Invitation to the Annual General Meeting 2014 Deutsche Postbank AG, Bonn German Securities Code (WKN) 800 100 ISIN DE0008001009
2 We hereby invite the shareholders of our Company to the Annual General Meeting to be held on July 9, 2014, at 10:00 a.m. CEST at the Maritim Hotel Bonn, Godesberger Allee (access: Kurt-Georg-Kiesinger-Allee 1), 53175 Bonn, Germany.
3 Agenda 1. Presentation of the adopted annual financial statements and the approved consolidated financial statements, of the management reports for the Company and the Group (including the explanations on the disclosures in accordance with sections 289(4) and 315(4) of the Handelsgesetzbuch [HGB German Commercial Code]) as well as the Report of the Supervisory Board for fiscal year 2013 On March 24, 2014, the Supervisory Board approved the annual financial statements and consolidated financial statements prepared by the Management Board, and hence adopted the annual financial statements. Therefore, no resolution of the Annual General Meeting is required by law on this agenda item and, consequently, none has been scheduled. The documents mentioned under this agenda item are available for inspection on the Company s website at https://www.postbank.de/hv2014. These documents will also be available for inspection, and will be explained, at the Annual General Meeting. 2. Resolution on the formal approval of the actions of the Management Board The Management Board and the Supervisory Board recommend that the actions of the members of the Management Board in office in fiscal year 2013 be formally approved. 3. Resolution on the formal approval of the actions of the Supervisory Board The Management Board and the Supervisory Board recommend that the actions of the members of the Supervisory Board in office in fiscal year 2013 be formally approved. 4. Election of the auditors for fiscal year 2014 In line with the recommendation of its Audit Committee, the Supervisory Board recommends that PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, Düsseldorf, be elected as the auditors of the Company and the Group for fiscal year 2014 and as the auditors for the review of the condensed set of financial statements contained in the half-yearly financial report and of the interim management report, as well as for the consolidated interim financial statements prepared prior to the 2015 Annual General Meeting.
4 5. Increase in the cap on variable remuneration components for members of the Management Board Under the version of section 25a(5) sentence 2 of the Kreditwesengesetz (KWG German Banking Act) in effect since January 1, 2014, the variable remuneration paid to banks senior managers may not, as a rule, exceed 100 % of the fixed remuneration. Section 25a(5) sentence 5 of the KWG does, however, allow the Annual General Meeting to approve higher variable remuneration, although this may not exceed 200 % of the fixed remuneration for the senior manager in question. The Supervisory Board recommends resolving that: For all members of the Management Board of Deutsche Postbank AG in question, the Supervisory Board is authorized to increase the cap on variable remuneration to 200 % of the member s fixed remuneration. As the aim is to ensure that Management Board remuneration is linked to performance and creates long-term incentives, the Supervisory Board considers it appropriate to maintain maximum flexibility with regard to the variable components of Management Board remuneration. Attractive performance-related Management Board remuneration has a decisive impact on the Bank s ability to attract and retain qualified management bodies so as to ensure its sustained success. In competing for these, the Bank must prevail not only against competitors that apply the 1:2 ratio, but also against financial services institutions within and, in some cases, outside the European Union as well as companies in other sectors that do not fall under the relevant requirements. As all members of the Management Board have overall responsibility for the management of the Bank, the remuneration structures provided for them are largely uniform. Since the aim is for this to remain the case, the Supervisory Board is asking for approval to increase the cap on variable remuneration in respect of all members of the Management Board in question in other words for five individuals at the present time as permitted by law. In doing so, the Supervisory Board is assuming that the members of the Management Board must be paid adequate total remuneration comprising fixed components and variable components that create incentives. The Bank s remuneration practice is
5 based on the total remuneration paid to members of the Management Board. This means that neither the individual total remuneration nor the structural nature of the remuneration components would differ depending on whether the regulatory requirements were implemented in the form of a 1:1 ratio or by applying the 1:2 ratio in accordance with section 25a(5) sentence 5 of the KWG rather, this would merely affect the composition of the total remuneration. If the option to grant variable remuneration components were limited by way of a 1:1 ratio, the fixed components would increase. If the option to grant a higher variable component were approved, on the other hand, this would address the regulatory requirements for a more long-term and therefore sustainable remuneration structure. As has usually been the case until now and as described in greater detail in the remuneration report on pages 163ff. of the Annual Report, the variable remuneration components are subject to time periods and conditions, which result in payment being deferred and, in the event of certain circumstances during those time periods, may also result in the remuneration components lapsing. Under the Institutsvergütungsverordnung (InstitutsVergV German Regulation Governing Supervisory Requirements for Remuneration Systems of Institutions), these restrictions are not possible in the case of the fixed remuneration components. Through the parameters used to determine the actual amount of the variable remuneration, the Supervisory Board has already ensured that an appropriate balance is struck between creating positive incentives and avoiding inappropriate incentives, in particular to enter into unreasonably high risks. Special attention is also devoted to this when actually setting the variable remuneration for the members of the Management Board in question. As part of the Bank s annual financial statements, the remuneration report provides considerable transparency over the amount and composition of the remuneration paid to each member of the Management Board. The amounts for 2013 can be found on page 166 of the Annual Report. We do not expect the proposed approval to increase the cap on variable remuneration components for members of the Management Board to have a measurable impact on the Bank s ability to maintain adequate own funds. The cost of the variable remuneration in excess of 100 % of the fixed remuneration is less than 0.1 % of the Bank s own funds. Moreover, this cost would only be incurred if the members of the Management Board were to substantially exceed the agreed targets. Apart from that, more closely linking variable remuneration components to long-term performance has a fundamental positive impact on the Bank s ability to maintain adequate own funds.
