Public Takeovers In Germany - How To Acquire A Publicly Listed Company In Germany

INTRODUCTION

PUBLIC TAKEOVERS IN GERMANY

For the successful acquisition of a publicly listed company in Germany, a bidder must carefully consider legal and strategic implications at each stage of the takeover process. This white paper explains the legal framework within which takeovers occur, and describes strategies for the effective implementation of a takeover bid.

Throughout the EU, takeovers of publicly listed companies are governed by the European Takeover Directive (2004/24/EC). In Germany, the Takeover Act (Takeover Act, or Wertpapiererwerbs- und Übernahmegesetz, WpÜG) implements the European Takeover Directive. It applies to public offers for German target companies whose shares are listed in Germany. Rules on the obligation to make a bid, permitted actions of the management board of the target and other corporate law questions also apply to public offers for German Companies whose shares are listed on the Stock exchange of another member state of the EU or the European Economic Area (which includes Norway, Iceland and Liechtenstein in addition to the member states of the European Union, but excludes Switzerland). Minimum price rules and rules on the offer procedure of the Takeover Act are also applicable on offers for non-German target companies that are listed in Germany. Note, however, that the Takeover Act only applies to offers for targets which are listed on a regulated market, and in Germany these would include in particular the Prime and General Standard of the Frankfurt Stock Exchange. In contrast, the Open Market (Freiverkehr) is not a regulated market and offers for target companies traded on the Open Market are neither governed by the European Takeover Directive nor the German Takeover Act, and are therefore simpler to implement.

Takeovers under the Takeover Act are conducted under the surveillance of the German Financial Services Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin).

In Germany, takeovers are typically friendly and supported by the target. In hostile takeover bid situations, the target companies often ultimately come to support the offer. Only in a few cases competing bids were launched by competing bidders and prices increased in the course of the offer.

HOW TO IMPLEMENT A TAKEOVER IN GERMANY

PREPARATION

INFORMATION ON THE TARGET

A takeover requires thorough preparation. Key information on the target is publicly available. In particular, financial statements and mandatory publications, such as ad hoc disclosures on important developments, can be obtained from the target's homepage. Targets which are listed on the Prime Standard of the Frankfurt Stock Exchange must publish this information in English; targets which are listed on the General Standard market segment need, however, only publish in German.

INFORMATION ON THE TARGET'S SHAREHOLDER STRUCTURE

Typically, German stock corporations issue bearer shares so that their holders are not known to the company. Some companies issue registered shares and must keep a share register with the names of the shareholders. However, the share register is not public and even shareholders are only entitled to receive information on the data registered in respect of themselves.

The German Securities Trading Act (Wertpapierhandelsgesetz, WpHG) contains notification obligations for holders of major stakes of voting rights in publicly listed companies, triggered by the following thresholds: 3 percent, 5 percent, 10 percent, 15 percent, 20 percent, 25 percent, 30 percent, 50 percent or 75 percent of the company's voting rights. Any person whose voting interest (either directly or by way of attribution, for example due to an acting in concert with another shareholder) reaches, exceeds or falls below any of these thresholds must inform BaFin and the company of the exact number of voting rights that such shareholder holds or are attributed to it, which notification must be published by the company.

Notification obligations also exist for financial instruments which entitle their holders to acquire shares with voting rights in the future or which result in the possibility to acquire shares with voting rights. Not only call options and all contingent agreements but also cash settled swaps must be notified. These notification obligations begin at a threshold of 5 percent and also apply where shares with voting rights and financial instruments together reach or exceed the 5 percent threshold.

Any shareholder whose voting rights reach or exceed the threshold of ten percent must additionally notify the company of its intentions with respect to the company and the source of the funds used for the acquisition. The company must publish the information so notified.

DUE DILIGENCE

If a bidder wants to obtain non-public information from the target, it must enter into negotiations with the target. The management board of a target company can provide due diligence information without breaching its confidentiality obligations, if a bidder is seriously interested in an acquisition, the acquisition is in the best interest of the company, and the bidder agrees to keep the information obtained in the course of the due diligence confidential. Therefore, target companies normally require bidders to enter into a confidentiality agreement and, additionally, a letter of intent or memorandum of understanding, in order to be able to demonstrate that the bidder is seriously interested in the acquisition, before due diligence starts.

AGREEMENTS WITH MAJOR SHAREHOLDERS

In order to increase a takeover's chances of success, it is advisable for bidders to enter into agreements with a target's major shareholders in advance of the bid. In such agreements, major shareholders can either directly sell their shares to the bidder (possibly subject to certain conditions, such as a minimum acceptance rate in the offer), or major shareholders can obligate themselves to accept the offer for their shares (so called irrevocable undertaking). Such agreements with major shareholders trigger the above described notification obligations. Therefore, it is advisable to enter into such agreements at the same time at which the takeover is made public (see below under "Offer Phase").

AGREEMENTS WITH THE TARGET COMPANY

Bidder and target company may be interested in concluding an agreement in connection with the takeover. The bidder may want to ensure that the target supports the offer. In a merger situation, bidder and target company are interested in agreeing on the business strategy and corporate governance going forward. The future composition of the boards may be very important for both sides. German law generally allows the conclusion of such Investment Agreements or Business Combination Agreements within certain limits. The management board of the target company must ensure that it acts in the best interest of the company at all times and it may not submit itself to instructions from the bidder, unless and until a domination agreement (see below) is concluded. The Takeover Act prohibits the bidder from offering unjustified benefits to board members of the target. Agreements between the bidder and the target must be described in the offer document and in the reasoned statement on the offer to be published by the board members of the target (see below).

STAKE BUILDING

Bidders can build stakes in the target by stock exchange or off-stock exchange acquisitions in advance of the bid. In connection with such efforts, the bidder must comply with the above mentioned notifications obligations for shares and financial instruments. As soon as a bidder acquires at least three percent of the shares with voting rights, or financial instruments relating to at least five percent of the voting rights, it must inform the target and BaFin. Due to the broad definition of financial instruments that need to be notified, hidden stake building is difficult. In calculating the five percent minimum threshold that triggers notification obligations for financial instruments, shares with voting rights already held must be taken into account. Therefore, if an investor holds two percent of the shares in a company and acquires cash settled swaps for an additional three percent, a notification must be made. Voting rights notifications can alert investors of the fact that an investment in the target is occurring, can trigger speculation and increase stock exchange prices.

Additionally, bidders must observe insider trading rules. These rules prohibit the use of inside information by acquiring (or disposing) financial instruments. Inside information is any non-public information which would be likely to have a significant effect on the price of the financial instrument, if it were made public. This is the case for information which a reasonable investor would be likely to use as part of his or her investment or divestment decision.

The intention of the bidder to buy shares in the target is not deemed to be inside information for the bidder itself. Although the fact that a subsequent public tender offer at a higher price is in process can be inside information, the bidder itself may generally acquire shares and implement its acquisition decision. However, if the bidder obtained inside information in the due diligence process, further purchases by the bidder may be regarded as insider trading. Therefore, the stake building process should be thoroughly considered in order to avoid any legal risks. Insider trading is a criminal offence which can be punished by fines or imprisonment.

During the offer phase, the bidder can make alongside purchases over the stock-exchange or in private transactions. Such alongside purchases must be included in the bidder's regular reporting on the number of shares held which reporting is obligatory during the offer phase. If alongside purchases are implemented above the offer price, this results in a respective increase of the offer price.

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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.