Disclosure of Holdings in Voting Rights Amendments by the Transparency Directive Implementation Act

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1 Corporate Law News. Disclosure of Holdings in Voting Rights Amendments by the Transparency Directive Implementation Act 1 Introduction 1 The Transparency Directive dated 15 December 2004 has to be implemented into German law until 20 January On 28 June 2006 the German Federal Government issued a draft Transparency Directive Implementation Act which was amended by the parliamentary Finance 2 Committee on 29 November (together Draft Implementation Act ). The Draft Implementation Act passed the Bundestag on 30 November 2006 and awaits the approval of the Bundesrat, the second chamber of the German Federal Parliament, to become effective. It is expected that the legislative procedure will be finalised within the next few weeks. According to the Draft Implementation Act, the new act will for most parts come into force on 20 January The implementation of the Transparency Directive will have a material impact on the existing German regulations on disclosure of material shareholdings in German publicly listed companies. It will particularly lead to changes of the notification, information and publication obligations which are set out in the German Securities Trading Act (Wertpapierhandelsgesetz WpHG ). The amendments aim at reaching a higher level of transparency and at preventing unnoticed approaches to publicly listed companies. Contents 1 Introduction 1 2 Current Legal Situation 2 3 Amendments to the Existing Disclosure Rules 4 4 Transitional Provisions 12 Contact 14 1 Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EG; available at 2 Transparenzrichtlinie-Umsetzungsgesetz; printed matter of the Federal Parliament (Bundestag) No. 16/2498, available in German only at: 3 Recommendatory resolution and report of the parliamentary Finance Committee as of 29 November 2006, printed matter of the Federal Parliament (Bundestag) No. 16/3644, available in German only at: December

2 In addition, the Draft Implementation Act amends the existing rules on financial reporting, disclosure of information relevant for capital markets (e.g. insider information, directors dealings) and on the publication obligations of issuers of securities. Please note, however, that this newsletter is limited to the changes of the shareholding disclosure rules. 2 Current Legal Situation 2.1 Scope of Application Currently only the holding of voting rights in stock corporations (Aktiengesellschaften) and partnerships limited by shares (Kommanditgesellschaften auf Aktien) with registered seat in Germany whose shares are admitted to trading on a regulated market within one of the countries of the European Economic Area ( Listed Company ) are subject to a disclosure obligation of the relevant shareholder. Both the Listed Company and the Federal Financial Supervisory Authority ( FFSA ) are to be notified of the fact of reaching, exceeding or falling below specific voting rights thresholds. The Listed Company then has to publish this fact in an official national stock exchange gazette within 9 calendar days. 2.2 Notification Thresholds Whoever reaches, exceeds or falls below by acquisition, sale or in another manner 5 per cent, 10 per cent, 25 per cent, 50 per cent, or 75 per cent of voting rights in a Listed Company shall notify in writing the Listed Company and the FFSA without delay (at the latest within seven calendar days) of this fact. For the purposes of determining the relevant holding in voting rights, voting rights arising from shares owned by the shareholder in question and voting rights which are deemed to be held by way of attribution (see 2.3) are to be taken into consideration. In case of a multiple attribution of voting rights, each person through which voting rights are attributed has to make a separate notification where the aforementioned notification thresholds are triggered in that person. Moreover, a holding of at least 5 per cent of the voting rights in a Listed Company is to be notified at the time of the initial admittance of the Listed Company s shares to a regulated market. 2 December 2006

3 2.3 Attribution of Voting Rights Voting rights attached to shares in a Listed Company are attributed to the shareholder in question which belong to a subsidiary of the shareholder, which belong to a third party but are held on the shareholder s account, which the shareholder has transferred to a third party as security unless the third party exercises the voting rights independently from any directions given by the shareholder, over which a right of usufruct (i.e. a special right to use) has been granted in favour of the shareholder, which the shareholder has an unconditional right to acquire and whose ownership is to be transferred automatically when the respective declaration of intent is made, which are entrusted to the shareholder who is vested with a discretionary power to exercise the voting rights unless particular directions are given by the owner of these shares, or which are held by a third party if this third party or its subsidiary is coordinating its conduct in relation to the Listed Company with the shareholder in question by way of an agreement or otherwise; agreements relating to the exercise of voting rights on individual occasions are excepted. 2.4 Exemptions Upon application the FFSA permits that voting shares are not considered when calculating the voting rights if the applicant is an investment services enterprise being admitted to participate in trading on a stock exchange within the European Economic Area, the shares are held or intended to be held in its trading book, and it is not intended to gain influence over the management of the Listed Company by the acquisition of shares. The same applies to enterprises domiciled in the European Economic Area with respect to the 5 per cent threshold if the shares are held in order to make short-term use of existing or expected differences between the acquisition price and the sales price and it is not intended to gain influence over the management of the Listed Company by the acquisition of shares. Corporate Law News. 3

