German Federal Office of Administration updates Q&As regarding the Transparency Register

• Stricter reporting obligations in multi-layer corporate structures
• De facto veto rights and blocking minorities in parent entities sufficient for beneficial ownership in subsidiaries

Under the German Anti Money Laundering Act, entities based in Germany are obligated to determine and report their beneficial owner(s) to the German Transparency Register. The beneficial owner of a German entity is in general any natural person that owns or controls that entity. In single-layer corporate structures, beneficial ownership requires a shareholding or holding of voting rights of more than 25% or other means of control. In multi-layer corporate structures, the beneficial owner of a subsidiary is any natural person that controls a parent entity which holds more than 25% of the shares or voting rights in the subsidiary or which controls the subsidiary by other means. Thus, for the determination of the beneficial owner in multi-layer corporate structures, the concept of control is key. The prerequisites of control can be quite challenging to determine in particular in complex corporate structures or in case of fiduciary arrangements. In order to facilitate compliance with the obligations placed on companies by the German Anti Money Laundering Act, the German Federal Office of Administration (Bundesverwaltungsamt – BVA), which acts as the regulatory agency for the Transparency Register, routinely publishes questions and answers regarding the Transparency Register. While the wording of the German Anti Money Laundering Act determines control in accordance with the criteria for the consolidation of accounts (majority of voting rights, right to determine the majority of the members of the company’s executive bodies, domination agreement and special-purpose vehicle), the BVA has in the recent past continuously extended the reporting obligations of German entities beyond the wording of the law to include in particular a majority of capital shares as a means of control.

As the latest step in  expanding reporting obligations, the BVA publishedupdated questions and answers regarding the Transparency Register on 19 August 2020 (‘BVA FAQ 2020/III’) for the third time this year. In the BVA FAQ 2020/III, the BVA again considerably extends the concept of control set out in the German Money Laundering Act, in particular to cases of passive control.

Companies affected by the BVA FAQ 2020/III

In its BVA FAQ 2020/III the BVA has fundamentally revised the explanations for determining the beneficial owner in the case of vetorights or rights to object.

In essence, this means significantly stricter notification obligations in multi-layer corporate structures if the parent entity has statutory, contractual or de facto veto rights or a blocking minority.

To date, beneficial ownership based on veto rights only within strict limits

According to the BVA’s previous interpretation of the law, a natural person may, within strict limits, qualify as a beneficial owner of an entity on the basis of a veto right or right of opposition at the general meeting. This requires a comprehensive veto right or opposition right with regard to decisions of the general meeting in the entity’s articles of association which enables the natural person to prevent decisions of the general meeting. In that case, according to the BVA’s interpretation, the veto right is treated as a means of control.

Accordingly, a veto right on the level of a parent entity may also lead to beneficial ownership in a subsidiary where the parent entity holds more than 25% of the shares or voting rights in the subsidiary or exercises control over the subsidiary by other means.

De facto veto right is sufficient for control

The BVA has now extended the above reasoning to de facto veto rights which enable a natural person to prevent the entity from passing resolutions on the basis of their voting rights or shareholding.

According to the BVA, such a de facto veto right exists in particular where, because of the distribution of voting rights among the shareholders, a majority at the general meeting cannot be reached without the consent of a particular shareholder. These conditions are met, for example, where the voting rights of a parent entity are shared equally among two shareholders. Where two shareholders each hold 50% of the voting rights in an entity, each shareholder may prevent a decision from being taken by the general meeting. Thus, in that case, both shareholders are beneficial owners of the parent entity and of its subsidiaries in which the parent entity directly holds more than 25% of the capital or voting rights or over which the parent entity is able to exercise similar control. If the articles of association provide for a qualified majority for (general) decisions of the general meeting, a lower share of voting rights in the parent entity may already suffice for beneficial ownership. If the articles of association provide for unanimity for decisions of the general meeting, each individual shareholder is a beneficial owner of the entity and its subsidiaries, even in the case of a purely marginal shareholding. On the other hand, according to the BVA, it is not sufficient for beneficial ownership if two or more shareholders have to cooperate in order to prevent a decision from being taken by the general meeting.

Furthermore, according to the BVA, a de facto veto right follows from an equity participation if a resolution by the general meeting requires a quorum which is based on equity participation and if a shareholder can subsequently prevent a decision of the general meeting by being absent from the meeting.

Control based on a blocking minority

In addition, according to Chapter B, point III, question 4, section 5 of the BVA FAQ 2020/III, a blocking minority of usually more than 25% of the voting rights in a parent entity is equivalent to a veto right and results in (indirect) beneficial ownership in the subsidiary. This is because fundamental decisions taken by the general meeting (e.g. amendments to the articles of association, capital measures, mergers) can generally only be prevented under these circumstances in the case of corporations (in particular German stock corporations (AG) or limited companies (GmbH); in the case of a European Stock Corporation (SE) only with more than 33.33% of the voting rights.

On the other hand, the above probably does not apply to group structures whose parent entity is a partnership. In partnerships under German law, decisions on amendments to the partnership agreement must in principle be taken unanimously in accordance with the basic concept of German partnership law, unless the partnership agreement provides for a majority decision. In fact, in the case of corporate structures where the parent entity is a partnership, it is most likely not the BVA’s intention to generally determine all the partners of the parent partnership as the beneficial owners of the subsidiaries. This is because the partners in a partnership are apparent from the commercial register anyway.