6 6. Increase in the cap on variable remuneration components for employees and for members of executive bodies of subsidiaries Under the version of section 25a(5) sentence 2 of the KWG in effect since January 1, 2014, the variable remuneration paid to banks employees may not, as a rule, exceed 100 % of the fixed remuneration. Section 25a(5) sentence 5 of the KWG does, however, allow the Annual General Meeting to approve higher variable remuneration, although this may not exceed 200 % of the fixed remuneration for the employee in question. The Management Board and the Supervisory Board recommend that the following resolution be adopted: The Management Board is authorized to increase the cap on variable remuneration components to 200 % of the fixed remuneration in each case for the groups of employees of Deutsche Postbank AG and its subsidiaries and investees described in greater detail below. As the aim is to ensure that the remuneration system is linked to performance and creates long-term incentives, the Management Board and the Supervisory Board consider it appropriate to maintain maximum flexibility with regard to variable remuneration components. Attractive performance-related remuneration has a decisive impact on the Bank s ability to attract and retain qualified specialists so as to ensure its sustained success. In competing for these employees, the Bank must prevail not only against competitors that apply the 1:2 ratio, but also against financial services institutions within and, in some cases, outside the European Union as well as companies in other sectors that do not fall under the relevant requirements. Deutsche Postbank AG is therefore aiming for a group-specific exception for the following groups of employees. The employees concerned are the executive managers of Deutsche Postbank AG, members of the divisional boards of Deutsche Postbank AG, unit heads, and department heads from Treasury and the Non-Core Unit, as well as members of the executive bodies of the subsidiaries Postbank Finanzberatung AG, Postbank Filialvertrieb AG, Postbank Firmenkunden AG, and Postbank Systems AG, and the regional and district director level at Postbank Finanzberatung AG and Postbank Immobilien GmbH.
7 Of the approximately 16,000 employees in the Deutsche Postbank Group, approximately 40 employees below the level of Deutsche Postbank AG s Management Board are currently in the above-mentioned groups. In the case of these employees, the variable remuneration may exceed the cap of 100 % of the fixed remuneration. The number of relevant employees may vary over time. It is not planned to significantly extend the group of employees affected by this exception, however. The small number of employees and the structure of the variable remuneration help to ensure unreasonable risk-taking is not encouraged. The Management Board and the Supervisory Board are assuming that employees must be paid adequate total remuneration comprising fixed components and variable components that create incentives. The Bank s remuneration practice is based on the total remuneration paid to employees. This means that neither the individual total remuneration nor the structural nature of the remuneration components would differ depending on whether the regulatory requirements were implemented in the form of a 1:1 ratio or by applying the 1:2 ratio in accordance with section 25a(5) sentence 5 of the KWG rather, this would merely affect the composition of the total remuneration. If the option to grant variable remuneration components were limited by way of a 1:1 ratio, the fixed components would increase. If the option to grant a higher variable component were approved, on the other hand, this would address the regulatory requirements for a more long-term and therefore sustainable remuneration structure, as these remuneration components are subject to time periods and conditions, which result in payment being deferred and, in the event of certain circumstances during those time periods, may also result in the remuneration components lapsing. Under the InstitutsVergV, these restrictions are not possible in the case of the fixed remuneration components. Through the parameters used to determine the actual amount of the variable remuneration, the Management Board has already ensured that an appropriate balance is struck between creating positive incentives and avoiding inappropriate incentives, in particular to enter into unreasonably high risks. Special attention is also devoted to this when actually setting the variable remuneration for the employees in question. We do not expect the proposed approval to increase the cap on variable remuneration components for employees to have a measurable impact on the Bank s ability to
