Share repurchasing has been employed as an instrument of financial policy by German stock corporations since a reform of the German Stock Corporation Act in 1998. It essentially requires the shareholders' meeting to authorize the management board to repurchase shares up to a total volume of 10% of the share capital for a period of 18 months. Furthermore, the shareholders' meeting fixes the highest and lowest price for the shares to be acquired but it is at liberty not to specify the purpose of the share repurchase. The share repurchase can serve various objectives: procurement of shares as acquisition currency, distribution of excess liquidity with unchanged dividend level, increase of income per individual share and, not least, giving positive signals to the capital markets.
Although initially not recognized, the new German Takeover Act now restricts a stock corporation to a considerable degree regarding share repurchases.
A share repurchase is structured either as a long-term and officially-announced, open-market repurchase via the stock market or as a public self-tender offer to all shareholders that is limited in time. The open market repurchase is most common. However, the self-tender offer is more suitable if either a large number of shares is to be repurchased in a short time or special signals are to be sent to the capital markets or the company wants to grant to all shareholders a special bonus on top or instead of a dividend.
Up to now, stock corporations have had to observe in particular the principle of equal treatment under the Stock Corporation Act with respect to a self-tender offer, that is shareholders of the same class must be treated equally in a public tender offer. In May 2002 the German Financial Supervisory Authority (BAFin), acting on a request of Siemens AG, took the view that the share repurchase by means of a self-tender offer to the shareholders constitutes an offer for the purchase of securities as defined by the Takeover Act. The Takeover Act provides for the offer procedure and the duties of a bidder in public tender offers as well as in all other public offers for the acquisition of securities of a target company. The Takeover Act obliges the bidder to publish its decision to launch a public offer, to submit an offer document to BAFin within four weeks of this publication and to publish the offer document following approval by BAFin. In addition to the terms of the offer, the offer document must contain supplementary information such as the effects of the successful bid on the assets, financial condition and results of the bidder and information on the intentions of the bidder with respect to future business activities of the target company. To the extent the offer provides for a cash payment as consideration, the bidder must further submit to BAFin the confirmation of an independent investment services enterprise stating that it is in a position to pay for the offer.
If and to what extent the Takeover Act applies to the public tender offer of a company for a share repurchase is controversial among experts. The majority of the provisions of the Takeover Act assume that bidder and target company are not identical. This is in line with the intention of the Takeover Act to improve the flow of information and transparency for the shareholders and employees of the target company affected by the public tender offer. Normally, this group does not need information regarding its own company, but rather information regarding an unknown bidder. A need for information, thus justifying the application of the Takeover Act, can arise if the repurchased shares are not paid for in cash, but rather with the shares of a subsidiary. This was exactly the intention of Siemens AG in the case on which the statement of BAFin is based. However, a recent statement of BAFin officials shows that in their opinion compliance with the Takeover Act is not limited to the case of such a non-cash consideration.
In practice, this means that until the legislator comes up with a fair regulation, there will probably not be any more self-tender offers for share repurchases. A tender offer under the Takeover Act is time-consuming, entails high costs as well as considerable administrative efforts and presses the company into a rigid timeframe required by law. Even more significantly, the Takeover Act obliges the management board to go through with the offer as soon as the decision to launch the bid has been published. Stock corporations will want to avoid this loss of flexibility with share repurchases.
Heiner Drüke, Josef Tobien and Arnold Büssemaker
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