With some delay, the ARUG II came into force on January 1, 2020. The focus is on changes in the German Stock Corporation Act. The changes that are significant in practice relate to the remuneration of the Management Board and the Supervisory Board. There are also innovations in transactions with related parties (“related party transactions”), in communication with and the identification of shareholders, as well as newly introduced transparency requirements for professional voting right advisors and asset managers.

OVERVIEW OF THE CHANGES

1. Remuneration of the Board of Directors and the Supervisory Board

The most relevant change in practice is brought about by the new requirements for Executive Board remuneration. The legislator saw a need for action here in order to prevent excessive remuneration, as he had to find it in individual cases in large companies, in the future. However, the legislator avoids specific requirements regarding the content, in particular also regarding the exact amount of the remuneration of the management board. It is limited to the mandatory requirement to now set a maximum remuneration in an abstract remuneration system (section 87a (1) no. 1 AktG nF). In addition, the remuneration structure should be geared towards the "sustainable" and now expressly "long-term" development of the listed company (section 87 (1) sentence 2 AktG nF). According to the justification of the law, this also includes social and ecological aspects. The participation of the shareholders should bring about a concrete steering effect. This is done by means of largely non-binding general meeting resolutions on the remuneration system and remuneration report as well as the resulting transparency towards the general public. The last option in the legislative process to reduce the maximum remuneration stipulated by the general meeting is a novelty in the management board remuneration system, since the supervisory board is bound by this resolution of the general meeting, which can therefore decide on the (maximum) amount of the board remuneration (§ 87 4 AktG new version). This is done by means of largely non-binding general meeting resolutions on the remuneration system and remuneration report as well as the resulting transparency towards the general public. The last option in the legislative process to reduce the maximum remuneration stipulated by the general meeting is a novelty in the management board remuneration system, since the supervisory board is bound by this resolution of the general meeting, which can therefore decide on the (maximum) amount of the board remuneration (§ 87 4 AktG new version). This is done by means of largely non-binding general meeting resolutions on the remuneration system and remuneration report as well as the resulting transparency towards the general public. The last option in the legislative process to reduce the maximum remuneration stipulated by the general meeting is a novelty in the management board remuneration system, since the supervisory board is bound by this resolution of the general meeting, which can therefore decide on the (maximum) amount of the board remuneration (§ 87 4 AktG new version).

All in all, the possibility of reducing the maximum remuneration for the board of directors represents a small revolution in terms of remuneration for the board of directors. In practice, however, there are also other important new points to consider when determining and reporting on them.

So far, the Supervisory Board has determined the remuneration of the Management Board by concluding individual service contracts with the respective Management Board members. An abstract remuneration system in the sense of a remuneration policy could be created on a voluntary basis. Such a compensation system was also submitted to the Annual General Meeting for approval on a voluntary basis. In practice, this option was not very well received. In any case, in the context of financial reporting, the total remuneration was given in the notes and the basic report of the concrete remuneration system was presented in the management report. If a company complied with the recommendation of the previous German Corporate Governance Code (DCGK), the disclosure was based on specified remuneration tables.

According to ARUG II, the responsibility for determining the remuneration of the Management Board lies exclusively with the Supervisory Board (Sections 87 and 87a AktG nF). However, ARUG II strengthens the possibility for shareholders to express their opinion on the remuneration of the Management Board at the Annual General Meeting, albeit without obligation (section 120a (1) AktG nF). What is completely new is that management board remuneration is only mandatory on the basis of an abstract remuneration systemIt may be determined which must have been previously submitted to the Annual General Meeting (Section 87a (2) AktG nF). The vote on this is now mandatory, but has no binding effect. The remuneration system must show a maximum remuneration (“cap”) (Section 87a (1) no. 1 AktG new version). The request to reduce the maximum remuneration (section 87 (4) AktG nF) can be submitted to the Annual General Meeting by means of a supplementary proposal.

