German Federal High Court overrules decade old precedent and significantly eases taking companies private

This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.

In October 2013 a decision from the German Federal High Court overruled a precedent, which it had previously set in 2002, making it significantly easier to convert public companies into private companies.

Investor protection at two different levels

In Germany the requirements for publicly listed companies leaving the stock exchange are partially governed by statutory rules and regulations, but much of the development of requirements has come from case law.

Under the German Stock Exchange Act a company which intends to delist its shares must file an application with the stock exchange. Provided that delisting of the shares will not contradict the required protection for investors the stock exchange will accept the application. Details of the standards which must be fulfilled to achieve the required protection for investors are set by regulations enacted by each stock exchange. For example, the Frankfurt Stock Exchange, by far the most important stock exchange in Germany, requires trading in the shares to continue for at least six months after the publication of the announcement that the shares will be delisted, unless special protection is offered to the investors.

There has been a long history of debate as to whether corporate law should provide additional protection and set supplementary requirements for companies leaving the stock exchange. In a surprising and much debated precedent ("Macrotron") in 2002 the German Federal High Court had found that:

• the decision to delist the shares in a company from a regulated market at a stock exchange cannot be made by the management of the company alone, but requires a shareholders' vote at a shareholders' meeting; and
• either the company or its majority shareholder must make an offer to all of the outstanding shareholders to acquire their shares at an appropriate price.

Change in 2012

Irrespective of the praise and criticism the decision in Macrotron received it had set the standard. Pivotal to the decision in Macrotron was the High Court's argument that an element of any shareholder's right to property, as protected by the German constitution, was the right to freely dispose of its shares. This right would be significantly impaired by a delisting.

In a decision in 2012, the German Federal Constitutional Court ruled that this was stretching the protection required by the constitution too far. The constitution does protect the legal ability to sell shares, but not the de facto possibility of shareholders to dispose of their shares. However, this decision did not necessarily mean that the decision in Macrotron was irrelevant and it was largely believed that Mactron's principles should continue to apply, as there were other legal arguments to support the requirements for a shareholders' vote and an offer to the outstanding shareholders.

What is new now?

The arguments for continuing to use some of Macrotron's principles have now been rejected by the Federal High Court. The decision in Macrotron was specifically overruled by the Federal High Court which found that the delisting of a company's shares neither requires a shareholders' vote nor an offer to the outstanding shareholders. Among other arguments, the Federal High Court rejected the idea of using the principles which apply in case of a merger. Statutory law provides that if a listed company is merged with and into a non-listed company with the non-listed company as the surviving entity, each shareholder that voted against the shareholders' resolution approving the merger must receive an offer to buy their shares. According to the Federal High Court, these principles do not need to be applied when delisting a company's shares without a merger occurring as the protection provided under the Stock Exchange Act is sufficient.

What does this mean for investors?

The decision affects different groups of investors in different ways:

• Financial investors in German stocks: Investors in German stocks have lost the prospect of receiving an offer to buy their shares before they lose the ability to sell their shares via the stock exchange. Nevertheless, the impact on investors should be limited, as the protection provided by the German Stock Exchange Act remains. The few empirical studies which exist indicate that the announcement that trading in the shares will end in six months has no immediate adverse effect on the stock price; therefore investors should always have sufficient opportunity to sell their shares at an appropriate price via the stock exchange before the delisting becomes effective. However, investors might want to check which stock exchange the shares they are buying are traded on, as not all stock exchanges provide for such a waiting period before trading is abandoned.
• Investors targeting special situations: Investors who seek to profit from the legal process in Germany in special situations have lost an opportunity to do so. In previous years investors such, as certain hedge funds, have increasingly bought into shares which were subject to a takeover offer or where structural decisions were expected which involve shareholders' resolutions and potential mandatory offers to the minority shareholders. Some of these investors appear to focus on filing claims challenging the validity of the shareholders' resolutions or the appropriateness of the offers made to the minority shareholders. Under the new Federal High Court decisions these investors will no longer be able to exploit the legal process in these special situations.
• Strategic Buyers: For investors who intend to take over German public companies the new decision is good news. Even after a successful takeover offer, it is by no means certain that the strategic buyer will be able to squeeze-out all minority shareholders of the target company, and sometimes the buyer might not even be interested in acquiring 100% of the outstanding shares. In such scenarios, it will be possible to take the company private without requiring a shareholders' vote (which could potentially be challenged in court) and, even more importantly, without being obliged to make an offer to the outstanding shareholders.

Any information contained in this article is intended as a general review of the subjects featured and detailed specialist advice should always be taken before taking or refraining from taking any action. If you would like to discuss any of the issues raised in this article, please get in touch with your usual Olswang contact. This article was included in our Equity Capital Markets Update Q4 2013.