Transparency Register: reporting obligation regarding veto rights relaxed

Federal Office of Administration updates questions and answers regarding Transparency Register

 

The questions and answers regarding the Transparency Register updated on 9 February 2021 were published by the German Federal Office of Administration (Bundesverwaltungsamt - BVA) on 22 February 2021, (“the BVA FAQ 2021/I”).

Some aspects of latest tightening of reporting obligations reversed

The BVA’s last update of its answers to frequently asked questions (FAQ) regarding the Transparency Register dated 19 August 2020 ("the BVA FAQ 2020/III") brought with it a significant increase in the number of persons that – according to the BVA’s interpretation of the law – were required to be reported to the Transparency Register as beneficial owners of an entity. According to the BVA FAQ 2020/III, not only legal and contractual but also de facto veto rights regarding an entity subject to a reporting obligation held by the entity itself or its parent company were to be considered sufficient to establish the veto holder as the entity’s beneficial owner (see our article dated 22 September 2020).

When put into practice, this increase met with strong criticism. The main criticism was that the increase in numbers of beneficial owners in indirect shareholding structures which were to include cases that the BVA termed “preventive control” were not covered in the wording of the law. According to section 3(2), second to fourth sentences, German Anti-Money Laundering Act, in indirect shareholding structures, a beneficial owner must be able to exercise control over an intermediate company that holds more than 25% of the capital shares or voting rights in a subsidiary required to report or that exercises control over the subsidiary in a similar manner.

The BVA is now reacting to practitioners’ criticism by placing some limits on its interpretation of the law as regards “preventive control”.

Control not assumed based on statutory or contractual veto rights

According to the BVA’s interpretation of the law as expressed in the BVA FAQ 2020/III, if a shareholder has statutory or contractual veto rights, this should always be assumed to constitute “preventive control” and result in control within the meaning of section 3(2), second to fourth sentences, German Anti-Money Laundering Act.

With its BVA FAQ 2021/I, the BVA is now restricting this general legal consequence and clarifying that statutory or contractual veto rights only result in (direct) beneficial ownership in certain cases, and beneficial ownership is now to be determined on a case-by-case basis.

Control not assumed based on de facto veto rights

One of the most significant expansions expressed in the BVA FAQ 2020/III was the statement that “control by another means” was to be assumed if an individual shareholder could prevent a general meeting from passing a resolution.

Accordingly, a “dominant influence” as defined in section 3(2), second to fourth sentences German Anti-Money Laundering Act was to be deemed to exist in particular if a natural person was able to block passage of a resolution by a company’s general meeting solely due to the size of his or her participating interest in that company and the majority requirements for shareholders’ resolutions as stated in the company’s articles of association (“de facto veto right”). If a company’s articles of association provided that resolutions of the general meeting could only be passed unanimously, one of the results of this interpretation of the law was that each shareholder, even one with a marginal minority voting right, was a beneficial owner of that company.

According to the BVA, a shareholder was also to be deemed a beneficial owner if, due to the amount of that shareholder’s equity participation, that shareholder could prevent the general meeting from passing a resolution by being absent from the meeting. This prerequisite could be met in particular if, according to the articles of association, a certain amount of capital had to be represented in person in order to constitute a quorum for the general meeting’s resolutions.

Finally, according to the BVA FAQ 2020/III, achieving a blocking minority regarding fundamental resolutions to be passed by the general meeting was also to be assumed to be dominant influence on an intermediary company and thus direct beneficial ownership of a subsidiary in which the intermediate company held more than 25% of the capital shares or voting rights or exercised control in a similar manner.

This interpretation of the law led in practice to a substantial increase in the number of persons that were required to be reported to the Transparency Register as beneficial owners because blocking minorities are quite common in practice.

The references to de facto veto rights have been deleted from the BVA FAQ 2021/I, which means that now, even the BVA interprets the law in the circumstances described above, to mean that the holder of a de facto veto right will not usually be assumed to be the beneficial owner.

