that the Takeover Law was discussed and drafted under the influence of the takeover of Mannesmann by Vodafone, and at a time when the share prices were high. The Mannesmann shareholders, however, gained gratifying returns as a result of the takeover. In this case legal protection was not an issue. In the meantime the situation has changed. Minority shareholders are frequently in difficult positions. Especially last year, the stock markets were weak when takeovers were occurring, share prices were generally low, the hidden reserves and the business opportunities of the target companies were not reflected in their share price at the time of the takeover bid. There were frequent occurrences where the market capitalization and the price paid by the bidder were much lower than the fair real value or even the book value of the company. In such cases there is a danger that the bidder will greatly profit at the expense of the minority shareholders.
Although it is objected in response to this that a minority shareholder is not obliged to accept a bid, holding onto a share of the target would be a grave mistake in many cases. After a successful takeover a minority shareholder would hold shares of a company that is controlled by the bidder. Shares of listed subsidiaries are frequently valued much lower on the market than shares of companies that have a widely dispersed shareholder structure. There are good reasons for this: firstly, the capital market values the shares of dependent companies lower due to the inadequate minority shareholder protection and the actual shift of management influence to the controlling company; and secondly, the capital market is aware that there is the threat of divestiture of the target and/or that in the long run the minority shareholders could be squeezed out and/or the company de-listed. At the same time it has not been overlooked that the conclusion of a domination contract and profit transfer agreement, which is a peculiarity of German group law, gives the minority shareholder the chance to leave the company. In this case the consideration would be calculated according to the real value of the company as a whole.
In many cases the minority shareholder only has two courses of action should a takeover bid be offered. On the one hand, they could sell their shares on the stock markets. They would only receive market value, calculated according to the share prices, which would again only reflect the value of the bid. On the other hand, they could accept the bid. A shareholder cannot be interested in this course of action for a number of reasons. For example, participation in foreign companies results in tax repercussions - the German shareholders of Hoechst that received the French Aventis shares after the takeover were confronted with the fact that the French tax authorities only reimburse paid taxes after a number of years - some German shareholders are still waiting. One thing is certain: an independent shareholder is in reality often under the pressure to tender his shares of the target company. This clearly shows that independent shareholders have to rely on regulated procedure.
The Wella case
Several takeover cases have revealed that the legal position of minority shareholders have not been sufficiently catered for in the German Act on the Acquisition of Securities and on Takeovers and that, in cases where the regulated procedure is carried out, they still do not have adequate legal protection. The Wella case is a good example. Procter & Gamble made a voluntary takeover bid for the acquisition of all of the Wella AG shares on April 28 2003. They were offering €92.25 for the ordinary shares and €65.00 for the preference shares. Some investors were thought that the bid for the preference shares was inadequate, seeing as the preference shares without voting rights had been valued on average at 5.6 % higher than the ordinary shares with voting rights over the previous three years. In view of this, the question arose of whether the minority shareholders could take legal action against the authorization of the bid by the Federal Financial Supervisory Authority. Section 48 of the German Act on the Acquisition of Securities and on Takeovers stipulates that orders issued by the Federal Financial Supervisory Authority are subject to appeal. The Higher Regional Court of Appeal in Frankfurt am Main has jurisdiction over these cases. But the court in Frankfurt has taken the view, in two rulings regarding Wella (on May 27 2003 and on July 4 2003), that the shareholders of the target are not entitled to any legal protection against the decision of the Federal Financial Supervisory Authority to permit a takeover bid. The court thus subscribed to the view of the Federal Financial Supervisory Authority that an individual shareholder is not granted a specific enforceable right by the Takeover Law to challenge the authorization of a bid. The Higher Regional Court of Appeal has also denied minority shareholders of the target legal protection in other cases, for example in the case of Pro Sieben AG.
The chance to improve the legal protection of minority shareholders in takeover procedure has been missed as a result. The reason for this is not convincing. The Financial Federal Supervisory Authority fears that it would cause mass torts with thousands or even tens of thousands of shareholders. This situation could not be swiftly dealt with - for this reason all individual legal protection is being denied. A preposterous situation.
Legal protection granted by the civil courts
The Wella case is no exception. Many more situations are conceivable in which a minority shareholder would require legal protection. The following examples come to mind:
The individual or company that has acquired control fails to submit a mandatory bid and the Federal Financial Supervisory Authority does nothing against this, although the law requires that it should.
The offer document provided is inadmissible, but the Federal Financial Supervisory Authority allows it despite this.
The Federal Financial Supervisory Authority allows, contrary to legal requirements, an exemption from the obligation to make a bid.