8 maintain adequate own funds. The cost of the variable remuneration in excess of 100 % of the fixed remuneration is less than 0.1 % of the Bank s own funds. This theoretical cost would only be incurred if both the group of individuals were to deliver outstanding individual performance and the Deutsche Postbank Group were to achieve an outstanding consolidated profit. Apart from that, more closely linking variable remuneration components to long-term performance has a fundamental positive impact on the Bank s ability to maintain adequate own funds. 7. Resolution on the amendment to and revision of Article 15 of the Articles of Association in order to adjust the Supervisory Board s remuneration The current remuneration structure for the Supervisory Board was adjusted most recently in 2004. To do justice to the increase in recent years in the requirements relating to the Supervisory Board s activities and responsibilities, as well as the current requirements of the German Corporate Governance Code (the Code) regarding Supervisory Board remuneration, the proposal has been made to adjust the remuneration structure with retrospective effect as of January 1, 2014. Currently, the remuneration of Supervisory Board members comprises an attendance allowance, fixed annual remuneration, performance-related remuneration with a long-term incentive effect, and a performance-related remuneration component based on consolidated net profit per share for the respective fiscal year. The Chairman of the Supervisory Board, the Deputy Chairman, and the members and the chairmen of Supervisory Board committees receive correspondingly higher remuneration. The proposal made involves switching the remuneration system with retrospective effect as of January 1, 2014, to a purely fixed remuneration system plus attendance allowances that does not grant any variable remuneration. This is intended to simplify the remuneration system significantly and strengthen the Supervisory Board s independence in performing its control function. These new requirements also reflect the current requirements of the Code, which no longer recommends variable remuneration. With respect to remuneration for activities on Supervisory Board committees, the goal is to make distinctions based on the extent of the responsibilities assumed, the actual workload, and the complexity. In line with past practice, it is proposed that a committee chairman receive double the amount of remuneration received by a committee member. In the future, the amount of remuneration will also vary between the different committees. The chairs and members of the Audit Committee and the Risk
9 Committee will receive higher remuneration than people occupying these positions on other committees. As before, no additional remuneration is foreseen for positions on the Mediation Committee. In line with past practice, the remuneration and the attendance allowance will be due after the end of the Annual General Meeting that receives or decides on the approval of the consolidated financial statements for the fiscal year concerned. When the Supervisory Board s new remuneration system was developed, the amount of the remuneration, including the current variable remuneration components and the attendance allowance, was also reviewed. The appropriateness and the competitiveness of the remuneration was considered during this process, as the aim is to continue to attract suitable, qualified candidates in the future for the Supervisory Board of Deutsche Postbank AG, one of Germany s largest financial services providers. In line with this, fixed remuneration of 40,000 is being proposed for members of the Supervisory Board. The Chairman of the Supervisory Board is to receive double this base pay and the Deputy Chairman 1.5 times the base pay. The attendance allowance is to be increased to 500. The Management Board and the Supervisory Board therefore recommend adoption of the following resolution: a) Article 15 of the Articles of Association will be reformulated in its entirety as follows: Article 15 Remuneration (1) In addition to reimbursement of their cash expenses and any value added tax incurred on their remuneration and the reimbursement of their expenses, the members of the Supervisory Board shall receive fixed annual remuneration. The base pay for each member of the Supervisory Board amounts to 40,000. (2) The Chairman of the Supervisory Board shall receive double the base pay in accordance with paragraph 1 and the Deputy Chairman 1.5 times the base pay. (3) Remuneration shall increase by the following additional fixed annual remuneration for members and chairs of Supervisory Board committees:
10 a. Members of the Audit Committee and the Risk Committee shall receive an additional 30,000 each; the chairs of these committees shall receive an additional 60,000 in each case. b. Members of the Executive Committee, the Human Resources Committee, the Compensation Control Committee, and the Nomination Committee shall each receive an additional 20,000; the chairs of these committees shall receive an additional 40,000 in each case. c. No additional fixed remuneration shall be granted in the case of the members and the chair of the Mediation Committee set up in accordance with section 27(3) of the Mitbestimmungsgesetz (German Codetermination Act MitbestG). (4) In addition, Supervisory Board members shall receive an attendance allowance of 500 for each meeting of the Supervisory Board and its committees that they attend. (5) Supervisory Board members who only belong to the Supervisory Board and/ or its committees for part of the fiscal year shall receive pro rata remuneration rounded up or down to full months. Pro rata remuneration for committee positions requires the committee concerned to have met during the corresponding period of time in order to perform its duties. (6) The remuneration and the attendance allowance shall become due after the end of the Annual General Meeting that receives or decides on the approval of the consolidated financial statements for the fiscal year concerned. b) On the entry into effect of the provisions of the Articles of Association in accordance with letter a) of this agenda item, the revised remuneration of the Supervisory Board will be applied for the first time in the fiscal year (the year in which the remuneration will be paid) that began on January 1, 2014.
