The German Federal Court of Justice (FCJ), in two recent judgments (case numbers II ZR 219/21 and II ZR 220/21), awarded former shareholders of a target company that accepted a takeover offer payment claims for the difference between the amount of consideration of the takeover offer and the minimum amount of compensation for shareholders that the bidder agreed within the framework of a separate agreement in relation to the conclusion of a domination and profit and loss transfer agreement (DPLTA) with the target company.
The judgments follow the line of several leading decisions of the FCJ, in which the Senate, related to transactions in the runup to takeover offers, carried out an economic analysis in the sense of equal treatment of the shareholders. With the current decisions, the FCJ now declares, with regard to the relevant period for subsequent acquisitions after a takeover offer, that individual agreements are relevant for the minimum offer price in which a block shareholder undertakes to support the conclusion of a DPLTA, if the bidder promises a minimum amount of the compensation payable in the context of the DPLTA.
According to the German Securities Acquisition and Takeover Act (Wertpapiererwerbs- und Übernahmegesetz – WpÜG), the bidder of a takeover or mandatory offer must offer the shareholders reasonable consideration. To safeguard this right of the shareholders, the WpÜG contains minimum price regulations that are based on the fundamental principle of equal treatment of shareholders.
According to the WpÜG, the bidder is obliged to pay the shareholders who have accepted the offer a cash payment in the amount of the difference if he acquires shares in the target company outside the stock exchange within one year after the publication of the result of the offer (at the end of the acceptance period) and a higher value than that stated in the offer is granted or agreed for this. According to the WpÜG, agreements on the basis of which the "transfer of title to shares can be demanded" are equivalent to a minimum price-relevant acquisition (Section 31 paragraph 6 sentence 1 WpÜG).
In both cases decided now by the FCJ, the plaintiffs held shares in a German stock corporation that was the target company of two voluntary public takeover offers pursuant to the WpÜG in 2017. The defendant in both cases is the legal successor of the original bidder and is the sole shareholder of the current main shareholder of the target company.
In April 2017, the original bidder submitted a voluntary public takeover offer to the shareholders of the target company that did not reach the minimum acceptance threshold. In July 2017, the target company published a notification according to which a certain investor E. and fund companies controlled by him (jointly, E.) held and controlled a total of 8.69% of the target company’s share capital.
On July 19, 2017, the original bidder published a second voluntary public takeover offer at a price of 66.25 euros per share in the target company, with a minimum acceptance threshold of 63% and an acceptance period until August 16, 2017. On August 18, 2017, the original bidder announced that the minimum acceptance threshold had been reached and that there would be an additional acceptance period until September 1, 2017. The plaintiffs accepted the offer and submitted their shares.
After the target company announced on August 24, 2017 that it had been informed by the original bidder of its intention to conclude a DPLTA, the original bidder and E., who at that time held 13.26% of the target company’s share capital, concluded on August 30, 2017 an English-language agreement referred to as an “irrevocable commitment” (Irrevocable Commitment). In it, E. undertook to approve a DPLTA at the target company’s general meeting, among other things, if the compensation for outside shareholders specified therein was at least 74.40 euros per share. With this agreement, the original bidder wanted to secure E.’s consent to the DPLTA because it could not achieve a majority of three-quarters of the capital represented in the resolution with its own voting rights.
Thereafter, the original bidder contributed its shares in the target company (65.82% of the target company’s share capital) to its wholly owned subsidiary N. GmbH. At the end of December 2017, N. GmbH concluded a DPLTA with the target company in which N. GmbH undertook to acquire the shares of outside shareholders for a cash compensation of 74.40 euros per share. The general meeting of the target company approved the DPLTA at the beginning of February 2018. The DPLTA was entered in the commercial register on March 20, 2018. In October 2018, N. GmbH published a public delisting tender offer at an offer price of 81.73 euros per share in the target company, which E. accepted on the basis of a previously concluded tender agreement.
