I. The Transparency Register – A Recap

The 4th EU-Money-Laundering Directive (2015/849), which entered into force in mid-2015, required national legislators of EU Member States to establish, in each jurisdiction, a register for information on the beneficial owners of companies and other undertakings located in such jurisdictions (“Transparency Register”).  Echoing Justice Louis D. Brandeis’ famous metaphor of publicity as a remedy for social and industrial diseases, the Directive states that information on the beneficial ownership of companies is a key factor for tracing criminals who might otherwise hide their identity behind corporate structures.

In Germany, as reported in one of our previous blog posts, the Transparency Register has been established in late 2017.  Since October 1, 2017, all legal entities and certain other types of associations having their statutory seat in Germany have to provide information (to the extent available to them) on their beneficial owner(s), i.e. individuals holding 25% or more of capital or voting rights or able to exercise control in a comparable way, to the Transparency Register. The information to be provided comprises the name of the beneficial owner, the date of birth, the place of residency and information regarding the economic interest (e.g. the percentage of capital interest or voting rights). As of today, only certain public authorities have immediate access to the Transparency Register, and other persons or entities may only be granted access, if they can demonstrate a legitimate interest within the context of the prevention of money laundering.

Since its launch, the concept of the Transparency Register has been subject to criticism and its practical relevance for law enforcement has been limited.

  • Some have argued that the transparency achieved by the current rules goes beyond what the government should reasonably request to be disclosed by private individuals. Indeed, while targeted at criminals hiding behind corporate structures, the obligation for beneficial ownership interests in German companies to be disclosed in the Transparency Register also captures investors who legitimately seek confidentiality of their investments such as private investors or family offices.
  • Others have argued that the achieved level of transparency is not yet sufficient. They point to the fact that, under the current rules, not all major participations in German companies are recorded in the Transparency Register and there is room for circumvention.

Indeed, under the current rules, certain holding structures may not be captured by the disclosure obligations.  E.g. in cases in which an individual indirectly holds a participation (> 25% of capital or voting rights) in a German company through another corporate vehicle which is not controlled, i.e. in which the indirect investor holds 50% or less of the capital or voting rights, such individual does not qualify as beneficial owner of the German company.  In such a case, as a replacement, the managing director of the German company will be recorded in the Transparency Register as a (fictitious) beneficial owner.

II. New Rules in the Making

In mid-2018, an amendment of the 4th EU-Money-Laundering Directive (2015/849), also known as 5th EU-Money-Laundering Directive (2018/843), has been adopted at the EU level, requiring national legislators of EU Member States to make certain adjustments to the rules on the Transparency Register by January 2020.  With a view thereto, the German government has published a draft bill (Referentenentwurf) of an implementing act on May 20, 2019 (“Draft Bill”).  In short, both the 5th EU-Money-Laundering Directive and the Draft Bill seem to echo those critics who consider the current level of transparency not yet sufficient (although the most stringent proposals made by some of those critics have not been implemented).

The following are the key changes that will be introduced should the Draft Bill be enacted as proposed:

  • General access: Any member of the general public will be allowed, without having to demonstrate a legitimate interest, to access the Transparency Register and obtain information on beneficial owners.
  • Mandatory use: Persons who are subject to the obligations under the German Anti-Money Laundering Act (Geldwäschegesetz), such as banks, lawyers, notaries or tax advisors, will be required to obtain an excerpt from the Transparency Register, or other evidence of registration, before entering into a commercial relationship with a German company. Also, the Draft Bill will categorize the deposit, administration and custody of crypto assets as a financial service within the meaning of the German Banking Act (Kreditwesengesetz); as a result, persons engaging in these activities will qualify as financial services provider and, in addition to becoming subject to a license requirement under the German Banking Act, become subject to the obligations under the German Anti-Money Laundering Act.  In addition, brokers engaged in the brokering of real estate for lease (lease brokers) and certain persons active in the art sector (including art dealers, gallerists, auction houses) will be made subject to the obligations under the German Anti-Money Laundering Act and, as a consequence, have to consult the Transparency Register before entering into a commercial relationship with a German company.
  • Accuracy: Persons who are subject to the obligations under the German Anti-Money Laundering Act will be required to inform the administrator of the Transparency Register of any information contained in the Transparency Register which, based on the information available to them, appear to be inconsistent or inaccurate. The administrator will then initiate administrative procedures aimed at verifying and, if necessary, correcting the relevant information in the Transparency Register.
  • Network: The Transparency Registers of the individual EU Member States will be connected with each other through a European Platform.