11 8. Elections to the Supervisory Board and appointment of an alternate member The terms of office of Wilfried Boysen, Peter Hoch, Werner Steinmüller, and Tessen von Heydebreck as shareholder representatives on the Supervisory Board expire at the end of the Annual General Meeting. In accordance with sections 96(1) and 101(1) of the Aktiengesetz (AktG German Stock Corporation Act), section 7(1) sentence 1 no. 3 of the MitbestG of May 4, 1976, and Article 9(1) of the Articles of Association, the Supervisory Board consists of ten shareholder representatives and ten employee representatives. The Annual General Meeting is not bound by election proposals with respect to elections to the Supervisory Board. It is intended to hold separate votes for the Supervisory Board elections. 1) In line with the recommendation of the Nomination Committee, the Supervisory Board recommends resolving that: The following persons are elected to the Supervisory Board as shareholder representatives for a term of office until the end of the Annual General Meeting that resolves on the formal approval of the actions of the Supervisory Board for fiscal year 2018: a) Katja Langenbucher, professor of civil law, commercial law, and banking law, Goethe-Universität Frankfurt am Main, Frankfurt am Main b) Karl von Rohr, Global Chief Operating Officer, Regional Management, Deutsche Bank AG, Oberursel c) Werner Steinmüller, member of the Group Executive Committee, Head of Global Transaction Banking, Deutsche Bank AG, Dreieich. Due to the standard age limit of 72 years set for Supervisory Board members by the Supervisory Board itself, the following person is only elected to the Supervisory Board as a shareholder representative for a term of office until the end of the Annual General Meeting that resolves on the formal approval of the activities of the Supervisory Board for fiscal year 2016: d) Tessen von Heydebreck, Chairman of the Board of Trustees of Deutsche Bank Foundation, Berlin.
12 2) Furthermore, in line with the recommendation of the Nomination Committee, the Supervisory Board recommends resolving that: Till Staffeldt, PBC Global Chief Administrative Officer, PBC Global Head of Human Resources, Deutsche Bank PGK AG, Frankfurt am Main be elected as an alternate member for Katja Langenbucher, Karl von Rohr, Werner Steinmüller, and Tessen von Heydebreck. If a successor is appointed for a Supervisory Board member who left before the end of his or her regular term of office and whose place was taken by Mr. Staffeldt, Mr. Staffeldt will revert to his status as an alternate member for the other Supervisory Board members for whom he was appointed as an alternate member. Information regarding item 8 of the agenda in accordance with section 125(1) sentence 5 of the AktG The shareholder representatives proposed for election to the Supervisory Board under agenda item 8 are members in each case of statutory supervisory boards of the companies listed under a), and members of comparable supervisory bodies in Germany and abroad of the business entities listed under b). Katja Langenbucher a) None b) None Karl von Rohr a) Deutsche Bank Luxembourg S.A., Luxembourg, member of the Supervisory Board b) Manpower Deutschland GmbH & Co. KG, Eschborn, Chairman of the Advisory Board Werner Steinmüller a) Deutsche Bank Nederland N.V., Amsterdam, Chairman of the Supervisory Boards b) True Sale International GmbH, Frankfurt am Main, member of the Advisory Board Tessen von Heydebreck
13 a) Dussmann Stiftung & Co. KGaA, Berlin, member of the Board of Trustees Vattenfall GmbH, Berlin, member of the Supervisory Board b) IFA ROTORION-Holding GmbH, Haldensleben, Chairman of the Advisory Board Kommanditgesellschaft CURA Vermögensverwaltung G.m.b.H. & Co., Hamburg, member of the Supervisory Board DECM Deutsche Einkaufs-Center-Management G.m.b.H., Hamburg, member of the Advisory Board Till Staffeldt a) None b) DB Capital Partners Asia G.P. Ltd., Georgetown, member of the Board of Directors Disclosures on section 5.4.1(4) to (6) of the German Corporate Governance Code The Supervisory Board does not consider any of the proposed candidates to have personal or business relations with the Company or its Group companies, the Company s executive bodies, or a shareholder holding a material interest in the Company, the disclosure of which is recommended under sections 5.4.1(4) to (6) of the German Corporate Governance Code. 9. Authorization to issue profit participation certificates with warrants, convertible profit participation certificates, and other hybrid bonds that meet regulatory requirements for recognition as Additional Tier 1 capital (AT1 capital), bonds with warrants, and convertible bonds (with the option to disapply preemptive rights), to create contingent capital, and to amend the Articles of Association The Management Board and the Supervisory Board recommend adoption of the following: a) The Management Board is authorized with the consent of the Supervisory Board to issue bearer or registered profit participation certificates on one or more occasions in the period up to July 8, 2019. At the time of their issue, the profit participation certificates must meet the conditions set out in the European legislation (in particular Article 52(1) of Regulation (EU) No. 575/2013 of the European Parliament and of the Council of June 26, 2013 hereinafter referred to as the CRR ), for the capital paid in for the grant of profit participation rights to be included in AT1 capital, or to otherwise be eligible for recognition as regulatory own funds. Bearer