In both lawsuits, the plaintiffs demanded from the defendant the difference between the price of 66.25 euros per share in the target company stated in the takeover offer and the minimum compensation of 74.40 euros per share promised to E. in the Irrevocable Commitment, for the shares tendered for acceptance of the takeover offer. Whereas the district court dismissed both lawsuits and the appeal court rejected the respective plaintiffs’ appeal against this, the FCJ allowed the appeals to the extent that a claim for the difference amount by the respective plaintiff was denied.
The FCJ overturned the contested decisions of the appeal court and ordered the defendant to pay the difference amount because it found that the arguments on the basis of which the plaintiffs' claims had been rejected do not stand up to legal scrutiny on two crucial points, namely, on the one hand, the view that the Irrevocable Commitment is not an agreement equivalent to a minimum price-relevant acquisition and, on the other hand, the view that the right to the difference amount is excluded because the Irrevocable Commitment is an agreement that is related to an acquisition of shares in connection with a legal obligation to grant compensation to shareholders.
At the heart of the FCJ’s decision is the question of whether the Irrevocable Commitment is a minimum price-relevant agreement within the meaning of Section 31 paragraph 6 sentence 1 WpÜG. After all, the Irrevocable Commitment provided for neither an immediate acquisition of shares nor a right of the original bidder to demand the delivery of shares, and the original bidder only received a commitment to approve the conclusion of the DPLTA in return for setting the minimum compensation.
The FCJ holds that, according to the prevailing view in case law and literature, an agreement by which the bidder grants a shareholder in the target company the right to tender shares in the target company or enters into an obligation to acquire the shares does not constitute an agreement that is equated to an acquisition. However, according to the FCJ, this view cannot be followed.
According to the FCJ, the wording of the law does not mean that the bidder must be able to demand the transfer of shares. Rather, Section 31 paragraph 6 sentence 1 WpÜG covers as minimum price-relevant agreements in general agreements on the basis of which the transfer of title to shares can be demanded without specifying who is entitled and who is obliged under the agreement.
The FCJ states that the regulation in the WpÜG is to prevent the circumvention of rules related to the acquisition in rem through agreements under the law of obligations. If, instead of an acquisition, an agreement under the law of obligations is concluded that enables the acquisition in rem, this agreement should be used as a basis (for example, when determining the relevant minimum price of prior acquisitions for the offer consideration). This is to ensure that the bidder sticks to the price that he himself considered reasonable at the time of the takeover bid. For the FCJ, these considerations can also be transferred to agreements that are treated as equivalent to an acquisition during the acceptance period or after the acceptance period has expired.
The FCJ holds that the principle of equal treatment is affected regardless of whether the bidder secures the acquisition of shares at a price higher than that stated in the offer or whether he enables the sale at such a price. The bidder can also indicate the price at which he is willing to acquire the shares by granting a right to tender and in this way give individual shareholders preferential treatment.
According to the FCJ it is irrelevant whether the bidder can enforce the acquisition because the protection against circumvention is not based on the bidder securing shares in the target company outside of the public offer, but on the fact that the bidder's disposition expressed in the agreement corresponds to that of a direct acquisition. According to the FCJ, the bidder can express the price he is willing to pay for the acquisition of the shares, especially when he puts the decision as to whether an acquisition will take place in the hands of a potential seller. If this price is higher than the offer price, such a disposition is associated with unequal treatment of the shareholders accepting the offer, which is to be avoided within the periods specified in the WpÜG.
The FCJ finds that the agreement, with which the original bidder secured the consent of a block shareholder to the DPLTA, contains a legal disposition of the original bidder. The Irrevocable Commitment provided for a minimum compensation for the outside shareholders in the event that the DPLTA was concluded and the agreement served to secure the majority required for the DPLTA.