In practice, a blocking minority of more than 25% of the voting rights in AGs and SEs will in general already be disclosed through the notifications under sections 33 et seq. of the German Securities Trading Act or section 20 et seq. of the German Stock Corporation Act, so the assumption under section 20(2) of the German Money Laundering Act applies in this respect. Under this assumption, the obligation to report the beneficial owner to the Transparency Register is deemed to be fulfilled in case the beneficial owner(s) of an entity are apparent from certain registers, in particular the commercial register. However, the above does not apply if the voting rights in individual cases deviate from the capital shares. According to the BVA FAQ 2020/III, it also remains unclear whether this assumption applies to a GmbH if a shareholding of more than 25% is disclosed in the list of shareholders. After all, the list of shareholders contains only information on the shareholding, the amount of which may differ from the voting rights. The voting rights in a GmbH become apparent only from a combination of the list of shareholders and the articles of association. Although the articles of association are available in the commercial register, they cannot trigger the assumption of the first sentence of section 20(2) in conjunction with the first sentence of section 22(1) German Money Laundering Act (see also Chapter B, point IV, question 2, BVA-FAQ 2020/III). In the case of foreign parent entities, the articles of association and the requirements for a blocking minority must in any case be examined in detail based on the applicable foreign law.

A company’s own shares not taken into account

The BVA FAQ 2020/III also clarify that the shares held by a company itself are not to be included in the calculation of a natural person’s share of that company’s capital. This is in line with the rule laid down in the second sentence of section 290(4) German Commercial Code, which, through the reference of the fourth sentence of section 3(2) German Money Laundering Act, was already applicable, at least in indirect shareholding structures. However,  in the case of a one-layer corporate structure, this aspect has not yet been a matter of course within the scope of the German Anti Money Laundering Act. In particular, since, in the absence of any indication to the contrary, the BVA FAQs have suggested a formal method of calculating the share of the capital (including the company’s own shares), the change is likely to result in some shareholders exceeding the 25% or 50% threshold in multi-layer corporate structures once the entity’s own shares have been taken out of the equation.

Combination of capital shares and voting rights when determining control

The BVA FAQs have so far suggested that control within the meaning of the German Anti Money Laundering Act in a multi-layer corporate structure can only be based on either capital shares or voting rights and therefore a combination of capital and voting rights (e.g. over 25% of capital shares at first level and majority of voting rights at second level) does not lead to control.

However, it is now clear from the BVA FAQs 2020/III that the requirements for control can also be met in case of a combination of capital and voting rights.

As a result, when determining the beneficial owner in multi-layer corporate structures at second or higher levels, the existence of control within the meaning of section 3 German Anti Money Laundering Act must be determined separately for each layer of a corporate structure, i.e. detached from the rest of the structure. In particular, this determination process must include a distinction as to which legal form the entity at the relevant layer has and whether control is exercised by means of a certain number of capital shares or voting rights or by any other means. Where control is exercised by shares, a majority of capital is still required in principle, unless, as an exception, there is a capital-based quorum for the general meeting or a company holds some of its own shares. If, on the other hand, control is exercised by means of voting rights, a majority of voting rights at each level is no longer necessary. Instead, a share of voting rights of 25% plus one vote at a parent entity is normally sufficient for beneficial ownership of its subsidiaries.

Extension of beneficial ownership of founders of foundations

The BVA FAQs have so far indicated that the founder can only be identified as the beneficial owner of a foundation if he or she has an active influence on the foundation’s asset management and income distribution, i.e. in particular if he or she can actively control the distribution of the foundation’s income. The BVA FAQs 2020/III now clarify that the founder can also be considered the beneficial owner in case of a mere veto right concerning asset management and income distribution, i.e. also in cases where the founder has passive influence. In practice, this is likely to be the case much more often than active influence. It is therefore likely that a certain number of founders will now have to be reported to the Transparency Register as the beneficial owner of a foundation.

Extension of the beneficial ownership of foundation board members in subsidiaries of a foundation

As in the past, a member of the board of a foundation can only be considered a beneficial owner of a subsidiary of a foundation if he or she can exercise a dominant influence over the foundation. Up to now, the BVA FAQs have considered this requirement to be met, for example, if the foundation’s board consists of only one person. According to the newly inserted Chapter C, point III, question 9, paragraph 3 of the BVA-FAQ 2020/III, the requirements for a controlling influence over a foundation can now also be met in case of a multi-member foundation board if two board members have equal rights or if the statutes require unanimity for board decisions. In such cases, according to the BVA, both or all of the foundation board members are to be regarded as beneficial owners of the foundation’s subsidiary. Since the updates to the BVA FAQs 2020/III aim to also include cases of passive influence, it is likely that the BVA considers this requirement to have been met if all members of the board must actually cooperate in order to take board decisions and represent the foundation. Accordingly, a two-member board with joint power of representation would always meet this requirement.

If you have any questions about the content of the BVA FAQ or about the potential need for action (in particular reports to the Transparency Register, corrections of reports, requests for restriction of inspection, monetary fine proceeding or legal actions), please do not hesitate to contact us. We constantly monitor developments in the area of Transparency Register obligations and are in constant contact with the competent authorities.