14 warrants may be attached or a conversion right (also a conversion obligation) for the holder may be linked to the profit participation certificates. The options or conversion rights entitle the holder to subscribe for shares of the Company as specified in more detail in the terms and conditions of the profit participation rights with warrants or convertible profit participation rights. The Management Board is additionally authorized to issue, on one or more occasions in the period up to July 8, 2019, and instead of or in addition to profit participation certificates, other hybrid financial instruments with an unlimited term which meet the aforementioned capital requirements, but which, from a legal standpoint, may not be classifiable as profit participation rights, to the extent that their issue requires the approval of the Annual General Meeting under section 221 of the AktG, because of the profit-related return, for example, or for other reasons (these instruments are referred to hereinafter as hybrid bonds ). The Management Board is further authorized to issue, on one or more occasions in the period up to July 8, 2019, and instead of or in addition to profit participation certificates or hybrid bonds, bonds with warrants and/or convertible bonds with a fixed term of no more than 20 years or with an unlimited term, and to grant the holders of bonds with warrants option rights on and the holders of convertible bonds conversion rights (if appropriate, including a conversion obligation) to new shares of the Company as specified in more detail in the terms and conditions of the bonds with warrants or convertible bonds. The instruments issued under this paragraph need not meet the legal requirements for recognition as AT1 capital. The aggregate principal amount of the profit participation certificates, hybrid bonds, bonds with warrants, and convertible bonds to be issued under this authorization may not exceed a total of 3 billion. Options or conversion rights may only be issued on shares of the Company with a notional interest in the share capital of up to 273,500,000. As well as in euros, the profit participation certificates, hybrid bonds, bonds with warrants, and convertible bonds (profit participation rights, hybrid bonds, bonds with warrants, and convertible bonds, hereinafter also referred to collectively as partial rights ) may be issued in the official currency of an OECD country limited to the equivalent value in euros. Bonds with warrants and convertible bonds may also be issued by affiliated companies of the Company. In this case, the Management Board is authorized to guarantee on behalf of the Company that the bonds will be repaid and to ensure that options or conversion rights are granted.
15 If profit participation certificates with warrants or bonds with warrants are issued, one or more warrants are attached to each profit participation certificate or bond that entitle the holder to subscribe for new shares of the Company as specified in more detail in the terms and conditions of the warrants to be determined by the Board of Management. The proportionate interest in the share capital attributable to the shares to be subscribed for per partial right may not exceed the principal amount of the profit participation certificates with warrants or bonds with warrants. The maximum term of the option right is 20 years. If convertible profit participation certificates or convertible bonds are issued, the holders of the profit participation certificates or bonds will receive the right or have an obligation to exchange their individual profit participation certificates or bonds for new shares of the Company as specified in more detail in the terms and conditions of the profit participation certificates or bonds. The proportionate interest in the share capital attributable to the shares to be issued on conversion may not exceed the principal amount of the convertible profit participation right or convertible bond. The Company may decide not to grant a conversion right to the holders if the AktG permits this at the time the authorization is exercised. The exchange terms and conditions may also establish an unconditional or a conditional conversion obligation at the end of the term or at another time, which may also depend on a future event that is still uncertain at the time when the convertible profit participation certificate or convertible bond is issued, and may specify a conversion price at the date when the conversion obligation arises that differs from the conversion price at the date when the conversion right is exercised. The terms and conditions of the profit participation certificates or bonds may also stipulate whether and how a full exchange ratio is rounded, whether a cash topup payment or a cash settlement is set in the event of any fractions, and whether a particular date may be set by which the conversion/option rights may or must be exercised. The option or conversion price may not be less than 50 % of the price of Deutsche Postbank shares in Xetra trading (or in a comparable successor system) on the Frankfurt/Main stock exchange. The price is calculated as the average closing price on the ten exchange trading days before the final resolution by the Management Board to publish an offer to subscribe for profit participation certificates or bonds or to declare acceptance by the Company following a public invitation to submit
16 offers to subscribe. Where rights are traded, the days on which the rights are traded shall apply, with the exception of the last two exchange trading days for the rights, unless the Management Board sets the final option or conversion price before trading in the rights begins. Section 9(1) and section 199(2) of the AktG shall remain unaffected by this. Irrespective of the provisions of section 9(1) and section 199(2) of the AktG, the terms and conditions of the warrants, profit participation certificates, or bonds may provide, in an antidilutive provision, for the option or conversion price to be reduced by payment of a corresponding amount in cash when the conversion right is exercised or by reducing the top-up payment if the Company increases the share capital, issues additional profit participation certificates, bonds with warrants, or convertible bonds, or grants other option rights during the option or conversion period while granting preemptive rights to its shareholders and does not grant the holders of options and/or conversion rights preemptive rights in the amount to which they would be entitled following exercise of the option and/or conversion right. The terms and conditions may also stipulate the adjustment of the option and/or conversion right in the event of a capital reduction. In each case, the