4 2.5 Sanctions Disobeying the notification obligation by omitting the notification or making an incorrect or incomplete notification will lead to two major consequences: an administrative fine of up to 200, can be imposed on the relevant shareholder; the civil law sanction, however, would be harsher. An infringement of the notification obligation would lead to a loss of the shareholder rights which are attached to the shares held by the relevant shareholder, by its subsidiaries or on its account. This comprises in particular the right to take part and vote in a general meeting of the Listed Company and the right to receive dividends and liquidation proceeds. The latter rights resurge with retrospective effect if the violation was not committed on purpose and the notification was made without undue delay after the wrongdoer became aware of the violation. These rights will only resurge where the shareholder is able to proof that he had not acted on purpose when committing the violation. 3 Amendments to the Existing Disclosure Rules The Draft Implementation Act will bring about the following changes to the current rules on shareholding disclosure in publicly listed companies: 3.1 Scope of Application The Draft Implementation Act leads to the implementation of the so-called home member state principle. Notification obligations might arise due to the holding of voting rights in the following companies ( Issuers ): stock corporations and partnerships limited by shares with registered seat in Germany whose shares are admitted to trading on a regulated market within the European Economic Area (this is already the case under the current legal situation), and companies having their registered seat in a country which is not a state of the European Economic Area whose shares are admitted to trading on a regulated market in Germany or in the European Economic Area provided that the issuer has to lodge its annual document within the meaning of sec. 10 Securities Prospectus Act (Wertpapierprospektgesetz) with the FFSA. 4 December 2006

5 3.2 Notification Thresholds New voting rights thresholds of 3 per cent, 15, per cent, 20 per cent and 30 per cent are to be introduced. Thus, a shareholder will now be obliged to notify the Issuer and the FFSA if its holding of voting rights (including the attributed ones) reaches, exceeds or falls below a threshold of 3 per cent, 5 per cent, 10 per cent, 15 per cent, 20 per cent, 25 per cent, 30 per cent, 50 per cent, or 75 per cent. Furthermore, the notification threshold at initial admittance of the Issuer s shares to a regulated market will be lowered to a holding of 3 per cent of the voting rights. 3.3 Attribution of Voting Rights The current attribution rules (see 2.3) continue to be effective, but will be amended by the following: Proxy Voting At present voting rights attached to shares belonging to a third person and entrusted to the shareholder in question are to be attributed when this shareholder has - in the absence of particular directions given by the owner of the shares - a discretionary power to exercise the voting rights (see 2.3.6). The same will now be the case for shares which are not entrusted but whose voting rights can be exercised by the relevant shareholders as a proxy. The German legislator reasoned that this extension was required to ensure that all relevant scenarios are included but without providing any example as to the kind of scenarios this may concern. However, the reasoning of the Draft Implementation Act explicitly stipulates that the exercise of voting rights by credit institutions and professional agents in the general meeting of a stock corporation shall not be covered by that attribution rule Portfolio Management by Investment Services Enterprises The Draft Implementation Act provides for an exemption from the general principle that voting rights of shares held by a subsidiary are to be attributed to its controlling shareholder (see 2.3.1). Such exemption applies if the subsidiary holding the shares qualifies as an investment services enterprise which is authorised to render portfolio management services provided that the following pre-requisites are given: the shares are held by the subsidiary in the context of portfolio management 4, 4 Portfolio management is the management of individual assets invested in financial instruments for others on a discretionary basis. Corporate Law News. 5

