By:
Charles E. Stewart
Albrecht S. Munch
Frankfurt am Main
Germany is attempting to become a better place to do business and is trying to help its own businesses compete internationally. Changes have been made both at the micro and macro levels. For example, the corporate law has been simplified to make it easier to form and maintain corporations. Changes in the securities law seek to make equity investment attractive to the German investor. Although the short-term success of these measures is not assured, the trend is clearly away from the ponderous formality of the past, and toward greater simplification of, and greater access to, the German equity markets. Further reform is expected in the near future.
NEW GERMAN LAW FOR SMALL CORPORATIONS AND FOR THE DEREGULATION OF CORPORATION LAW ("SMALL CORPORATION ACT")
German company law provides for two types of corporations, the stock corporation (Aktiengesellschaft or "AG"), and the limited liability company (Gesellschaft mit beschrunkter Haftung or "GmbH"). The GmbH is a relatively simple vehicle, while the AG is significantly more complicated. Only an AG, however, can be publicly listed in Germany. Until the recent changes brought about by the Small Corporation Act, forming and maintaining an AG in Germany was so costly and time-consuming that most smaller firms chose the GmbH form. The fact that, at present, there are some 500,000 GmbHs, but only 2,000 AGs, testifies to the foregoing. The result is that a great number of firms were excluded from access to the German public capital markets. The Small Corporation Act is designed to make it easier for smaller and middle-sized firms to tap the German equity markets by simplifying the formation and administration of AGs. An AG now may be formed by a single incorporator, whereas previously at least five were required. The by-laws may restrict the shareholders' right to receive stock certificates, reducing formation expenses still further.
Corporations formed after August 10, 1994 that employ fewer than 500 persons are not subject to the provision of the Co-determination Law that reserves a third of the seats on the supervisory board for employee representatives. Prior to this amendment, only limited liability companies and family-owned corporations with fewer than 500 employees were not subject to employee co-determination. It should be noted, however, that corporations formed prior to August 10, 1994, are still subject to co-determination, even if they have fewer than 500 employees.
The Small Corporation Act reduces much of the formality previously associated with the AG, particularly with respect to shareholder meetings. Prior to the Small Corporation Act, shareholders' meetings were called by publication of the notice and order of business in the Federal Gazette at least one month before the date of the shareholders' meeting. Meetings may now be called by registered letter; the date of registration is deemed to be the date of notice. The Small Corporation Act also permits the waiver of all formalities with respect to the form of notice if all shareholders are present in the meeting and no shareholder objects thereto. Prior to the Small Corporation Act, all shareholder resolutions had to be recorded by a notary; this requirement now applies only to resolutions requiring a three-quarter majority and to resolutions of corporations whose shares are quoted on the stock exchange. Other resolutions may simply be recorded by the chairman of the supervisory board. Thus, a notary does not need to be present in a meeting to adopt resolutions concerning the approval of the annual accounts, dividend distribution or the election of members of the supervisory board.
LAW OF MERGERS AND REORGANIZATIONS AND THE MERGERS AND REORGANIZATION TAX ACT
The purpose of the Small Corporation Act is to make the AG more suitable for the formation of new businesses, and to promote the conversion of partnerships and GmbHs into AGs. To simplify such conversions, the German Law On the Transformation of Business Form was amended, effective January 1, 1995.
Simultaneously, tax provisions relating to transformations of business forms were amended. One result of the amendment is that it is now easier to transfer "hidden reserves" without realization of gain. When the form in which a business is conducted is transformed, "transformation financials" as of the date of transformation must be prepared. Prior to the amendment of the tax law, such financials often revealed hidden reserves, resulting in increased tax liability. The amendment will allow firms to avoid the disclosure of hidden reserves in a great number of cases, thereby reducing the risk and increasing the attractiveness of transforming a business into an AG.