terms and conditions of the warrants, profit participation certificates, or bonds may stipulate that own shares of the Company may also be granted if the option or conversion right is exercised. In addition, the option may be given for the Company, in the event that the option or conversion right is exercised, to pay in cash (in full or in part) an equivalent amount corresponding to the average price of Deutsche Postbank shares in the closing auction in Xetra trading (or equivalent pricing in a successor system taking the place of Xetra trading) on the Frankfurt/Main stock exchange on at least two consecutive exchange trading days during a period of up to ten exchange trading days after notification of conversion or exercise of the option, as specified in more detail in the terms and conditions of the profit participation certificates or bonds. Shareholders must generally be granted statutory preemptive rights when the aforementioned profit participation certificates, hybrid bonds, and bonds with warrants and/or convertible bonds are issued. However, the Management Board is authorized, with the consent of the Supervisory Board, to disapply shareholders preemptive rights to the extent that the issue price is not materially lower than the theoretical fair value of the profit participation rights, hybrid bonds, bonds with warrants, or convertible bonds calculated using valuation techniques. The
17 total amount of the shares to be issued for profit participation certificates and bonds under this authorization in accordance with section 186(3) sentence 4 of the AktG (disapplying preemptive rights against cash contributions), together with other shares already issued or sold in accordance with or pursuant to this statutory provision during the term of this authorization, may not exceed 10 % of the share capital at the time the authorization becomes effective or, if this amount is lower, at the time this authorization is exercised. If the Management Board does not use this option, it is authorized, with the consent of the Supervisory Board, to disapply shareholders preemptive rights relating to fractions arising as a result of the subscription ratio and also to disapply preemptive rights to the extent necessary to grant the holders of options and/or conversion rights or the holders of convertible bonds or convertible profit participation certificates with conversion obligations preemptive rights in the amount to which they would be entitled following exercise of the options or conversion rights or following fulfillment of the conversion obligations. In each case, the Management Board will carefully examine whether disapplication of shareholders preemptive rights is in the Company s and therefore also in shareholders best interests. Equally, the Supervisory Board will only give the requisite consent if it believes these requirements are met. In the event that the aforementioned authorization is exercised, the Management Board will report on this to the next Annual General Meeting. The partial rights may also be underwritten by banks specified by the Management Board with the obligation of offering them to the shareholders (indirect preemptive rights). The Management Board is authorized, with the consent of the Supervisory Board, to determine the further details of the issue and its features and in particular the volume, timing, interest rate, issue price, and term or to do so in agreement with the executive bodies of the investee implementing the issue. The authorization to issue convertible bonds, bonds with warrants, profit participation rights, and/or income bonds (or combinations of these instruments) granted by the Annual General Meeting on April 29, 2010, which has not so far been used, and the corresponding contingent capital will expire when the aforementioned authorization becomes effective.
18 b) Contingent capital The share capital is contingently increased by up to 273,500,000 by issuing up to 109,400,000 new no-par value registered shares. The contingent capital increase serves to grant rights to the holders of profit participation certificates with warrants or convertible profit participation certificates, bonds with warrants, and convertible bonds that are issued in the period up to July 8, 2019, by the Company or by an affiliated company of the Company in accordance with the authorization under a) above. The new shares shall be issued at the option or conversion prices to be calculated in each case in accordance with a) above. The contingent capital increase may only be implemented to the extent that these rights are exercised or the holders with a conversion obligation fulfill such obligation. The new shares shall carry dividend rights from the beginning of the fiscal year in which they are created as a result of options or conversion rights being exercised or conversion obligations being fulfilled. The Management Board is authorized to determine the further details of the implementation of the contingent capital increase. c) Amendment of the Articles of Association Article 4(8) of the Articles of Association will be reformulated as follows: (8) The share capital shall be contingently increased by up to two hundred seventythree million five hundred thousand euros by issuing up to one hundred nine million four hundred thousand new no-par value registered shares (contingent capital). The contingent capital increase may only be implemented to the extent that a) the holders of conversion or option rights attached to profit participation certificates, convertible bonds, or bonds with warrants to be issued under agenda item 9 a by the Company or by its affiliated companies in the period up to July 8, 2019, on the basis of the authorization granted to the Management Board by resolution of the Annual General Meeting on July 9, 2014, exercise their conversion or option rights, or b) the holders of convertible profit participation certificates or convertible bonds with a conversion obligation to be issued by the Company or by its affiliated companies in the period up to July 8, 2019, on the basis of the aforementioned authorization fulfill their conversion obligation.
