Aquisition of German Publicly Traded Companies - An Introduction To The Legal Framework - Part 3

Defensive Measures During an Acquisition

The Stock Corporation Act grants the shareholders of a stock corporation the right to delegate certain powers to the company's management by authorizing certain activities that the company's management may take at a future date subject to the exercise of its business judgment. Furthermore, the Takeover Act permits the authorization by the shareholders' assembly of defensive measures against a takeover bid. The combination of these two constructs have given rise to a series of defensive measures that can successfully deter a hostile takeover bid.

Authorized Capital. The shareholders' assembly may authorize up to a 50% increase in the company's share capital for cash contributions or contributions in kind. The authorization may have a five year term and enable the management board to restrict the existing shareholders' subscription rights as to some or all of the newly issued shares. The capital increase will require the approval of the company's supervisory board, however. Furthermore, restricting the subscription rights of existing shareholders is subject to certain limitations. See also "Statutory Framework—Stock Corporation Act—Subscription Rights."

The issuance of authorized capital in connection with a business combination would enable the company to issue new shares representing up to one-third of the company's share capital following the capital increase for a contribution in kind, that could conflict with the business interests of the hostile acquiror, thus thwarting the hostile bid.

Treasury Shares. As indicated above, the shareholders of a stock corporation can authorize the management to repurchase up to 10% of its existing shares and to resell the same at a future date. The authorization can last as long as 18 months and may require the approval of the supervisory board. See also "Statutory Framework— Stock Corporation Act—Treasury Shares."

The effectiveness of treasury shares as a defensive measure is quite limited on its own ( e.g., it can be used to increase the market price of the target's shares), but may be significant if used in combination with newly issued authorized capital.

POST-ACQUISITION MEASURES

General

Once the offeror has acquired a controlling majority in the target company, it will wish to pursue one or more postacquisition measures to consolidate its control over the target company, to financially and strategically incorporate the target into its corporate group and/or to dispose of assets and consolidate its business in order to take advantage of synergies and increase the value of its equity in the target.

Some of the measures will require altering the corporate governance of the target, some affect the relationship between the target and the acquiror, some are aimed at altering the corporate structure of the target company, and others are aimed at altering the rights of minority shareholders in the target. The Stock Corporation Act limits the extent to which an acquiror can effect the foregoing and ultimately achieve its objectives. Consequently, it is important that potential acquirors plan their post-acquisition strategy, to the extent possible, prior to launching a takeover bid or pursuing the transactions that would lead to a mandatory offer.

The following is a brief summary of some of the more important measures acquirors may wish to pursue and the limitations imposed by German corporate law.

Squeeze-Out of Minority Shareholders

In many circumstances, ultimate goal in an acquisition is the ownership of 100% of a target's share capital. If feasible, this would eliminate the limitations German corporate law imposes on the management and restructuring of a stock corporation with minority shareholders.

The statute, pursuant to which the Takeover Act was adopted, included an amendment to the Stock Corporation Act that, for the first time in Germany, provides for the involuntary disposition of shares held by minority shareholders ( i.e., squeeze out). Once a shareholder holds, directly or indirectly, at least 95% of the target company's share capital, it may initiate a squeeze out procedure by proposing a resolution at a shareholders' assembly to that effect. Since the adoption of such resolution requires a simple majority, once the 95% threshold is satisfied, the procedure is but a formality.

A 95% shareholder is not required, however, to pursue a squeeze out procedure. The means by which the 95% threshold is reached are not limited to a takeover bid; the shareholder may reach the 95% threshold through a series of measures, including capital increases and business combinations.

The provisions of the Stock Corporation Act dealing with the squeeze out procedure, however, require the 95% shareholder that is pursuing the squeeze out to offer consideration that is "adequate," taking into account the financial condition of the target company. The consideration must be in cash and the 95% shareholder must present a formal report to the shareholders at the assembly that demonstrates how the consideration is determined.

The consideration is determined on the basis of a valuation involving, among other things, a form of discounted cash-flow analysis, the target company's liquidation value, and its market price. While the market price of the target's shares can act as an indicator in determining the adequacy of the consideration, case law suggests that it is neither definitive, nor does it purport to act as a floor or a ceiling in every circumstance.

In determining the adequacy of the consideration, the 95% shareholder must engage an independent court-appointed auditor that presents a fairness opinion concurrently with the 95% shareholder's report at the assembly. In addition, the shareholders will receive the financial statements of the target company for the three preceding fiscal years as well as the proposed resolution to be adopted at the shareholders' assembly.

Prior to inviting the shareholders to the assembly, the 95% shareholder must deliver to the management board of the target company an unconditional guarantee of a German financial institution in respect of the consideration to be paid to the minority...