III. A Hint of Brandeis

If enacted as proposed, the Draft Bill will leave the key concepts of the legal regime on the Transparency Register such as beneficial ownership and control as well as the ownership thresholds triggering the qualification as beneficial owner unchanged – the latter despite efforts aimed at lowering the relevant threshold to as low as 10% of capital or voting rights (as is the case for purposes of foreign investment control with regard to critical infrastructures).  The general trend transpiring from the proposed amendments, though, seems clear: General access; extended pool of persons subject to the obligations under the German Anti-Money Laundering Act and mandatory use by such persons of the Transparency Register; quest for accuracy. The generalized access, in particular, marks a paradigm shift: Pursuant to the 5th EU-Money-Laundering Directive, the opening of the Transparency Register to the general public is aimed at allowing greater scrutiny by civil society, including by the press, and contributing to the preservation of trust in the integrity of business transactions and of the financial system.

It remains to be seen whether, once in effect, the new rules bring about the desired effects and, as Justice Brandeis might have said, shed sunlight or electric light on German corporate structures.  Meanwhile, it is not hard to predict what might be next: Expansion of the pool of companies or undertakings subject to the registration requirements under the German Anti-Money Laundering Act and lowering of the relevant ownership thresholds.

Any investor legitimately seeking confidentiality of his or her investment holdings, such as private investors or family offices, should therefore be aware of the proposed amendments contained in the Draft Bill and any further amendments that may possibly be introduced during the legislative process or at a later stage.

On January 1, 2019, the German Act on the Strengthening of Company Pensions (Betriebsrentenstärkungsgesetz) leading to an amendment of the German Company Pensions Act (Betriebsrentengesetz), including its provisions regarding deferred compensation (Entgeltumwandlung), entered fully into force.

Deferred Compensation

Under the German Company Pensions Act, each employee is generally entitled to request from the employer that a certain part of the employee’s gross salary (up to an amount equal to 4% of the social security contribution ceiling (Beitragsbemessungsgrenze), i.e., currently EUR 3,216 per year) is used as deferred compensation for company pension purposes.  According to the newly implemented changes, employers are now obliged to provide their employees with an employer-paid top-up to the employees’ contributions to the deferred compensation.  Continue Reading Changes to Deferred Compensation in Germany

Recently, Vanguard updated its Vanguard Fund proxy voting guidelines, disclosing a proxy voting policy relating to what Vanguard considers to be overboarded directors, based on the evolving role of directors and its assessment of the time and energy required to effectively fulfill director responsibilities.  Continue Reading How Many Directorships is Too Many? Vanguard’s Evolving View

The German Federal Court of Justice (Bundesgerichtshof) recently had the opportunity to clarify a number of important practical questions of corporate law in connection with asset disposals, the allocation of responsibilities among directors and transactions concluded with board members. We summarize the three relevant decisions from 2018/2019 below. Continue Reading Recent Important Corporate Law Decisions by German Federal Court of Justice

On Friday, the SEC proposed extensive amendments to the rules governing financial disclosures by registrants about businesses they buy or sell.

The proposed amendments primarily relate to disclosures required by Rule 3-05 and Article 11 of Regulation S-X in registration statements and 1934 Act reports, and, for the most part, they would reduce the burden of preparing historical financial statements and pro forma financial information. The proposal follows a broader 2015 concept release on financial disclosures about entities other than the registrant, and it represents another step by the SEC to reduce the burdens on registrants in a careful way that does not take away information that is material to investors.

Please click here to read the full alert memorandum.