For the FCJ, the application of the provision in the WpÜG is also not precluded by the fact that this acquisition of shares can only take place after the DPLTA has come into effect with entry in the commercial register and after the shareholders have exercised their option right to supply their shares against receipt of the compensation. Since the WpÜG already equates the agreement with a minimum price-relevant acquisition, the FCJ is of the opinion that no restriction can be derived from the provision with regard to when this right to tender can be exercised. Rather, with regard to the intended protection against circumvention, there is no reason for this if the bidder shows which price the bidder is willing to pay for the acquisition of the shares when concluding the agreement. The FCJ emphasizes that the legislature of the WpÜG also had in mind agreements with a postponed period of performance, which is why the claim to transfer of ownership from the agreement does not have to be due and conditional or limited agreements are also covered by the provision.
In the opinion of the FCJ, the fact that the minimum compensation agreed in the agreement was related to the amount of the compensation to be specified in the intended DPLTA does not prevent it from being taken into account as price-relevant in the sense of the WpÜG. The FCJ determines that, according to the purpose of the provision on protection against circumvention in the WpÜG, it is irrelevant on which basis the bidder bases his valuation of the shares. The decisive factor is whether the consideration granted or agreed for the acquisition is higher than that stated in the offer.
According to the WpÜG, in the case of relevant subsequent acquisitions, there is no entitlement to the difference between the offer consideration and the consideration granted or agreed for the subsequent acquisition in the case of an acquisition of shares in connection with a statutory obligation to grant compensation to shareholders of the target company and for the acquisition of the assets or of parts of the assets of the target company through a merger, division, or asset transfer (Section 31 paragraph 5 sentence 2 WpÜG).
In the context of the examination of the scope of this exclusion, which is disputed in the literature,[1] the FCJ comes to the conclusion that an agreement with which a block shareholder commits himself (in advance) to support with his voting rights the consent of the general meeting to the conclusion of a DPLTA, if the outside shareholders are offered a minimum compensation of a certain amount, is not “connected with a legal obligation to grant a compensation to shareholders of the target company” within the meaning of Section 31 paragraph 5 sentence 2 WpÜG.
In the opinion of the FCJ, the character of the provision as an exception rule suggests a narrow understanding of the concept of the required connection, so that the objective underlying the claim to the difference is not undermined, namely to ensure the equal treatment of shareholders also with regard to the prices agreed within one year after the publication of the offer result at the end of the acceptance period.
The direct scope of application of the exception rule that is linked to an acquisition of shares also speaks for narrow understanding. The legal basis for the existence of a statutory compensation claim is either laid before the bidder acquires the shares, as in the present case through the conclusion of the DPLTA, in which the controlling company undertakes, at the request of an outside shareholder of the controlled company, to acquire the shares of the controlled company against payment of the adequate compensation, or, such as in the case of incorporation, with the acquisition of the shares by the bidder.
This direct link with a statutory right to compensation corresponds to a narrow understanding of the concept of connection, also for agreements that are only equated with a minimum price-relevant acquisition under the WpÜG. If, on the other hand, agreements relating to a statutory entitlement to compensation were made possible in advance of a statutory obligation to make compensation, this would mean a considerable expansion of the scope of the exception rule.
In the opinion of the FCJ, the opening of the exception rule for compensation commitments to individual block shareholders with regard to later structural measures would enable bidders to promise special advantages in order to achieve their takeover target. This is no longer covered by the purpose of the exception rule.
These decisions will have a major impact on takeover law practice. Bidders seeking a DPLTA for the integration of a target company into their own group or for access to the target company's liquidity must subject agreements in the runup to the conclusion of the DPLTA, which only indirectly enable an acquisition of shares and do not provide for the bidder's own right of acquisition, to a most careful review to determine their minimum price relevance according to the WpÜG.
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[1] According to one view, a right to the claim for the difference under the WpÜG should also be excluded if the bidder prematurely negotiates a compensation that exceeds the offer price with a shareholder, while another view regards the exclusion rule as not applicable to such agreements.