Recent changes in Germany regarding transparency of indirect major holdings in voting rights

February 2017 | EXPERT BRIEFING | FINANCE & INVESTMENT

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The implementation of the EU Amending Directive (2013/50/EU) to the Transparency Directive (2004/109/EC) has resulted in a couple of changes to the notification and publication requirements for major holdings of voting rights in shares of an issuer whose home country is Germany. As a consequence, in the German Securities Trading Act (WpHG) which includes the national measures to implement the provisions of the (amended) Transparency Directive, group filings have been facilitated and certain attribution rules have been amended.

Relevant changes in direct voting rights and certain financial instruments expressing indirect voting rights must be reported to the relevant issuer and to the Financial Services Supervisory Authority’s (BaFin) without undue delay. The reporting thresholds are 3 percent (which is only applicable to directly held voting rights), 5 percent, 10 percent, 15 percent, 20 percent, 25 percent, 30 percent, 50 percent and 75 percent of the voting rights.

New administrative guidance

BaFin’s level of activity regarding the interpretation of the transparency requirements remained high throughout 2016. BaFin’s list of frequently asked questions regarding changes resulting from the implementation of the Amending Directive, which had been published in 2016 and updated at the end of November 2016, provides a wide range of new administrative interpretation. The FAQ list is currently available in German language only.

Among other things, a specific focus lies on the rules governing the notification requirements for holders of certain financial instruments and the so-called ‘acting in concert’ principle. Previously, voting rights held indirectly through certain financial instruments could be attributed to another position holder if its parent company or a trustee had been involved. Other scenarios, when considering non-parental fund advisers or members of the board, required further clarification on a case-by-case basis in lack of missing explicit legal provisions and administrative publications. Thereby, BaFin’s has added further ‘pieces to the puzzle’.

Acting in concert

BaFin clarified that any indirect voting rights, which are expressed by certain financial instruments, and belong to a third party will also be attributed to a position holder in full if the position holder or its subsidiary coordinates with such third party, on the basis of an agreement or in another manner, its conduct in respect of the issuer (however, agreements in individual cases shall be excluded, as well as a coordination relating to the acquisition or sale of shares). For these purposes, ‘coordinated conduct’ requires the position holder or its subsidiary and the third party to reach a consensus on the exercise of voting rights, or collaborate in another manner with the aim of bringing about a permanent and material change to the issuer’s business strategy. Of course, this acting in concert attribution shall apply mutatis mutandis to the calculation of the percentage of voting rights held by the third party.

An allocation of voting rights by means of the acting in concert principle is no novelty in German regulatory practice, and it remained unchanged when implementing the Amending Directive, but in accordance with BaFin’s interpretation its application will now be extended to indirect voting rights held through financial instruments. In contrast to the amended Transparency Directive, which provides an attribution of voting rights only in case of an acting in concert based on an ‘agreement’ which sets out ‘obligations’ between the position holder and the third parties, the German acting in concert principle is also applicable if coordination is conducted in ‘another manner’ (for example, including a mere non-binding gentlemen’s agreement). The European Court of Justice (ECJ) will have to determine whether the ‘gold plating’ approach taken by the German lawmaker is still compliant with the objectives of the Amending Directive which is aiming at an increased level of harmonisation.

Proxy voting

In its FAQ, BaFin also clarified that any indirect voting rights in terms of financial instruments belonging to a third party will also be attributed to a position holder if the latter (or any of its subsidiaries) may exercise the rights from such financial instrument by means of proxy at its own discretion and in the absence of specific instructions from the actual holder of the financial instrument or if it has been entrusted in a similar manner. It remains unclear whether the attribution presumes a specific exercise right and, if so, what the actual requirements regarding the content of the exercise right are. On the basis of BaFin’s broad interpretation, even financial instruments such as swaps, futures, options or CFDs which do not provide for a physical delivery of the shares (but rather for the payment of a cash amount) should be covered by the attribution rules. BaFin, in general, argues that all financial instruments named by the European Securities and Markets Authority (ESMA) in its indicative and non-binding list shall qualify as relevant financial instruments for the purpose of allocation.

In addition, BaFin has announced in its FAQ that further attribution rules which, pursuant to the WpHG, are applicable to direct voting rights may, in the future, also be extended to financial instruments expressing indirect voting rights.

Fund structures

As a general rule, fund managers are imposed with voting rights for shares which are held in the funds which they manage. This applies both to internally managed funds and to externally managed funds. A parent company of the fund manager has to consolidate the voting rights held in these funds, unless the fund manager is able to declare its ‘independence’, i.e., demonstrate that these voting rights can be exercised without being influenced by its parent company. In this regard, BaFin has, for so called ‘multi-layer manager structures’ (where the fund manager is a subsidiary of another management company), given up the so-called ‘all-or nothing principle’ and clarified that a consolidation requirement is only unavoidable if such influence is given at all relevant levels of the chain.

In connection with the implementation of the Transparency Directive, an exemption from the reporting requirements has been made for the holding of shares or units in open-ended funds. Following an amendment to the relevant WpHG provisions last summer, this no longer applies to so-called ‘special funds’ – funds which only have professional or semi-professional investors. The relevant reporting requirements (which already existed prior to the implementation of the Amending Directive in Germany) have therefore been ‘revitalised’. Investors of closed-ended funds can, by no means, benefit from the above exemption.

Since the Amending Directive has been transposed into national law BaFin has started to take into account more detailed aspects of the disclosure requirements. This process is ongoing and the regulatory environment for complex corporate and fund structures remains challenging. Particular attention should be paid to derivative financial instruments relating to share positions.

Hilger von Livonius is a partner and Philipp Riedl is counsel at K&L Gates LLP. Mr von Livonius can be contacted under +49 89 321 215 331 or by email: hilger.livonius@klgates.com. Mr Riedl can be contacted on +49 89 321 215 331 or by email: philipp.riedl@klgates.com.

Hilger von Livonius and Philipp Riedl

K&L Gates LLP