Also new is that the general meeting on the compensation reporthas to vote (section 120a (4) sentence 1 AktG new version). However, this resolution also remains non-binding (section 120a (4) sentence 2 AktG nF). This remuneration report, which was introduced by ARUG II, is a report that is independent of commercial law accounting. Unlike in the past, the Annual General Meeting will therefore have to deal twice with the Executive Board compensation, on the one hand with the approval of the compensation system and also with the approval of the compensation report. However, these two new mandatory resolutions are not expected to have explosive effects on the general meeting practice. This is due to the fact that the legislature has ruled out their contestability (section 120a (4) sentence 2 in conjunction with (1) sentence 3 AktG new version). The discussion on these agenda items is likely to be explosive,

The determination and reporting of the remuneration of the Board of Management and the Supervisory Board are as follows:

Executive compensation

1. Determination and approval of remuneration system

• Resolution of the supervisory board on a "sustainable and long-term" and "clear and understandable" remuneration system for the entire board of directors stipulating a maximum amount (section 87 a AktG nF).
• Resolution of the general meeting on the remuneration system decided by the supervisory board. Resolutions must be passed whenever there is a significant change to the remuneration system, but at least every four years (section 120a (1) sentence 1 AktG nF). There is no possibility for shareholders to submit a competing remuneration system for approval by means of a countermotion. The first decision must be made in the AGM season 2021 (Section 26j Paragraph 1 Sentence 1 EGAktG new version). In preparation for the 2021 Annual General Meeting, an approvable remuneration policy for the Executive Board should be drawn up.
• The compensation system submitted to the Annual General Meeting and the AGM must immediately on the company's website published and kept accessible for ten years (§ 120a para. 2 AktG).
• If the general meeting has not approved the remuneration system, the supervisory board must present a verified remuneration system to the next general meeting (section 120a (3) AktG new version). The review does not have to lead to an adjustment of the remuneration system, but does trigger reporting obligations (Section 87a (1) No. 11 AktG new version).

2. Setting specific board remuneration

• Determination of the Supervisory Board on the specific remuneration of the Management Board based on the remuneration system presented to the Annual General Meeting (not necessarily also approved) (Section 87a (2) AktG nF).
• The first remuneration must be set within two months of the approval of the general meeting (Section 26j Paragraph 1 Sentence 2 EGAktG new version). Exceptionally, a mere submission is not sufficient here, but the submitted compensation system only has to be applied if the approval has actually been given.
• Existing board contracts enjoy protection of existence.
• Remuneration that deviates from the remuneration system can also be temporarily set if this is "in the interest of the long-term well-being of society" and the remuneration system provides for this (section 87a (2) sentence 2 AktG nF).

3. Remuneration report

• Management and Supervisory Board reports on the actual remuneration of the Management Board in the remuneration report (Section 162 (1) sentence 1 AktG new version). The prescribed content of the remuneration report is detailed in Section 162 (1) and (2) AktG.
• Annual resolution of the general meeting on the approval of the remuneration report (section 120a (4) sentence 1 AktG new version ), for the first time in the 2022 general meeting season for the reporting year 2021. The resolution does not create any rights or obligations and is also not contestable (section 120a (4) sentence 2 in conjunction with para. 1 sentence 2 and 3 AktG new version).
• For small and medium-sized companies acc. Section 267 (1) and (2) HGB suffices to submit it to the Annual General Meeting as a separate item on the agenda for discussion (ie without passing a resolution by the Annual General Meeting) (Section 120a (5) AktG new version).
• The remuneration report and the certification mark of the auditors are on the company's website for at least ten years to publish (§ 162 para. 4 AktG).
• Failure to publish the remuneration report can result in a fine of up to EUR 25,000 (Section 405 (4) Var. 3 in conjunction with Section 1 No. 6 AktG new version). Incorrect information in the remuneration report can constitute a criminal offense that can be punished with a fine or imprisonment of up to three years (section 400 (1) no. 1 AktG nF).