THE SECURITIES TRADING ACT
The newly created Federal Regulatory Authority for Securities Trading (Bundesaufsichtsamt for den Wertpapierhandel) (the "Regulatory Authority"), located in Frankfurt, was established by the 1994 Securities Trading Act (Wertpapierhandelsgesetz). The Regulatory Authority is empowered to take action against abuses that interfere with, or are materially detrimental to, the proper functioning of the securities market. The rules essentially apply to companies whose shares are publicly traded. The most important topics treated by the new Securities Trading Act are the following:
Insider Trading: The Securities Trading Act prohibits an "insider" from (i) using any information he might possess about the company to buy or sell securities, (ii) passing on inside information to third parties or (iii) making recommendations, based upon inside information, to a third person to buy or sell securities. Any person possessing inside information, even if such person is not an insider within the meaning of the Securities Trading Act, is prohibited from using such information to buy or sell securities. Securities protected under the act are known as "insider securities" (Insiderpapiere), and include both (i) securities traded on European Union ("EU") or European Economic Area ("EEA") exchanges, or securities of a corporation that has applied for (or has announced its intention to apply for) registration of securities on such exchanges, and (ii) subscription rights, calls or puts, derivatives and any other financial innovation traded on EU or EEA exchanges, or with respect to which an application has been made or an intention has been announced to register such securities on such exchanges. An insider is (i) a member of the management or the supervisory board or a general partner of the issuer or an affiliate with an interest in the capital of the issuer or an affiliate, whose duties involve non-public information, when (ii) such information (a) relates to one or more issuers or their securities and (b) is such as would be material, in the sense of having a significant influence on price if it were publicly known. Violations of the insider trading rules are punishable by fine or imprisonment of up to five years.
Disclosure of inside information. Issuers of listed securities are required to disclose immediately new non-public information arising in the course of business if the information is such that it would affect the financial situation or general trend of business of the issuer, significantly influence the market price of the issuer's securities, or if the registrant's ability to fulfill its obligation towards bondholders would be impaired. Disclosure must be made either in a national journal of record or in an electronic data dissemination system widely used by banks, other companies listed on the exchange and insurance companies. Prior to disclosure, the issuer must notify the Regulatory Authority as well as any exchange on which its securities or related derivatives are listed. Because the Securities Trading Act has been in force only a short time, the definition of inside information is not yet entirely clear, and companies are tending to err on the conservative side. Violations are subject to fines of up to DM100,000, DM500,000 or DM3,000,000, depending upon the severity of the violation.
REPORTING OBLIGATIONS
The Securities Trading Act also provides that any person who acquires or sells 5%, 10%, 25%, 50% or 75%, respectively, of the voting shares of a company listed on the stock exchange, or who thereby exceeds or falls below such thresholds, must notify the Regulatory Authority and the company in question within seven calendar days of the purchase or sale. The Securities Trading Act provides for attribution of beneficial ownership and voting rights.
THE TENDER OFFER CODE
Tender offers are not specifically regulated by statute. The only specific rules on the subject are found in a voluntary tender offer code (the "Code") originally promulgated by the Securities Exchange Committee of the Federal Ministry of Finance in 1979. Due to subsequent developments in the area of shareholder protection and EU proposals on tender offers, the Securities Exchange Committee recently revised the Code. The new Code remains voluntary, however. The Code provides that majority and minority shareholders in the same company be treated identically in a tender offer. If the offeror makes a more favorable offer to any individual shareholder, such offer must be made to all shareholders, including those who may have accepted a prior offer. The new Code creates several reporting requirements in addition to the publication of the offer itself. These include publication of information on (i) the number and price of target shares purchased by the offeror both prior to the tender offer and subsequently thereto, (ii) the offeror's intentions concerning the target company, and (iii) possible effects of the takeover on the bidder and the target company. The target company is required to disclose its opinion on the offer. A new provision of the Code requires any shareholder with 50% or more of the voting rights of a listed company to make an offer to the other shareholders to buy the remaining shares. The German position is thus in sharp contrast to the EU's position, which provides for a threshold of 33%. The Securities Exchange Committee is to appoint a Takeover Commission to monitor compliance with the Code and publish its position with respect to violations of the Code. The Takeover Commission will also compile lists of those entities that have indicated their voluntary acceptance of the Code.