6 the subsidiary exercises its voting rights independently from the controlling shareholder, and the subsidiary may only exercise the voting rights attached to the shares under instructions given in writing or by electronic means. If this is not the case, the subsidiary has to ensure that individual portfolio management services are conducted independently from any other services and under conditions equivalent to those provided for under the Undertakings for Collective Investment in Transferable Securities ( UCITS ) Directive. 5 This exemption does not apply if the controlling shareholder or another subsidiary of the controlling shareholder has invested in holdings managed by such investment services enterprise and the investment services enterprise has no discretion to exercise the voting rights attached to such holdings and may only exercise such voting rights under direct or indirect instructions from the controlling shareholder or another subsidiary of the controlling shareholder Investment Management Companies Under existing law German investment management companies (Kapitalanlagegesellschaften) are not considered to be subsidiaries for the purpose of the aforementioned attribution rules set out in the Securities Trading Act. However, under the Draft Implementation Act this rule will only apply if the investment management company is a UCITS which exercises the voting rights for the shares which it holds in the fund in its own discretion, i.e. independently from the controlling shareholder. This rule will also apply to management companies having their seat within the European Economic Area and which comply with the UCITS Directive. Furthermore, it will apply to management companies having their seat in a state outside the European Economic Area provided they would require a licence as an investment company under German law (if they were subject to German law) and provided they are acting independently from their controlling shareholder and pursuant to rules which correspond to the provisions of independency for investment management companies under German law. The FFSA will set out criteria as to when those foreign rules on independency may be considered as being equivalent to the German rules. 5 Council Directive 85/611/EEC dated 20 December 1985 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities, as amended. 6 December 2006

7 3.4 Exemptions The exemptions hitherto existing are repealed. In future, voting shares will not be considered when calculating the holding in voting rights in the following cases without the need for filing an application with the FFSA Trading Book Exemption Voting rights which do not exceed 5 per cent of the voting rights of the Issuer are not considered if the holder of the shares is an investment services enterprise whose registered seat is within the European Economic Area, holds the shares or intends to hold them in the trading book, and ensures that the voting rights attached to those shares are not exercised and are not used otherwise to exercise influence on the management of the Issuer. The Draft Implementation Act is thus introducing stricter rules as before as the exemption only applies if a maximum of 5 per cent of the voting rights in an Issuer are held or attributed. Thus, if holdings exceed the 5 per cent threshold, notification must be made for the total amount of the holding Clearing & Settlement / Custodians A new exemption is provided with regard to shares conferring voting rights if the shares are acquired for the sole purpose of clearing and settlement for a maximum of 3 trading days even if the shares are also traded over-the-counter; or if these shares are held by custodians in their capacity as custodians and the custodians may only exercise the voting rights attached to such shares under instructions given in writing or by electronic means Market Makers In addition, voting rights are not taken into consideration with regard to the 3 per cent and the 5 per cent threshold if the relevant shares are bought and sold by market makers which 7 are licensed for own-account trading under German law, act in their capacity as market maker, and do not interfere in the management of the Issuer and do not influence the Issuer in its decision to buy-back shares or to stabilize the share price. 6 Market Makers are official members of the stock exchange which fix the bid and the offer price for certain securities and act on its own risk and own account. 7 Purchase and sale of financial instruments on an own account basis for others. Corporate Law News. 7

8 Apart from the exemption regarding custodians, voting rights which are not considered due to an aforementioned exemption may not be exercised. 3.5 Financial Instruments Conferring the Right to Acquire Shares One of the most significant changes made by the Draft Implementation Act is the introduction of a separate notification regime with respect to the holding of financial instruments which confer the right to acquire voting shares of an Issuer. The notification obligation exists where the right to acquire shares is determined by a legally binding agreement and the holder of the financial instruments may acquire the shares upon its own initiative by exercising the right and demand transfer of shares. This notification obligation in particular applies to physically settled derivatives on shares, i.e. futures and options. As the notification obligation only arises where the holder of the financial instruments may acquire shares upon its own initiative, holdings in derivatives where the right to demand transfer of shares depends on the share price do not have to be disclosed. The notification obligation arises if the holder of the financial instruments may acquire at least 5 per cent of the voting rights in an Issuer or reaches, exceeds or falls below 8 any of the other thresholds triggering notification obligations apart from the 3 per cent threshold. Moreover, financial instruments held by a subsidiary or a trustee are to be included as well. Beyond that, attribution rules for financial instruments do not exist. The aforementioned exemptions for the non-consideration of voting rights (see 3.4) also apply to financial instruments. The voting rights attached to shares which may be acquired by means of the financial instruments do not have to be aggregated with the already existing holdings in shares of the Issuer. The notification obligation constitutes a separate notification obligation. Thus, the simultaneous acquisition of 2.99 per cent of voting shares in an Issuer and of financial instruments conferring the right to acquire further 4.99 per cent of the voting rights will not trigger any notification obligation as long as the right to acquire voting rights is not exercised. In certain cases it may happen that an attribution of voting rights is caused by holding a financial instrument ( unconditional right to acquire alternative, see 2.3.5). Then a separate disclosure in the financial instrument regime is not required. 8 The notification threshold may be fallen below where the financial instrument is exercised or expires, but also in case of a resale. 8 December 2006