4. Reduction of the maximum remuneration

• If a corresponding supplementary proposal is made, the Annual General Meeting can resolve by resolution to reduce the maximum remuneration of the members of the Management Board specified in the remuneration system (Section 87 (4) AktG new version).
• The reduction decision can only relate to a compensation system that has already been submitted to the Annual General Meeting.
• The reduction decision is binding for the Supervisory Board. However, the general meeting resolution to lower the maximum remuneration only refers to the maximum remuneration as defined in the system. The content of the maximum remuneration remains the responsibility of the Supervisory Board and results from the remuneration system.
• The reduction decision has no effect on current contracts.

Supervisory Board remuneration

In contrast, the changes in the remuneration of the Supervisory Board are limited, since the Annual General Meeting is already deciding on the remuneration of the Supervisory Board. What is new is that a decision on the remuneration must be taken at least every four years, even if the remuneration does not change (section 113 (3) AktG nF).

1. Determining the remuneration system and concrete remuneration

• A remuneration system must also be presented to the Annual General Meeting with regard to the remuneration of the Supervisory Board . The minimum disclosures correspond to those of the Management Board remuneration system (sections 113 (3) sentence 3 in conjunction with section 87a (1) sentence 2 AktG new version).
• However, since the Annual General Meeting has already decided on the specific remuneration of the Supervisory Board and the structure of the remuneration is generally fairly simple, the resolution on the remuneration system and the specific remuneration are summarized in one resolution.
• In the event of a negative vote by the Annual General Meeting, a verified remuneration system must be presented to the next Annual General Meeting (Sections 113 (3) sentence 6 in conjunction with 120a (3) AktG new version).

2. Reporting

• Reporting in the remuneration report (together with report on management board remuneration) (Section 162 (1) sentence 1 AktG new version).

practical Tips

• Affected companies
  The changes only affect companies whose shares are admitted to the regulated market. Over-the-counter values ​​(e.g. Open Market, m: access) are not affected.

• Management Board remuneration system
  The remuneration structure is to be geared towards a “sustainable” and expressly “long-term” development of the company (Section 87 (1) sentence 2 AktG nF). The previous obligation of the supervisory board to pay attention to the “sustainable development” of the company when determining the remuneration of the management board has been understood by practice and literature predominantly in terms of a “long-term development”. By naming both terms, "sustainable" and "long-term", the legislature intends to stipulate that the supervisory board should also take social and ecological considerations into account when determining remuneration, in particular the choice of remuneration incentives. However, there are no specific requirements.

  The minimum information on the remuneration system is listed in detail in Section 87a (1) AktG new version. However, this information can only be given on those points that are actually provided for in the remuneration (Section 87a (1) sentence 2 AktG new version).

  The guidelines for sustainable management board remuneration, which were published in July 2018 by a working group of well-known chairmen of the supervisory boards of listed German companies, as well as representatives of institutional investors, academics and corporate governance experts, provide information on the content of a remuneration system.

  In order to be able to temporarily deviate from the remuneration system in exceptional situations, a corresponding regulation must be included. This must (i) specify the procedure for the deviation and (ii) the components of the remuneration system from which a deviation is to be made (section 87a (2) sentence 2 AktG nF).

  The information in the remuneration system should be "clear and understandable". Legislators suggest using graphs and examples.

• Maximum remuneration What is new is the legal obligation to determine a maximum remuneration within the framework of the remuneration system (“cap”) (Section 87a (1) No. 1 AktG nF). A corresponding recommendation already existed in the DCGK.

  The Supervisory Board has scope for the design of such a cap. A fixed amount of money for each board member or group of board members would be conceivable, a total amount for all board members together, a separate determination for the chairman and full board members, or for variable and fixed remuneration components. The DCGK recommends setting a maximum remuneration for each individual member of the board. The maximum remuneration has to give concrete figures according to the recommendations of the legal committee. For this purpose, it should also be possible to base their calculation on, for example, a multiple of the average employee remuneration. It remains to be seen whether this will be well received in practice.

