Takeover regulations in the government draft on the German Future Financing Act

First published in Noerr Public M&A-Report 02/2023 

On 16th August 2023, the German government has resolved on a government draft of a law on the financing of future-proof investments (Future Financing Act – Zukunftsfinanzierungsgesetz).

The core objective of the Future Financing Act is to strengthen Germany’s position as an internationally attractive capital market. Shares are to become a more attractive capital investment by adding incentives on the demand side and strengthening the supply side by increasing the number of listed companies. The intention is to make it easier to access to capital markets and raise equity capital, particularly for start-ups, high-growth companies and small- and mediumsized enterprises (“SMEs”), which are considered drivers of innovation.

For these purposes, electronic shares are to be introduced by amending the Act on Electronic Securities (Gesetz über elektronische Wertpapiere), and stock exchange law is to undergo substantial simplifications for IPOs and in particular for SPACs.

However, the Future Financing Act also proposes amendments that have formal, procedural and substantive implications for public takeovers under the Securities Acquisition and Takeover Act. These proposed amendments in the government draft, which have changed only in minor aspects compared to the ministerial draft dated 12th April 2023, are presented below with comments.

The takeover-related amendments of the Future Financing Act are expected to come into force at the beginning of 2024. Therefore, the time frame for further amendments in the course of the parliamentary process is fairly short.

BaFin no longer to be given prior notification of the offer

The takeover procedure will immediately be relieved of the burden of a superfluous formality. In the future, bidders will no longer have to notify BaFin in advance of their decision to submit an offer before publishing it. Section 10(2), no. 3 of the Securities Acquisition and Takeover Act is to be repealed.

Although bidders have been leaving this notification to service providers anyway, the abolition is to be welcomed without reservation, as this notification has no relevance from a supervisory point of view for monitoring compliance with the requirements of the bidding procedure.

In contrast, the requirement to provide stock exchanges with prior notification remains unaffected. In addition, bidders must continue to notify BaFin (and the stock exchanges) of the decision to make a takeover bid immediately after its publication.

Changeover of the calculation of cut-off periods to “working days” – no de facto shortening of deadlines

The Future Financing Act provides for a further procedural simplification for calculating takeover deadlines. This will be changed and based on the newly introduced term “working days”.

It is general knowledge that significant cut-off periods under takeover law are currently measured in terms of “business days”. By referring to section 3(2) of the German Federal Leave Act (Bundesurlaubsgesetz), BaFin also includes Saturdays as “business days” since the term is not defined by law in the Securities Acquisition and Takeover Act. This has led to practical problems and de facto shortened deadlines in the formalised takeover procedure.

Due to this practice, the general tenday period for BaFin to review the offer pursuant to section 14(2), first sentence of the Securities Acquisition and Takeover Act may in fact be shortened because BaFin, as an authority, does not work on the Saturdays in the period. This is advantageous for the bidder, but possibly challenging for BaFin.

Similarly, the period during which bidders can amend their offers pursuant to section 21(1) of the Securities Acquisition and Takeover Act may effectively be shortened. Up to now, an amendment has been possible up to one business day prior to the expiry of the (original) acceptance period. This has sometimes led to problems for bidders. Depending on the acceptance rate, bidders generally only wish to amend their offer shortly before the deadline expires (e.g. by increasing the consideration or reducing the minimum acceptance threshold), but would have to ensure timely publication even on a Saturday. It is therefore not uncommon for bidders to publish their offers on the previous Friday as a precautionary measure.

Comparable uncertainty existed, if less relevant in practice, if bidders made their offers subject to the condition of an approving resolution of their shareholders’ meetings, which had to be procured without undue delay pursuant to section 25 of the Securities Acquisition and Takeover Act, but no later than the fifth business day prior to the expiry of the acceptance period. Counting Saturdays shifted the beginning of this period, which is to be calculated backwards, further forward. It is to be welcomed that the Future Financing Act aims to remedy this problem. The term “working days” is to apply uniformly to deadline calculations and is to replace the term “business days” in the future. Pursuant to the legal definition in section 2(9) of the draft Securities Acquisition and Takeover Act, “working days” are calendar days with the exception of Saturdays, Sundays and public holidays. This should eliminate the abovementioned problems in transaction planning with regard to Saturdays. However, the government draft still fails to clarify the question, which has already been as controversial as it is relevant in practice, of whether “public holidays” should consist of only national holidays. A restriction to national holidays would be appropriate and should be clarified.

