Voting rights held by shareholders who are “acting in concert” are mutually attributed for purposes of the German Securities Trading Act (“WpHG”) and the German Takeover Act (“WpÜG”). Such attribution may thus not only trigger (additional) voting rights notifications, if the relevant voting rights thresholds are reached or crossed, but also the obligation to launch a mandatory offer, if based on the voting rights so attributed a shareholder acquires control of a company. In light of these implications, the question of what type of behavior constitutes acting in concert is of high practical relevance. Unfortunately, the definition in statutory law is open-ended, and several details are heavily disputed. In its decision of September 25, 2018 (II ZR 190/17), the German Federal Court of Justice (“FCJ”) had the opportunity to clarify two important questions:
First, the coordination of shareholder behavior in an individual case does not qualify as acting in concert. According to the FCJ, the question of whether coordination among shareholders is limited to an “individual case” is to be determined applying a formal rather than substantive test. Second, mutual coordination of conduct among shareholders does not constitute acting in concert if it is aimed at maintaining an existing corporate strategy (or defining it for the first time), rather than at bringing about a permanent and material change to an existing corporate strategy.
A. ACTING IN CONCERT
Acting in concert can result from shareholders entering into an agreement to coordinate their behavior, but absent a shareholders’ agreement also from factual coordination of behavior. Pursuant to statutory law, in either case acting in concert requires (i) coordination among shareholders on the exercise of voting rights (first alternative) or (ii) collaboration of shareholders in another manner with the aim of bringing about a permanent and material change to the corporate strategy (second alternative). Notably, in the second alternative behavior outside a shareholders’ meeting which is based on a coordinated exercise of shareholder rights or of factual influence as a shareholder may suffice; even the mere intent to bring about a permanent and material change to the corporate strategy is sufficient.
By contrast, coordinated voting or behavior (and/or a respective agreement) will not trigger an attribution of voting rights under acting in concert rules, if it is limited to an individual case.
In the case at hand, the plaintiff, a shareholder of a stock corporation that had gone through insolvency plan proceedings and thereupon resumed new business activities, had requested access to a shareholders’ meeting, but the corporation had refused his attendance, arguing that he had not complied with applicable voting rights notification obligations (under German law, shareholder rights may not be exercised (and a shareholder may thus not attend a shareholders’ meeting) as long as voting rights notification obligations have not been complied with). The plaintiff thereupon sought to invalidate certain resolutions taken at said shareholders’ meeting in his absence.
Justifying the plaintiff’s exclusion from the shareholders’ meeting, the corporation argued that the shareholder had acted in concert with a former management board member of the corporation and had failed to attribute the voting rights held by such former management board member in the voting rights notification he submitted. The company claimed that the former management board member and the plaintiff had cooperated with a plan to redefine the business model of the company and to bring about a permanent and material change to its corporate strategy. According to the company, the two shareholders had planned to give effect to such strategy by means of voting their shares in a coordinated fashion regarding the termination of office of the then-acting supervisory board chairman and the election of additional supervisory board members to the then incomplete supervisory board of the company.
B. CLARIFYING THE INDIVIDUAL-CASE-EXCEPTION
The main focus of the FCJ’s decision is on the question of whether the intention of the plaintiff and the former member of the management board to vote their shares in a coordinated fashion with the aim to change the composition of the supervisory board and thereby, indirectly, give effect to a certain corporate strategy of the company, constituted a coordination in one “individual case” only, and is thus subject to the statutory exemption from acting in concert.
The issue of the applicable test when determining whether an “individual case” exists had long been an open and heavily disputed question. Lower instance courts and legal commentators couldn’t agree on whether a purely formal test was appropriate or whether substantive criteria should have to be taken into account.
While the higher regional court in Stuttgart (in line with a large group of legal commentators) applied a formal test, asking whether the cooperation or coordination among shareholders requires or is aimed at one single or several shareholder actions, the German financial regulator BaFin and other commentators have long held that a substantive test is appropriate. Based thereon, BaFin would qualify a one-time coordination of voting conduct or other cooperation as acting in concert, so long as the coordination or cooperation related to a matter that was of exceptionally material quality or had permanent effects based on a long term strategy pursued by the shareholders concerned. In other words, one-time coordination of shareholder behavior would not be viewed as occurring in an “individual case” if it was deemed exceptionally material, having permanent strategic implications for the company in question.
In its September 25 decision, the FCJ dismissed this view and held that a formal test applies, primarily based on requirements of legal certainty. According to the FCJ, the substantive test would not meet these requirements, since it would necessarily remain vague and not be clear as to what fact patterns may have an “exceptionally material quality” or “material permanent effect on corporate strategy”. This would make it impossible for shareholders to determine their voting rights notification obligations with sufficient certainty, risking the loss of voting and dividend rights attached to their shares as well as administrative sanctions should they fail to fully comply with such obligations.
Based thereon, the FCJ held that there was no “acting in concert” based on the one-time coordinated voting of shares regarding the composition of the company’s supervisory board in the case at hand.
C. MODIFYING A CORPORATE STRATEGY
In addition, the FCJ held that the requirements for the second alternative of “acting in concert” were not fulfilled either, since the parties did not intend to change an existing corporate strategy of the company.
A company’s corporate strategy is determined by its management board and includes setting the fundamental course that affects the company as a going concern. Should two or more shareholders consistently aim at influencing or changing a company’s corporate strategy in a permanent and material manner, such behavior would qualify as “acting in concert”.
In the case decided by the FCJ, the company’s corporate strategy was no longer in line with the business purpose set out in its articles of association, since the company had filed for insolvency some years ago. Hence, it had only remained an empty shell with no specific strategy and the ultimate goal of its liquidation.
Upon the resumption of business activities following an extraordinary shareholders’ meeting however, the then sole management board member, the shareholder with whom the plaintiff allegedly was acting in concert, outlined a proposal for the reorientation of the company’s business towards activities related to renewable energies, which was subsequently implemented (while the company’s business purpose set forth in its articles of association was initially not adjusted).
The FCJ held that the plaintiff and the former management board member did not envisage to change the corporate strategy, but rather support the initial corporate strategy of the company as adopted by its management board when the company came out of insolvency. Such corporate strategy had been defined by the former management board member during the time he was still in office. While this new strategy was not yet reflected in the company’s business purpose as set out in its articles of association, the management board had validly adopted such strategy for the company going forward, and the collaboration between the plaintiff and the former management board member did not aim at changing such existing strategy, but rather at maintaining it.
The FCJ confirmed the majority view in legal literature that any collaboration which aims at effectively maintaining a current strategy and/or supporting the strategy of the incumbent management board does not fulfill the requirements for a “change in corporate strategy” and therefore is irrelevant for purposes of determining an acting in concert.
The FCJ’s decision clarifies important questions in connection with a potential attribution of voting rights resulting from “acting in concert”. The court’s confirmation that coordinated support of an existing management strategy in itself does not lead to a mutual attribution of voting rights reflects the previous majority view in legal literature. By contrast, the FCJ’s ruling with regard to the “individual case” exception settles a controversial question and is highly relevant in practice. The court’s interpretation of the law will give investors significantly increased leeway in seeking to influence corporate strategy through a one-time coordinated voting of shares or other collaboration, such as a one-time vote on the composition of the supervisory board and one-time collaboration regarding restructuring or turn-around situations.