Risk Limitation Bill (Risikobegrenzungsgesetz) passed the German...

As expected, the Risk Limitation Bill (Risikobegrenzungsgesetz) passed the German Parliament (Bundestag) in July, which intends to ban stakeholders acting in unison to influence the management of a listed company concerning its future or its overall business purpose.  Originally, it came under fire from financial investors for being overzealous in its quest for transparency, but further legal ramifications will affect investors of all sizes. This is primarily due to its effects on the Securities Acquisition & Trading Act (SATA) (Wertpapierübernahmegesetz), which means it will equally affect current and prospective shareholders in distressed German firms

The SATA governs offers to buy stock. These must be risked and traded in a regulated market, such as the stock market, as defined in the European Investment Services Directive (Wertpapierdienstleistungrichtlinie).

The act also restricts the ability of stockholders to cooperate, which is defined as stockholders exercising their voting rights in unison. The SATA is aimed at preventing one group of stockholders from gaining a position of dominance. As with the threshold in the Risk Limitation Bill, the SATA defines the dominance threshold as holding 30 percent of voting rights.

Contravention of this threshold invokes a ruling of "acting in concert" in the current legislation if it occurs at a shareholders' meeting. If the sums of voting rights from multiple stockholders acting in unison exceed 30 percent, they are obliged to bid for the remaining stock.

The scope of the SATA has been broadened by the Risk Limitation Bill, such that even an arrangement concerning the purchase of stocks may be construed as acting in concert, triggering the need to bid for the remaining stocks if their collective holding rights exceed the 30 percent threshold. This renders unlawful even indirect influence upon a corporation acting in unison.

One of the key motivations behind the Risk Limitation Bill concerns the battle against overseas financial investors, which the government sees as having a largely unwelcome impact on German businesses. Critics claim that the updated SATA nonetheless fails to even address this concern, especially considering the fact that smaller investors working together to avoid a large investor gaining a controlling interest could also be viewed as acting in concert, exacting the same requirements detailed above, including the need to bid for all the stock.

Moreover, during a reorganising or restructuring program, investors routinely collaborate and written evidence of such agreements is retained. Although it is possible to apply for exemptions in such circumstances, the SATA is imprecise on this subject. Combined with the high requirements of the Federal Finance Supervisory Authority (BAFin), which often requires an independent auditor's view of the feasibility and viability of the restructuring or reorganising plans, this an arduous and uncertain process.

This is especially pertinent in debt-equity exchanges, where equity, subject to rescue arrangements, exceeds 30 percent. Some experts even go so far as to suggest that the changes to the SATA contravene the rules governing the free movement of capital in the EC. They cite the decision of the European High Court, which stated that even curbing the appeal of buying stock is a violation of the free movement of capital.

Now that the Risk Limitation Bill has been approved, strategic investors need to be aware of their heightened risks and prepare accordingly. Careful planning on the part of investors will limit the impact of the Risk Limitation bill and its changes in the SATA, but together they still mark a definitive stance on the part of the German government to do more to prevent overseas investors taking over distressed companies or trading in their assets.

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