German Corporate Governance and the Law

In addition to the German Corporate Governance Code there are many German laws and governmental initiatives that have an impact on corporate governance.

The most important developments are listed here:

2008:

In May 2008 the federal cabinet adopted a draft law, the so-called BilMoG,  to modernise accounting laws planned to come into effect in 2009. This law will bring about the biggest change on accounting laws since the adoption of the EU Directives in German law in 1985.

Also, in May 2008, the German Federal Ministry of Justice submitted a draft bill for the so-called ARUG, an Act which will implement the Shareholders' Rights Directive in Germany, the so-called ARUG which in November 2008 passed the Bundesrat and is planned to come into force effective November 1, 2009.

The ARUG addresses the following four important areas:

• Partial abolition of audit of contribution in kind

• Deregulation of proxy voting by banks

• Measures against abusive shareholder claims

• Implementation of the Shareholders' Rights Directive

In August 2008, the Risk Limitation Act was passed. One of the core aspects of the act is the extension of the scope of the acting in concert provisions.

Also in August 2008, the German government passed a draft amendment to the Foreign Trade Act. In the future, any acquisition of a share of more than 25% of the voting rights in a German-based company by a non-EU/EFTA entity may be subject to formal investigation by the Federal Ministry of Economics and subject to restrictions. Voting rights held by third parties are considered if a joint exercise of the voting rights has been agreed. The draft amendment still needs to be passed by the German Parliament. 

The Financial Market Stabilisation Act which came into force on October 18, 2008, is Germany’s response to the global financial crisis. Its aim is to create a sustainable package of instruments to stabilise financial markets, provide needed liquidity, restore the confidence of the financial market players and prevent further aggravation of the financial crisis.

More information on these Acts can be found in our DSW-newsletter. 

2007:

On January 20, 2007, the Transparency Directive Implementation Act came into force. The new law implements the European Transparency Directive and entails some significant changes to the disclosure requirements of German listed companies: the introduction of the so-called Bilanzeid.

In addition, new share ownership notification rules have been introduced, which considerably increases transparency of voting control of German listed companies.

More information on this Act can be found in our DSW-newsletter.

2005:

With the so-called UMAG which has been approved by the German Federal Council in July 2005, the governmental "ten point programme" has almost completely been settled. Most parts of the UMAG came into force on November 1, 2005 and thus effect the upcoming AGM season. The UMAG, which will significantly amend the German Stock Corporation Act (AktG) with regard to directors' potential liability centers on the following aspects:

1. Business judgement rule: In the future, management decisions will not be deemed a violation of duties, if the management board member reasonably believes that he acted for the good of the company and if his decision was based on appropriate information.

2. Enforceability of indemnities against board members: In the future, shareholders holding a one percent nominal stake in a company or a prorata amount of at least € 100,000 will be entitled to claim company's losses against management board members in their own name. Shareholder lawsuits against board members will be filtered and concentrated through preliminary court proceedings that must allow shareholder litigation. The responsible court will allow claims for damages, only if the claiming shareholders held their shares prior to the alleged wrongdoing of the director, the shareholders urged the company without success to litigate the matter on its own behalf, they allege facts that would prove gross negligence of the director and there are no important reasons, which could justify the inadmissibility of shareholder law suits. A newly implemented shareholders’ forum in the Federal Gazette (e-Bundesanzeiger) shall facilitate minority shareholders coordinating their claims.

3. Implementation of a record date: In order to facilitate especially foreign institutional investors the exercise of their votes a ‘record date’ of 21 days before the general meeting will be introduced.