  The Annual General Meeting has the opportunity to decide on a reduction in the maximum remuneration (Section 87 (4) AktG new version). This requires an application to add to the agenda in accordance with Section 122 (2) AktG, which requires the usual minimum participation of 5% or EUR 500,000 in the share capital. The resolution at the general meeting requires a simple majority and the resolution can be appealed.

  The general meeting resolution to lower the maximum remuneration relates to the maximum remuneration as defined in the system. The content of the maximum remuneration remains the responsibility of the Supervisory Board and results from the remuneration system.

  Current contracts remain unaffected by the reduction decision. If a total maximum remuneration for all members of the Board of Management specified in the remuneration system is reduced, then only the sum of the newly concluded Board of Management contracts must correspond to the reduced maximum remuneration in order not to affect current remuneration obligations.

• Annual General Meeting resolution of the Executive Board remuneration system
  In order to secure the approval of the remuneration system by the Annual General Meeting, it is advisable to identify the relevant decision-makers (relevant shareholders, institutional investors and voting rights advisors) and their goals and requirements (voting guidelines) in advance. This process should be initiated in good time.

  The remuneration system is to be included in full in the invitation to the Annual General Meeting and is therefore known to the general public through its publication in the Federal Gazette. Success targets and similar parameters should therefore be designed in such a way that they do not contain any trade secrets or confidential planning.

  Even in cases where the mere "submission" of the remuneration system to the Annual General Meeting is sufficient, companies are well advised to subject the remuneration system to a thorough review and, if necessary, adjustment if the vote is negative or if the vote is not very convincing. Some professional voting rights advisors require an adjustment already at approval rates below 70%, otherwise there is a risk of refusing to discharge the supervisory board at the upcoming general meeting or of a supplementary proposal to lower the maximum remuneration.

• Annual General Meeting
  resolution of the Supervisory Board remuneration system Even if the Supervisory Board remuneration should not change, a resolution on the remuneration of the Supervisory Board members by the Annual General Meeting is required at least every four years (Section 113 (3) sentences 1 and 2 AktG new version).

• Determination of Management
  Board remuneration The Supervisory Board must determine the remuneration of the Management Board members in accordance with "a" remuneration system submitted to the Annual General Meeting for approval (Section 87a (2) sentence 1 AktG new version). The required remuneration system only has to be “presented” to the Annual General Meeting, but not actually approved. The remuneration of the Executive Board does not necessarily have to be determined in accordance with the most recently submitted remuneration system; this can also be a previously submitted remuneration system. In such a case, however, the Supervisory Board will only have to abolish the most recently submitted remuneration system in order to act in accordance with its obligations.

  Special features apply to the transition period when a remuneration system is introduced. In principle, all existing board contracts remain valid. If a new remuneration system is set up by the Supervisory Board and submitted to the Annual General Meeting, it is only after two months (the transitional provision in Section 26j EGAktG is formulated here, however, which is unclear with the stipulation “until the end of two months”) after the first approval decision (not the template) make all further remuneration decisions based on the remuneration system. Until then, current and new board members can still be remunerated according to current remuneration practices. (Section 26j (1) sentence 2 EGAktG new version). If the Executive Board remuneration system presented by the Supervisory Board for the first time is not approved,

• Determining
  the remuneration of the supervisory board The remuneration of the supervisory board is decided by the general meeting together with the remuneration system. In contrast to the board of directors, no maximum remuneration needs to be determined, since the general meeting sets the remuneration anyway.

  Accordingly, there is also the option for shareholders to submit a different remuneration system for the Supervisory Board by way of a countermotion. This option is not available in the Management Board remuneration system.

• Remuneration
  report The remuneration report must be prepared jointly for the Management Board and the Supervisory Board for the past financial year (Section 162 (1) sentence 1 AktG new version). This report must contain information about the remuneration of each individual (current and former) member of the Management Board and the Supervisory Board. This also includes information on how the maximum remuneration set for the members of the Management Board was observed. Management board remuneration must be shown individually. The remuneration report must be written and published in an understandable form.

