Takeover general meetings

First published in Noerr Public M&A-Report 01/2019

Paragraph 3 of section 3.7 of the German Corporate Governance Code (in the version of 7 February 2017, which entered into force upon publication in the Federal Gazette on 24 April 2017) recommends that in the event of a takeover offer, the management board of the target company should convene an extraordinary general meeting “at which shareholders discuss the takeover offer and, if appropriate, decide on corporate actions.” This is merely a recommendation made by the Code, meaning that the governing bodies of the company do not have to comment on this in the “Declaration of Conformity with the Code” required by sec. 161 of the German Stock Corporation Act (Aktiengesetz – AktG) if they do not follow this recommendation. However, the fact that the “takeover general meeting” has been included in the Code at all makes it clear that convening such a meeting is in line with good corporate governance in the Code Commission's assessment.

A look at the practice of public takeovers in Germany, however, sheds some doubt on this finding. In the period from 2012 to 2018, 148 takeover bids were submitted, but only three extraordinary takeover general meetings were convened by management boards (Source: Own research. It was not examined to what extent topics relevant to the offer were discussed at an ordinary general meeting held after the publication of the decision to submit a takeover offer.). Two of these general meetings were cancelled before the day of the meeting (Invitation to the Hawesko Holding AG general meeting published on 19 December 2014; invitation to the Pfeiffer Vacuum Technology AG general meeting published on 3 July 2017.). The third was not based on an independent resolution of the management board, but on a minority request (Invitation to the Rücker AG general meeting published on 26 September 2012). Since the management board members of a stock corporation normally pay particular attention to compliance with the principles of good corporate governance, especially in the “stress situation of a takeover”, this extremely small number of general meetings is surprising.

If the legal situation that a management board is exposed to when a takeover general meeting is convened is taken into account, this hardly common practice becomes more understandable: In itself, the announcement of the takeover bid is not a reason for the governing bodies of the target company to convene such a meeting. Rather, the general rule applies according to which the management board must convene a general meeting if it is “necessary in the best interests of the company” (section 121(1) 2nd alternative AktG). In this context, the management board must make an entrepreneurial decision in which it has to balance the interests of all stakeholders in an appropriate manner; however, prevailing opinion gives the management board broad decision-making scope in this respect.

A distinction has to be made between two cases here: firstly, the case in which the management board rejects the takeover offer. This leads to the question of whether it is in the interest of the company to defend itself against the offer. If the defence strategy pursued by the management board includes measures which can only be implemented with an appropriate resolution of the general meeting (e.g.an ordinary capital increase, restructurings to which the “Gelatine” doctrine of the Federal Court of Justice (Cp. Federal Court of Jusitice, judgement of26 April 2004, NZG 2004, 571 et seq. – Gelatine I; Federal Court of Jusitice, judgement of26 April 2004, NZG 2004, 575 et seq.– Gelatine II.) applies), their implementation is in the interest of the company to the extent that the defence strategy is also in its interest. In this special case, the management board will therefore convene the general meeting.

On the other hand, there are cases in which the management board welcomes the offer or is neutral towards it. There is then no need for resolutions that would have to be adopted at the general meeting. The only purpose that then remains to justify convening a general meeting in the interest of the company is to use the general meeting to consult with the shareholders on the offer. Although such a general meeting at which no resolutions are adopted is considered permissible by prevailing opinion, the interest of shareholders in obtaining information alone will not justify such a meeting of the shareholders which would involve a lot of preparatory work and incur costs. Information can normally be communicated to shareholders in a less complicated manner. There are also other ways to get a picture of the mood among shareholders which can be considered (e.g. discussions with investors), since shareholders known to the management with larger shareholdings are likely to be given more weight in this context. In this case, it is not generally necessary to hold a general meeting in the interest of the company.

This conclusion is in line with empirical findings, according to which takeover general meetings at which no resolutions were adopted were only convened in cases in which there was a public conflict between the management and bidders (or related members of the supervisory board). After clarification of the underlying personnel issues, both of these takeover general meetings were cancelled again accordingly.

This shows that the recommendation of the Code that a general meeting should be held in the event of takeover offers is doubtful in terms of legal policy. This criticism, which has already been repeatedly voiced, has led to the fact that the deletion of this regulation has been proposed during the ongoing consultations for a revision of the Code. It is to be hoped that this sensible proposal is implemented.