9 As both notification regimes are treated as separate regimes one can assume that in case of the exercise of the financial instrument a notification in the financial instrument regime on falling below the notification threshold and a notification in the voting rights regime on reaching or exceeding the relevant notification threshold have to be made. The Draft Implementation Act and its reasoning, however, do not mention this point explicitly. 3.6 Timing and Form of Notification Person obliged to make the notification Each company which holds or is deemed to hold voting rights in an Issuer is obliged to make a notification. This applies to all companies through which voting rights are attributed and in which notification thresholds are reached or crossed. In case of a group of companies for which consolidated accounts are prepared, the German parent company may make the notification for itself and for its subsidiaries. According to the wording of the Securities Trading Act, this only applies to German group of companies. Where the parent company is a foreign one, this foreign parent company or any of its affiliates may be authorised to make the notification in the name and on behalf of the affiliated companies Timing As under current law, disclosure obligations are triggered when the holder of the shares or financial instruments party learns or should have learnt that its holding in voting rights or financial instruments have reached or crossed a relevant threshold. Notification must be made without undue delay at most within 4 trading days after the disclosure obligation arising. Trading days are all calendar days other than Saturdays, Sundays and public holidays. The FFSA will publish a list of trading days on its homepage Addressee of the Notification Notification must be made to the Issuer and the FFSA Form of notification The notification must be made in writing and delivered by mail or telefax, but not sent by . The notification may be made in German or English Contents of the notification In case of a notification of the holding of voting rights in an Issuer, the amended statutory provisions stipulate the following compulsory contents: the heading must specify that the notification is a notification of voting rights ; Corporate Law News. 9

10 the name and address of the person obliged to make the notification; the name and address of the Issuer; the threshold in question and whether the shareholding has reached, exceeded or fallen below that threshold; the percentage of voting rights held in relation to the total amount of voting rights in the Issuer 9 ; the date when the threshold has been reached or crossed; and in case of an attribution of voting rights, the name of the holder of shares/voting rights which are attributed to the person obliged to make the notification. Moreover, the persons through which voting rights are attributed are to be named. This only applies where at least 3 per cent of the voting rights are attributed from that person to the person obliged to make the notification. If a notification of the holding of financial instruments which confer the right to acquire shares in an Issuer is made (see 3.5), the following information must be included in the notification: the heading must specify that the notification is a notification of voting rights ; the name and address of the person obliged to make the notification; the name and address of the Issuer whose shares can be acquired; the threshold which would be reached or exceeded if the shares were actually acquired and the actual amount of shares that could be acquired; the statement whether the threshold was reached, exceeded of fallen below 10 ; in case of indirect holdings, the name of the subsidiaries which hold the financial instruments in question or through which the financial instruments are attributed; the date of the hypothetical reaching, exceeding or falling below the threshold; in case of financial instruments which may be exercised within a certain period of time the indication when the shares will or can be acquired; the date of maturity or expiry of the financial instruments. 9 and in relation to all shares of the relevant class of voting shares 10 When acquiring a financial instrument the threshold is reached or exceeded; in case of a sale of the financial instrument, but also in case of its exercise or expiry, the threshold is fallen below. 10 December 2006

11 3.7 Publication of the Notification by the Issuer The Issuer whose shares are admitted to trading on a regulated market in Germany has to publish the information received without undue delay at most within 3 trading days. The Issuer has to send the information received to such media for publication as may reasonably relied upon for the effective and speedy dissemination of the information throughout Europe. The legislator requires the Issuer to use a bundle of media without prescribing exactly which media to use. The number and kind of media used shall be determined due to the circumstances of each individual case. Regularly, an electronic business information distribution system (e.g. Reuters, Bloomberg), news agencies and major German and European print media are to be used. It is essential that the Issuer has fulfilled its obligation when the information is received by the bundle of media which had been properly selected. As no duty of the media exists to transmit the information, the market itself shall - according to the reasoning of the Draft Implementation Act decide on the actual dissemination of the information. As a rule, furnishing an electronic business information distribution system with the notification, sending respective notifications to major German and European print media and - reasonably - publishing the notification on the Issuer s website should meet the requirements set. A mere publication in one of the national official stock exchange gazettes (e.g. Börsen-Zeitung) does not seem to be sufficient any more. The information furnished has to be in German and additionally in English when the Issuer s shares are admitted to trading on a regulated market in other countries of the European Economic Area. 11 Where the notification by the person obliged to make the notification was already made in English, the information sent to the media may also be given solely in English. Simultaneously the Issuer has to notify the FFSA about the publication and submit the notification thereafter to the Company Register (Unternehmensregister) without undue delay. 3.8 Publication of Total Number of Voting Rights by the Issuer The Issuer whose shares are admitted to trading on a regulated market in Germany has to publish in future throughout Europe (see 3.7) the total number of shares at the end of each calendar month in which an increase or decrease of the total number of voting rights in the Issuer has taken place (e.g. due to a capital increase or capital decrease). Simultaneously the Issuer has to notify the FFSA about the publication and submit the information thereafter to the Company Register (Unternehmensregister) without undue delay. When making the notification of holdings in voting 11 In lieu of information to be given in English, a language can be used which is accepted by the relevant supervisory authority of the state of the European Economic Area where shares are admitted to trading on a regulated market. Corporate Law News. 11