The modus operandi of shareholder activism is to agitate for change, often involving campaigns to convince other shareholders to support proposals to change the composition of the board and the company’s strategy.

Under UK law a shareholder activist, in its capacity as shareholder, can attack the board and its strategy in the press and in discussions with other shareholders free from the constraints of corporate law duties.  However, in a recent UK High Court decision, Stobart Group v Tinkler, the High Court considered a number of issues which are pertinent to the criticism of boards by shareholder activists who have nominated a director to the board.  This case is a clear warning of the risks to board nominees of shareholder activists who in furtherance of an activist campaign brief against the board in discussions with other shareholders and misuse the company’s confidential information.

Please click here to read the full alert memorandum.

In late March 2019, the Hertz Corporation and Hertz Global Holdings, Inc. (collectively, “Hertz”), filed two complaints (the “Damages Proceedings”) against its former CEO, CFO, General Counsel and a group president seeking recovery of $70 million in incentive payments and $200 million in consequential damages resulting from Hertz’s 2015 decision to restate its financial statements and an ensuing SEC settlement against Hertz and federal class action lawsuit (which was dismissed).  At the same time, the defendants in those actions each filed separate complaints (which have been consolidated in the Delaware Chancery Court) demanding advancement of their legal fees in the Damages Proceedings (the “Advancement Proceedings”).  The litigation between Hertz and its former executives raises novel questions about whether executives have a legally cognizable duty to set the right “tone at the top” and the consequences if they fail to do so.  The litigation also raises important and interesting questions regarding clawbacks and indemnification.[1]     Continue Reading Hertz Pursues Novel Theory to Hold Former Management Team Personally Liable for Restatement and Ensuing Legal Proceedings

In the wake of the Securities and Exchange Commission’s proposed clawback rules under the Dodd-Frank Wall Street Protection and Consumer Reform Act of 2010, many US public companies began implementing clawback policies.[1]  Although the proposal was originally issued in 2015 and the SEC has yet to adopt final clawback rules, instances of alleged executive misconduct in recent years has begun leading to claims under the clawback policies.  Increased scrutiny from legislators, institutional investors, shareholders and the general public has put significant pressure on boards of directors and compensation committees to exercise their rights to claw back compensation in the event of a corporate scandal.[2]

This post discusses two recent developments related to the exercise of compensation clawbacks.  The first confirms that boards should have broad discretion in deciding when to exercise a clawback, and the second discusses important indemnification and advancement issues that can arise in connection with a claim for the enforcement of a clawback policy. Continue Reading Courts Considering Clawback Claims

As discussed in our most recent blog post, on April 30, 2019, the Criminal Division of the U.S. Department of Justice (“DOJ” or “the Department”) announced updated guidance for the Criminal Division’s Evaluation of Corporate Compliance Programs (“the Guidance”).  The Guidance is relevant to the exercise of prosecutorial discretion in conducting an investigation of a corporation, determining whether to bring charges, negotiating plea or other agreements, applying sentencing guidelines and appointing monitors.[1]  The Guidance focuses on familiar factors: the adoption of a well-designed compliance program that addresses the greatest compliance risks to the company, the effective implementation of the company’s compliance policies and procedures, and the adequacy of the compliance program at the time of any misconduct and the response to that misconduct.  The Guidance makes clear that there is no one-size-fits-all compliance program and that primary responsibility for the compliance program will lie with senior and middle management and those in control functions. Continue Reading DOJ Guidance on Corporate Compliance Programs: A Checklist for Directors

On April 30, 2019, the Criminal Division of the U.S. Department of Justice announced updated guidance for the Criminal Division’s Evaluation of Corporate Compliance Programs (“the Guidance”) in charging and resolving criminal cases.  This memorandum highlights key updates and discusses the themes present across versions of the Guidance.  Overall, this newest version places greater emphasis on distilling “lessons learned” from misconduct, and on incorporating those lessons into the compliance program using objective metrics collected from monitoring and information gathering.  The Guidance also reinforces the Department’s review of third party management and the implementation of compliance tools in the M&A context.

Please click here to read the full alert memorandum.