4. Limitation of shareholders’ rights in the general meeting: Unfortunately, the UMAG also cuts down shareholders’ rights in the general meeting: From now on, the chairman of the general meeting may not only set an appropriate time limit on the right of a shareholder to speak but also on the right to ask questions in the general meeting. Furthermore, the management board may refrain from answering a question at the general meeting if the answer has been published on the internet site of the company for at least a period of seven days prior to the meeting and during the meeting. A number of stock listed companies used this years’ AGM season to implement a respective amendment to the articles of association approved. DSW voted against the adoption of such shareholder unfriendly rules in all cases. The extent of the questions depends on the agenda. A “standard” general meeting must be viewed differently than a general meeting where for instance important structural measures are on the agenda. Last but not least, the general meeting is the only forum where shareholders have the chance to directly talk with the management which means that the right to ask questions and discuss is already very limited.

The so-called KapMuG, which was approved in July 2005, introduces the possibility of test case litigation to establish whether market information were falsely given or suppressed: In a claim for damages as a result of wrong or misleading capital information by the company, especially by one of its directors, shareholders have the right to apply for a decision at the Higher Regional Court (Oberlandesgericht) on a premise of the basis for the claim. The court has to decide on this question, whether shareholders in at least ten pending proceedings also apply for such a decision within four months after the first application was published. The decision of the Higher Regional Court is binding for all claimants. The German Government regards the KapMuG as a ‘pilot project’ and therefore limited the law in time: until 2010.

In July 2005, the so-called VorstOG was approved by the German Federal Council. This law is designed to enhance transparency for investors as it obliges stock corporations to individually disclose what their management board members earn. In the future, companies are required to reveal the names and the individual salaries of its management board members and to include an itemisation of the benefits into performance-based and fixed components as well as other incentive compensation (e.g., stock options). Further, the disclosure requirements include benefits payable to a board member if his/her contract is terminated. For this reason, pensions and redundancy payments will have to be included. The required information shall be included in the notes of accounts. Listed stock corporations will be required to indicate the management board’s salary and benefit structure in the management report. Unfortunately, the German Government made a concession to the industry and included an opt-out rule in the law. Shareholders may allow a company to opt out of disclosure of individual management board remuneration. The requirement for non-disclosure is approval of a resolution to that effect by at least a three-quarter majority at the general meeting. Such a resolution would be effective for a maximum of five years. The law comes into force in time for the 2006 business year, so individual management income and benefits have to be published with the 2006 annual reports.

2004:

On the 1st of January 2004, the new ‘Investmentmodernisierungsgesetz’ came into force, transforming changes proposed by the EU-directive on mutual and similar funds (OGAW). This law gives investors more transparency in the reporting and allows the indirect sale of hedge funds to private investors for the first time.

In December 2004 the government enforced the ‘Bilanzrechtsreformgesetz’ covering the issue of ‘independence of the auditors’, as is included in the EU-directive.

Also, the government enforced the ‘Bilanzkontrollgesetz’ in December 2004, hereby establishing an independent enforcement authority for the consolidated financial statements of the companies, the so-called DPR.

2003:

In February of 2003, the government presented "a catalogue of measures to strengthen the integrity of companies and investors’ protection”, the so-called ten-point programme:

1. Strengthening the rights of shareholders by introducing a compensation claim by the company vs. its boards (‘Klageerzwingungsrecht’ § 147 Aktiengesetz)

2. The direct liability of both boards in the case of intentional or grossly negligent wrongful information of the capital market and the improvement of a collective assertion of shareholder claims,

3. The further development of the Corporate Governance Code,

4. A further development of the accounting rules,

5. A strengthening of the role of the auditor,

6. A supervision of the legal validity of the consolidated financial statements by an independent authority (enforcement),

7. Further development of the structure of the stock exchanges and of the law for supervision,

8. Introduction of the obligation for a prospectus also for the - not yet regulated - capital market, the so called ‘Grauer Kapitalmarkt’.

9. The securisation of the reliability of  company valuations by financial analysts and rating agencies,

10. The tightening up of criminal laws concerning offences in the field of the capital market.

On the 1st of September 2003, the new ‘Spruchverfahrensneuordnungsgesetz’ came into force. This law deals with a shortening of the legal procedure called ‚Spruchverfahren’, a legal action which shareholders can file, if they doubt the adequacy of the price. The price will then be checked by an auditor appointed by court.