12 rights, determining whether a threshold has been reached, exceeded or fallen below and calculating the holding in voting rights then are to be based on this published figure. The FFSA may release Issuers domiciled outside the European Economic Area from such obligation provided that they are subject to equivalent rules of their home country or agree to comply with them. 4 Transitional Provisions The Draft Implementation Act stipulates a partial stock-taking for the date of its coming into force. 4.1 Notification Obligation Where no equivalent notification has been made prior to 20 January 2007, a stock-taking notification obligation arises for the following persons: each holder of voting rights (including attributed ones) which holds on 20 January 2007 a proportion of voting rights reaching, exceeding or falling below the threshold of 15 per cent, 20 per cent or 30 per cent. The meaning of this provision s wording is ambiguous. According to the reasoning of the Draft Implementation Act it can be assumed that a notification only has to be made when one of the newly introduced thresholds of 15 per cent, 20 per cent or 30 per cent have been touched by acquisition, sale, attribution or changes to the legal situation in the period between the last notification correctly and completely made and 20 January Due to the unclear legal situation and impending significant sanctions (see 4.4) it may be advisable to make a notification as a precaution when the proportion of voting rights held has changed significantly even if these changes have not touched any of the newly introduced voting rights thresholds; each holder of voting rights amounting to at least 5 per cent due to the new proxy voting attribution (see 3.3.1) coming into force on 20 January 2007; each holder of financial instruments holding financial instruments on 20 January 2007 which confer the right to acquire at least 5 per cent of the voting shares in an Issuer. However, no disclosure obligation arises with respect to the 3 per cent threshold. 4.2 Notification Procedure By 20 March 2007 the Issuer - but not the FFSA - is to be notified by the person obliged to notify. Rules regarding the persons obliged to make the notification, the form, and the contents of the stock-taking notification conform with the rules on regular notifications (see 3.6). 12 December 2006

13 4.3 Publication of the Notification by the Issuer The Issuer whose shares are admitted to trading on a regulated market in Germany must publish the notification received Europe-wide (see 3.7) without undue delay at most by 20 April 2007 and simultaneously notify the FFSA about the publication. Thereafter, the Issuer has to submit the notification to the Company Register (Unternehmensregister) without undue delay. 4.4 Sanctions Disobeying the stock-taking notification obligation by omitting the notification or making an incorrect or incomplete notification will lead to the same legal consequences as in case of a violation of regular notification obligations (see 2.5), i.e. the imposition of an administrative fine of up to 200, and a loss of shareholder rights until the notification will be made. Such stock-taking notification obligations have been a serious source of error in the past when amending the Securities Trading Act in To prevent significant sanctions, the stock-taking notifications should be carried out with great diligence and care. Corporate Law News. 13

14 Your contact Stephan F. Oppenhoff Tel. (49-69) Andreas Steck Tel. (49-69) Antje-Irina Kurz Tel. (49-69) Dr. Lars-Gerrit Lüßmann Tel. (49-69) Berlin Rankestraße Berlin Tel: (49-30) Fax: (49-30) Cologne Börsenplatz Cologne Tel: (49-221) Fax: (49-221) Frankfurt am Main Mainzer Landstraße Frankfurt am Main Tel: (49-69) Fax: (49-69) Munich Prinzregentenplatz Munich Tel: (49-89) Fax: (49-89) This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts at Linklaters, or contact the editors. Linklaters. All Rights reserved 2006 Please refer to for important information on the regulatory position of the firm. We currently hold your contact details, which we use to send you newsletters such as this and for other marketing and business communications. We use your contact details for our own internal purposes only. This information is available to our offices worldwide and to those of our associated firms. If any of your details are incorrect or have recently changed, or if you no longer wish to receive this newsletter or other marketing communications, please let us know by ing us at marketing.database@linklaters.com