The controlling shareholder is believes that they are exempt from the obligation to make a bid.
It can be assumed, following the rulings of the Higher Regional Court of Appeal in Frankfurt, that the minority shareholder is not entitled to the takeover procedure provided for in section 48 of the German Act on the Acquisition of Securities and on Takeovers in any of the above cases. This means that there is no opportunity either to challenge the decisions of the Federal Financial Supervisory Authority or to demand intervention by them.
With this in mind, the question arises of whether minority shareholders of a target have an immediate claim against a dominant acquirer and can therefore look to the civil courts for legal protection.
There is no explicit regulation in the German Act on the Acquisition of Securities and on Takeovers that entitles the shareholders to require a new majority shareholder to purchase their shares, or to be offered an appropriate price for their shares, or by which they could exert their right to the implementation of the procedure laid down in the law. All that is regulated is that the dominant acquirer is obliged under certain circumstances to make an offer. But the above cases show that the legal rights of shareholders are debatable if the acquirer neglects to do this. Section 38 of the German Act on the Acquisition of Securities and on Takeovers provides solely for a right to interest payment should the rules regarding mandatory bids be breached.
In practice the content of section 38 is open to debate. It is often said that it only entails a sanctions norm and is to be viewed in conjunction with section 59, which regulates the loss of voting rights. But doing so does not take into consideration the dogmatic character of the norm. The notion that it deals with a statutory contractual penalty is not convincing for a number of reasons. Such conceptions are alien to German legal system. Moreover, recent in-depth research by the authors of this article in The non-contractual right to consideration in mandatory bids shows to the contrary that section 38 is to be interpreted as a special formulation of the statutory right to overdue interest. This is underpinned by the legal concept that the shareholders of a target have non-contractual, specific rights, which can be asserted against the dominant acquirer and which are indeed independent of the publication and acceptance of the mandatory bid. This claim is not expressly laid down in the law, but it can be inferred from section 38 of the Takeover Law.
What does this claim entail? It involves the payment of a sum of money. However, the bidder can offer shares that are publicly traded and where there is offer and demand instead of money. This again is entailed in the law. The claim comes into existence at the time of acquisition and is calculated according to the intrinsic share value at this time. According to the general rules for evaluation, the intrinsic value of the shares in proportion to the inner value of the company as a whole is a deciding factor for the required calculation. This also counts for cases in which the Stock Exchange price and the market capitalization are below the true value of the company.
This is of the greatest importance to the shareholders of a target. It has been seen following the rulings of the Higher Regional Court of Appeal in Frankfurt, that the shareholders are denied the option of appellate procedure in takeover cases. But they have the opportunity to assert an immediate claim against the bidder through company law, if the dominant acquirer neglects to make an appropriate mandatory bid. This is also the case if the Federal Financial Supervisory Authority in any individual case wrongfully permits the setting aside of voting rights or exempts the acquirer from the obligation to submit a mandatory bid.
Author biographies
Uwe H Schneider
Uwe H Schneider is professor of corporation law and capital market law at the University of Darmstadt and director of the Centre for German and International Law of Financial Services, Johannes Gutenberg-Universität, Mainz.
He is a member of the German Takeover Panel; and is the German delegate to the OECD Steering Group on Corporate Governance, Paris and to the United Nations Commission on International Trade Law (UNCITRAL), Vienna/New York.
He has attended the University of Heidelberg and Freiburg (1960), Ecole Nationale d'Administration (ENA), Paris (1968), the Universität Freiburg (JD, 1969), the University of Edinburgh (1970), and the Habilitation University of Bochum (1974).
He has been visiting professor at: Boalt Hall, University, Berkeley (1981); the College of Law Georgia State University, Atlanta (1990); Chuo University, Tokyo (1992); and Duke University, Durham (2001).
He has written several books and articles in the area of corporation law, groups of corporation and capital market law.
Peter O Mülbert
Peter O Mülbert; Professor of Corporation Law, Capital Market Law and Banking Law, University of Mainz; Director of the Center for German and International Law of Financial Services, Johannes Gutenberg-Universität, Mainz; Member of the Administrative Protest Committee of the Federal Financial Supervisory Authority; Research Fellow of the European Corporate Governance Institute; 1976, University of Tübingen and Genf; 1984, PhD Degree in Law, University of Tübingen; 1994, Habilitation, University of München; 1994, Professor of Law, Universities of Heidelberg, Trier and Mainz; books and articles in the area of Corporation Law, Groups of Corporation, Capital Market Law, Banking Law.
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