19 The new shares shall be issued at the option or conversion prices to be calculated in each case in accordance with the aforementioned authorization. The new registered shares shall carry dividend rights from the beginning of the fiscal year in which they are created as a result of conversion or option rights being exercised or conversion obligations being fulfilled. The Management Board is authorized to determine the further details of the implementation of the contingent capital increase. 10. Authorization to issue profit participation certificates and other hybrid bonds that meet regulatory requirements for recognition as Additional Tier 1 capital (AT1 capital) The Management Board and the Supervisory Board recommend adoption of the following: a) The Management Board is authorized to issue bearer or registered profit participation certificates on one or more occasions in the period up to July 8, 2019. At the time of their issue, the profit participation certificates must meet the conditions set out in the European legislation (in particular Article 52(1) of Regulation (EU) No. 575/2013 of the European Parliament and of the Council of June 26, 2013 hereinafter referred to as the CRR ), for the capital paid in for the grant of profit participation rights to be included in AT1 capital, or to otherwise be eligible for recognition as regulatory own funds. The Management Board is additionally authorized to issue, on one or more occasions in the period up to July 8, 2019, and instead of or in addition to profit participation certificates, other hybrid financial instruments with an unlimited term which meet the aforementioned requirements, but which, from a legal standpoint, may not be classifiable as profit participation rights, to the extent that their issue requires the approval of the Annual General Meeting under section 221 of the AktG, because of the profit-related return, for example, or for other reasons (these instruments are referred to hereinafter as hybrid bonds ). The aggregate principal amount of the profit participation certificates or hybrid bonds to be issued under this authorization may not exceed a total of 3 billion. As well as in euros, profit participation certificates and hybrid bonds may be
20 issued in the official currency of an OECD country limited to the equivalent value in euros. As well as in cash, consideration for the issue of the profit participation certificates or hybrid bonds may be provided as valuable non-cash contributions as specified by the Company, in particular including in the form of existing bonds or profit participation rights that are to be replaced by the new instruments. b) Profit participation certificates and hybrid bonds that fulfill the conditions set out under a) may also be issued indirectly by affiliated companies of the Company in Germany or abroad. In this case, the Management Board is authorized to guarantee, on behalf of the Company and as permitted by supervisory law, that the profit participation certificates or hybrid bonds will be repaid and, for its part, to grant the affiliated company non-transferable profit participation rights or hybrid bonds of the same type up to the amount of the affiliated company s issue. If this option is used, only the volume of profit participation certificates or hybrid bonds issued by the affiliated company is counted towards the limit set out under a) above. Shareholders preemptive rights to the profit participation certificates or hybrid bonds issued to the affiliated company are disapplied. c) Shareholders must generally be granted preemptive rights when profit participation certificates or hybrid bonds are issued by the Company or by an affiliated company. However, the Management Board is authorized, with the consent of the Supervisory Board, to disapply shareholders preemptive rights to the extent that (i) the profit participation certificates and hybrid bonds have bond-like features, and (ii) the issue price is not materially lower than the theoretical fair value of the profit participation certificates or hybrid bonds calculated using valuation techniques. Bond-like features require, in particular, that a) the certificates or bonds do not establish membership rights or subscription or conversion rights to shares, b) the certificates or bonds do not grant a share in the liquidation proceeds, and c) the amount of the return is not based on the amount of net income for the year, net retained profit, or the dividend (hereinafter profit-related return ).
21 No share in the liquidation proceeds within the meaning of b) is granted if the profit participation certificates or hybrid bonds do not have a fixed term and repayment is only permitted with the consent of the competent supervisory authorities. In particular, the return is not profit-related within the meaning of c) above if it depends on there being no net loss for the year or no net accumulated loss, or if it arises due to the payment of interest or the fact that interest may only be paid from distributable items within the meaning of Article 4(1) no. 128 of the CRR. If the Management Board does not use the aforementioned option to disapply preemptive rights, it is authorized, with the consent of the Supervisory Board, to disapply shareholders preemptive rights relating to fractions arising as a result of the subscription ratio and also to disapply preemptive rights to the extent necessary to grant the holders of options and/or conversion rights or the holders of convertible bonds or convertible profit participation certificates with conversion obligations preemptive rights in the amount to which they would be entitled following exercise of the options or conversion rights or following fulfillment of the conversion obligations. The Management Board will carefully examine whether disapplication of shareholders preemptive rights is in the Company s and therefore also in shareholders best interests. Equally, the Supervisory Board will only give the requisite consent if it believes these requirements are met. In the event that the aforementioned authorization is exercised, the Management Board will report on this to the next Annual General Meeting. The profit participation certificates or hybrid bonds may also be underwritten by banks specified by the Management Board with the obligation of offering them to the shareholders (indirect preemptive rights). The Management Board is authorized, with the consent of the Supervisory Board, to determine the further details of the issue and its features and in particular the volume, timing, interest rate, and issue price or to do so in agreement with the executive bodies of the investee implementing the issue.