Changing the time limit regime to working days also leads to a modification of the notification period for mandatory offers. Accordingly, it will continue to be mandatory to publish an announcement of acquisition of control pursuant to section 35(1), first sentence of the government draft Securities Acquisition and Takeover Act “without undue delay”, but at the latest within seven working days and no longer seven calendar days.

Avoidance of the deemed approval in the case of bid prohibitions

A change in the time limit for BaFin’s prohibitions of offers is intended to increase procedural legal certainty. An offer is deemed to be permitted by BaFin if the authority has not issued a prohibition during the review period of ten business days (in the future: working days). If BaFin comes to the conclusion towards the end of this period that the offer is to be prohibited pursuant to section 15 of the Securities Acquisition and Takeover Act, it is possible that the prohibition order will not take effect until the end of the ten-day examination period, as it is in any case not yet deemed to have been announced or served, and the offer is then deemed to be permitted by virtue of statutory regulation.

Section 14(2a) third sentence of the government draft Securities Acquisition and Takeover Act now provides for an automatic extension of the ten-day period by further five working days after BaFin has made the prohibition available electronically pursuant to section 4f or 4g of the Financial Services Supervision Act (Finanzdienstleistungsaufsichtsgesetz) for retrieval via its reporting and publication system “RPS”, publicly announced it or submitted to be sent by mail.

In practice, this will mean that bidders and advisors must register on the RPS in good time and ensure that BaFin activates their RPS account before a takeover procedure offcially begins. This is because the “section 10 notification” – as the first formal transaction notification – will have to be sent to BaFin via the RPS immediately after its publication. Even though the RPS is supposed to be activated within one working day, it will be advisable to initiate the registration process a few days in advance.

Finally, BaFin’s investigative powers are also being adapted to the digital age. According to section 40(1), second sentence of the government draft Securities Acquisition and Takeover Act, BaFin’s authority to issue orders regarding requests for information and submission is to extend not only to the “whether” and “what”, but also to the “how”, i.e., a form to be determined by BaFin, such as requests for information on securities transactions in a machine-analysable electronic format.

Digitalisation of the administrative procedure under takeover law

The most welcome core issue addressed by the Future Financing Act is digitalising the administrative procedure under takeover law. To this end, the amended section 45 of the government draft Securities Acquisition and Takeover Act stipulates that applications as well as legally required notifications, declarations, information or transmissions will have to be submitted to BaFin exclusively electronically via BaFin’s reporting and publication system.

The exclusivity of this rule is to be emphasised and welcomed. Signed original documents will no longer be required. This means that bidders and the target company no longer have to deal with the cumbersome logistics of signatures and physical documents that have to be sent to BaFin. It certainly raises a smile to read in the explanatory memorandum of the government draft that prior registration on the RPS is a “reasonable” expectation to be placed on bidders, especially in comparison to sending documents by mail or buying a fax machine to send them.

The digitalisation project will have a fundamental impact on the takeover procedure. In particular, offer documents will no longer have to be signed in writing; after publication, they will have to be transmitted to BaFin via the RPS together with the notification thereof. The same will apply to the reasoned opinion of the target company’s corporate bodies.

Readmitting multiple-voting shares – unclear effects on public takeovers

• In addition to formal changes in takeover law, the Future Financing Act proposes readmitting multiple-voting shares. These are primarily intended to alleviate the concerns of shareholders of start-ups and SMEs about the loss of influence and control over the strategic direction of the company that might be associated with financing from the regulated capital market.
• Readmitting multiple-voting shares represents a paradigm shift. They were abolished in 1998 and the “one share/one vote” principle was strictly implemented in order to strengthen the market for corporate control. This is because multiple voting rights have a prohibitive effect on public takeovers due to their function of securing influence. The legislator is now showing preference to this function of securing influence and breaking away from the previous rationale governing legal policy.
• However, the government draft does not contain a consistent regulation of the effects of multiple voting rights in takeover law and on the disclosure obligations of major shareholdings, giving rise to fundamental systematic questions. How is the acquisition of control to be determined in the case of multiple voting rights, especially since, according to the concept of the government draft, they are to expire upon “transfer” of the shares listed in the regular market or the open market? How are attribution and circumvention issues to be dealt with here? Is it appropriate to require concerned shareholders to apply for a discretionary exemption by BaFin from a mandatory bid in cases of passive acquisition of control, which occur when the multiple voting rights expire? How can minimum acceptance thresholds be handled in a legally watertight manner?