How to buy a listed company in Germany
By Dr. Richard Mayer-Uellner, LL.M.
CMS Hasche Sigle, Cologne
Takeovers of listed companies in Germany are governed by the Securities Acquisition and Takeover Act. Together with German stock corporation law, it sets a strict and complex legal framework for the preparation and consummation of takeovers. A takeover offer as defined by the Act is an offer to acquire securities aimed to reach or increase the threshold of 30 percent of voting rights in the target company. If the investor reaches the 30 percent in a manner other than by a voluntary takeover offer, he or she is obliged to submit a mandatory offer to all outstanding shareholders to acquire their shares. The threshold of 30 percent is explained by the fact that such a stake usually grants a voting majority given the lower presence at shareholders’ meetings of listed companies. Therefore, an investor seeking to hold at least 30 percent of voting rights in a listed company needs to intensively examine with the specifics of the Takeover Act.
The investor must thoroughly prepare the takeover because upon publication of his or her intention to make the offer – which must occur as soon as the investor has finally decided to do so – the provisions of the Takeover Act impose a strict regime (including on the timing of each transaction step). Moreover, the investor can no longer withdraw from the takeover without breaching takeover law and having painful administrative fines be imposed on him or her by the German Federal Financial Supervisory Authority (BaFin). The investor is obliged to submit the offer and even to consummate it (subject only to occurrence of the offer conditions as described below).
Gaining information on the target company
Much information is publicly available given the extensive transparency requirements that apply to listed companies. If investors intend to carry out a due diligence review of a target, they will need to approach its management. Disclosing sensitive information is only allowed if the potential acquisition is in the company’s best interest and the investor commits to confidentiality. However, maintaining strict secrecy is also in the investor’s interest. This is due to the fact that the minimum offer price required by takeover law must, among other things, correspond to the weighted average stock exchange price of the target shares during the last three months prior to the investor’s publication of his or her intention to make the offer. If the market speculates that the investor could offer a takeover premium, this usually increases the stock exchange price and thereby also the minimum price required. Thus, strict nondisclosure agreements should be made with the target and the shareholders conducting sales talks with the investor.
Acceptance threshold and other offer conditions
Consummation of mandatory takeover offers may not be made subject to conditions save for necessary public approvals (for example, merger control clearance). Voluntary offers may be made subject to objective conditions but not to subjective ones. A condition is subjective if its occurrence can be affected by the investor or related persons. This applies, for example, to the condition that the investor only carries out the takeover if he or she can obtain sufficient funds to finance it, which is known as “financing out.” An objective—and widely used—condition is reaching a minimum threshold of shares tendered under the takeover offer (for example, at least 51 percent) in order to ensure the investor’s majority of shareholder votes. If it turns out that the threshold cannot be reached, it can be lowered or even waived before expiry of the acceptance period. Investors may not, however, increase the threshold after having published the offer. Furthermore, they are not allowed to establish a maximum acceptance threshold in order to prevent more shares from being sold under the offer than they originally intended. An admissible objective condition is the so-called material adverse change (MAC) clause according to which no MAC of the target’s situation or its economic environment may occur until the acceptance period ends. The MAC event must be clearly and objectively defined. For example, it may refer to business figures of the target such as revenues or EBIT or to the opening of insolvency proceedings (known as “solvency out”). Alternatively, the MAC may refer to macroeconomic developments. Takeover offers often provide that the DAX, MDAX or another relevant stock exchange index may not fall below a certain threshold. This kind of condition is very useful in times of highly fluctuating market prices. Referring to the stock exchange price of the target itself is not allowed since the investor can influence the price and thereby occurrence of the condition.
Minimum price requirements
The statutory minimum price to be offered must correspond not only to the average stock exchange price, but also to any price paid or agreed upon by the investor or related persons for the acquisition of target shares within six months prior to publication of the offer document. The same applies to share acquisitions during the takeover and to off-market share acquisitions within one year thereafter. These rules follow from the general takeover (and stock corporation) law principle that all shareholders must be treated equally. They particularly pose a problem if the shares are bought from a controlling shareholder who will usually request a control premium on the purchase price; in this case, the control premium would also have to be offered to all other shareholders. Some evasion techniques have evolved to avoid the minimum price requirements. For example, “creeping-in” was used in Schaeffler’s takeover of Continental and in Porsche’s failed takeover of VW. In this method, the investor acquires, unnoticed by the public, a participation in the target until he or she almost reaches the 30 percent threshold. The investor then waits until the minimum price is at an attractive (low) level, meaning the average stock exchange price remained low for three months and no expensive acquisitions of target shares were conducted for six months. At this point, the investor submits a takeover offer with an unattractive price and exceeds the 30 percent. After having consummated such offer, he or she can buy shares at a higher price via the stock exchange or, after expiry of the one-year-period, off-market. Of course, this only works out if the investor has enough time to spread the acquisition over a longer period. Furthermore, building stakes without raising awareness in the market has become very difficult because investors are obliged to publish the fact that they have reached or exceeded the 3, 5, 10, 15, 20 and 25 percent thresholds of voting rights. Previous evasions such as acquiring shares through cash-settled options or securities lending transactions have been made impossible by amendments to the statutory transparency requirements. In a similar scenario, the German Supreme Court recently had to decide whether Deutsche Bank breached the minimum price requirements when taking over Postbank from Deutsche Post. A minority shareholder as plaintiff argued that payment of the take – over premium was artificially delayed until a future point in time when the shareholders no longer benefited from the minimum price rules. One way to do this would be to acquire less than 30 percent of the shares from the controlling shareholder plus option rights entitling the investor to buy more shares (at a higher price) at a later point in time. A subsequent takeover could be timed in a way that the exercise of the options has no influence on the minimum price. The German Supreme Court took the view that there was no illegal evasion of the minimum price rules but that the lower court still had to decide whether Deutsche Bank and Deutsche Post acted in concert, resulting in an immediate obligation of Deutsche Bank to submit a mandatory takeover offer.
Financing of the offer
Even before submitting his or her offer, the investor must have sufficient liquid funds—generally by providing a bank’s financing confirmation—to finance the acquisition of all shares covered by the takeover offer, meaning all shares not held by the investor. If the investor does not hold any target shares, he or she has to secure financing that covers the purchase of 100 percent of shares, although such an acceptance quota cannot be achieved in cases of listed companies. Thus, investors must provide for more funds than ultimately required. For a long time, even the purchase of shares held by shareholders contractually obliged not to sell had to be included in the financing. Under the takeover of energy supplier EnBW by the German state of Baden-Württemberg from French EDF group, BaFin accepted the following exemption: A large shareholder committed not to tender his or her shares against payment of a contractual penalty. The penalty corresponded to the purchase price the shareholder would have received if he or she had accepted the offer nevertheless. In such cases, the investor could set off the penalty claim against the purchase price claim of the shareholder, and such a setoff would secure the sufficient financing of the offer.
Delisting made easier
In a recent ruling, the German Supreme Court changed its consistent case law on the requirements of a stock corporation’s delisting: Now, a delisting does not require a shareholder resolution adopted with 75 percent plus a compensation payment to the outstanding shareholders anymore. This ruling could have a material impact on future takeover attempts. It incentivizes shareholders to accept a takeover offer to avoid facing the risk of the future controlling shareholder easily delisting the shares of the target. If this happened, the shareholders would be trapped in a company with shares that are very difficult to trade and can usually only be sold at a substantial discount to the former stock exchange price.