22 Regarding agenda item 9 and agenda item 10 Report by the Management Board to the Annual General Meeting in accordance with section 221(4) in conjunction with section 186(4) of the AktG A generally strong capital base and adequate regulatory own funds provide the basis for the development of the Company s business. As well as creating new share capital directly by way of a capital increase, it may also make sense to issue convertible bonds or bonds with warrants, from which new share capital may or in the case of conversion obligations must be generated only at a later date. Moreover, other equity components recognized under banking supervision law also play a crucial role at banks in particular. The new European capital requirements set out in Regulation (EU) No. 575/2013 of the European Parliament and of the Council on prudential requirements for credit institutions and investment firms dated June 26, 2013 (Capital Requirements Regulation, referred to as the CRR for short in the following) stipulate that banks must have adequate own funds and introduce tougher requirements than were applicable under previous law. For example, the CRR also contains new rules for recognizing Additional Tier 1 capital. As a result, it has become necessary to replace previously recognized equity instruments with issues that meet the new regulatory requirements, and that will therefore continue to be recognized as Tier 1 capital going forward. In the future, such instruments will be indispensable components of the Company s own funds in addition to Common Equity Tier 1 capital (share capital and recognized reserves). In view of the resulting need to issue new instruments, the Company must have the necessary freedom to raise own funds on favorable terms in line with the market situation at any given time. The existing authorization to issue convertible bonds, bonds with warrants, profit participation certificates, and/or income bonds (or combinations of these instruments), as well as the corresponding contingent capital, granted by the Annual General Meeting on April 29, 2010, expires on April 28, 2015. The authorization requested under agenda item 9 is intended to create a new and broad basis for strengthening own funds and also to again provide the option to establish conversion obligations, in particular when certain equity ratios are not met or when the banking supervisory authority orders instruments to be converted. The floor of 50 % of the option or conversion price serves to limit the disadvantages of a conversion obligation, which the holders only suffer in the event of a significant deterioration in the Company s own funds, without unreasonably diluting shareholders interests. Furthermore, the
23 authorization is intended to enable the Company to issue profit participation certificates and hybrid bonds and thus create AT1 capital itself. The authorization requested under agenda item 10 is intended solely to create a new and broad basis for the Company to issue profit participation certificates and hybrid bonds, enabling flexible use to be made of these instruments at any time. This is intended to enable the Company to issue such instruments itself while ensuring in the event that instruments are issued by foreign subsidiaries in particular that they are recognized as AT1 capital of the Company. The goal is to enable the Company, if appropriate via its affiliated companies, to tap the German or the international capital market, depending on the market situation, and to issue the hybrid bonds both in euros and in the official currency of an OECD country. As explained in more detail below, the Management Board s option to disapply shareholders preemptive rights with the consent of the Supervisory Board is in the best interests of the Company. 1. Improvement in the capital structure in accordance with regulatory requirements and use of favorable funding opportunities As already mentioned at the beginning, a strong capital basis and the Company s supply of regulatory own funds are central to its business development. Disapplying preemptive rights gives the Company the flexibility it needs to quickly and selectively address potential investors and take advantage of favorable market conditions to issue bonds or profit participation certificates with warrants, convertible bonds or profit participation certificates, profit participation certificates, and other hybrid bonds. At the same time, the placement risk to the Company is clearly reduced since, with issues where preemptive rights are safeguarded, there is a risk that terms that have been fixed will no longer prove competitive by the time the issue is actually placed in the market, as market estimates often change substantially during the statutory subscription period. In the case of an issue where preemptive rights are disapplied, on the other hand, the Company is able to take advantage of a favorable time for allotment relatively quickly and flexibly. Practical experience clearly shows that, in the case of issues of bonds with warrants, convertible bonds, profit participation certificates, or comparable financial instruments where preemptive rights are disapplied, better terms can usually be achieved, as the issue can be placed immediately,
24 preventing the risks to the Company that affect the price. This is due to the structure of rights issues, for which the relevant legal provisions require a subscription period of at least two weeks to be observed, whereas in the case of an issue without preemptive rights, it is possible to not set the issue price until just prior to placement. In this way, an increased price risk can be avoided and the issue proceeds maximized in the interests of all shareholders, without any risk discounts. Therefore, if market conditions are correctly assessed and the Company incurs a lower premium, more funds can be generated for the Company when preemptive rights are disapplied. This enables the Company to flexibly set attractive issue terms and conditions at what it considers to be the best possible time and thus optimize its funding terms in accordance with the new regulatory requirements and in the interests of all shareholders. Overall, issues where preemptive rights are disapplied enable the Company to raise capital or fund itself much more favorably than do rights issues, irrespective of whether the aim of the issue is to raise AT1 capital. 2. Ability to respond to the supervisory authorities additional capital requirements In addition, the supervisory authorities have the power to impose capital requirements at short notice over and above the requirements of the CRR in individual cases, for example in the course of bank stress tests. In such cases, profit participation certificates or other hybrid bonds may be suitable capital instruments, depending on the actual supervisory requirement. This, too, means that the Company must be able to issue appropriate instruments quickly and flexibly if and when the need arises. If there were preemptive rights, the Company might only be able to raise AT1 capital in such cases on extremely unfavorable terms. 3. Specific aspects related to the issue of convertible profit participation certificates, profit participation certificates with warrants, convertible bonds, and bonds with warrants (regarding agenda item 9) Under section 221(4) sentence 2 of the AktG, the disapplication of preemptive rights when issuing convertible bonds or bonds with warrants is subject to section 186(3) sentence 4 of the AktG, with the necessary modifications. This states that preemptive rights may be disapplied if the capital increase against cash contributions does not