Foundation board members with equal rights no longer automatically beneficial owners of the foundation’s subsidiaries

Even before publishing the BVA FAQ 2020/III, the BVA stated the prerequisites under which members of a foundation’s board are the beneficial owners of the foundation’s subsidiaries. According to the BVA’s interpretation of the law, this is the case if a member of the foundation’s board can exercise dominant influence on the foundation. The BVA considers this prerequisite to be fulfilled, for example, if the foundation’s board consists of only one person.

The BVA FAQ 2020/III also provided that two foundation board members with equal rights were to be deemed beneficial owners of the foundation’s subsidiaries. If the foundation’s charter required that board decisions be unanimous, the BVA FAQ 2020/III provided that each member of the foundation’s board was to be deemed a beneficial owner of the foundation’s subsidiaries.

The literature was unanimous in criticising this interpretation of the law as incompatible with section 3(2), second to fourth sentences, German Anti-Money Laundering Act. It was also not clear in practice under what prerequisites the BVA would assume that a foundation’s board members had equal rights. There was no definition of “equal rights” in the BVA FAQ 2020/III, nor is there any in German law governing companies or groups of companies. In particular, it was not clear whether merely the requirement of joint representation by two foundation board members would constitute equal rights according to the BVA’s interpretation of the law.

In the BVA FAQ 2021/I, the BVA has now abandoned its interpretation of the law regarding dominant influence via compulsory cooperation by foundation board members, thus recognising that the members of a foundation’s board can only be beneficial owners of a subsidiary of the foundation in rare cases.

Place of residence is main place of residence

There is also clarification in the BVA FAQ 2021/I regarding the data of the beneficial owners to be reported to the Transparency Register. The BVA clarifies that, according to section 19(1) no. 3 German Anti-Money Laundering Act, the place of residence to be reported must be the main place of residence. Other places of residence need and must not be reported. Ultimately, this also means that, unlike other EU Member States, Germany does not permit a business address to be reported in the Transparency Register.

Conclusion

The changes initiated by the BVA FAQ  2021/I are to be welcomed in that they bring back legal certainty in dealing with the changes made by the BVA in its interpretation of the law in the BVA FAQ  2020/III. One opinion that the BVA continues to hold, i.e. that dominant influence can exist based on legal and contractual veto rights, must still be rejected; it is not covered by the wording of the law because sections 290(2)-(4) German Commercial Code, to which section 3(2), fourth sentence German Anti-Money Laundering Act refers to specify the definition of the term “dominant influence”, always assumes that active control is possible. The term “preventive control” is unknown in German commercial law governing groups of companies. Further restriction by the BVA of its interpretation of the law in this respect would be desirable. Until then, legal uncertainty remains as to whether the BVA’s interpretation of the law would hold up under judicial review.

For legal practitioners who conscientiously implemented the BVA FAQ 2020/III, the BVA FAQ 2021/I involves added expenditure of time and resources, as they now might have to revise their reporting to the Transparency Register for the second time within a short period of time. This necessitates substantial expenditure of time and resources, especially where complex group structures are involved. A statement by the BVA on adjusting the reports would have been desirable because, technically, an entry in the Transparency Register can be changed as either a correction or a “subsequent order”. A correction means that the entry is corrected retroactively, but a subsequent order changes the entry starting on the date of the order. But a correction of an entry in the Transparency Register is disadvantageous for the reporting entity because it always entails admitting that an incorrect entry was made. It would have been desirable if the BVA had issued an assurance that legal practitioners would not be subject to a fine if they once again change their reports to the Transparency Register solely due to another change in the BVA’s interpretation of the law.

Please feel free to contact us if you have questions regarding the content of the BVA FAQ or a potential need to act (especially reporting, corrections, applications to restrict access to records, fine proceedings or legal proceedings). We continuously monitor developments in the area of Transparency Register obligations and are in constant contact with the competent authorities.