  The auditor must formally check the remuneration report to determine whether it contains all the necessary components (section 162 (3) sentence 1 AktG nF). Unlike before, there is no content check. The audit report and the remuneration report must be published on the company's website (Section 162 (4) AktG nF). When commissioning the auditor, the audit of the remuneration report must also be provided as an additional subject of the audit. The audit firms refer to the possibility of a voluntary audit.

  The Supervisory Board must pass a resolution on the content of the remuneration report.

  The legislature has decided not to introduce the sample tables at the legislative level that are no longer included in the new DCGK. The European Commission will issue guidelines on the remuneration report, which according to the previous draft will contain a large number of tables with a level of detail that also goes beyond the tables of the DCGK 2017.

  The information required in the remuneration report in the future is more extensive and detailed than the previous information on executive board remuneration in the notes and management report. Issuers should therefore deal with the matter in good time.

  To protect personal data, there are three essential data protection regulations in Section 162 (5) AktG nF: For example, the remuneration report (i) must not contain any data that relate to the family situation of individual members of the Board of Management or the Supervisory Board. Furthermore, (ii) personal data must be removed from the compensation reports published on the website after the publication period of the compensation report of ten years. In addition, (iii) personal information on former board members must be omitted in all remuneration reports that are to be compiled ten years after the end of the financial year in which the respective member ended his / her activity. Issuers should note the relevant deadlines.

2. "Related Party Transactions"

Regulations for approval and disclosure in transactions with related companies and persons (so-called related parties, sections 111a to 111c, section 107 (3) AktG new version) have been introduced.

Related companies or persons are defined in accordance with the international accounting standards (mainly IAS 24.9) (section 111a (1) sentence 2 AktG nF). A natural person is a related party if he controls the company or is involved in its joint management, has a significant influence on the company or holds a key position in the management of the company or its parent company. "Related Party" are also all close family members of such a person. Companies are closely related if they are part of a group or if there are significant personnel links.

All "significant transactions" now require the prior approval of the Supervisory Board. In the case of a monistic SE, the Board of Directors is responsible for the approval (Section 111b (1) AktG nFiVm Section 22 (4) SEAG). A related party transaction is "material" if it, alone or together with transactions with the same related party within a current financial year, exceeds 1.5% of the total fixed and current assets in accordance with the most recent annual financial statements or consolidated financial statements. In the original bill, this threshold was significantly higher at 2.5%. According to section 111a (2) sentence 1 AktG nF, regardless of their value, transactions that are carried out in the ordinary course of business and under normal market conditions should not be considered as transactions with related parties. Listed companies must now set up an internal procedure to be able to regularly assess whether these requirements are met. The related parties involved in the transaction are to be excluded from this procedure.

In addition, the catalog provides for exceptions in accordance with Section 111a (3) AktG nF

- transactions with 100% subsidiaries,

- transactions that require the approval / authorization of the Annual General Meeting and all transactions and measures implemented in accordance with a resolution of the Annual General Meeting, the transfer of all company assets, the acquisition of treasury shares, post-employment contracts,

-compensation for board members,

- transactions by credit institutions that have been ordered or approved by the competent authority to ensure their stability,

- transactions that are offered to all shareholders under the same conditions and

- Business within contract groups. However, there is no special exception for business in the context of factual groups.

Violations of these publication obligations can be punished with a fine of up to EUR 500,000 (§§ 405 Paragraph 4 Var. 1, Paragraph 2a No. 6 in conjunction with 111c Paragraph 1 AktG new version). BaFin is responsible (section 405 (5) no. 1 a) AktG nF).

practical Tips

• These regulations apply from the entry into force, i.e. from January 1, 2020.
• A group-wide system for the continuous recording and monitoring of “related party transactions” must be set up.
• The rules of procedure of the Management Board and the Supervisory Board should be adapted to ensure that the Supervisory Board is involved in this matter.

According to the draft law, the supervisory board's approval powers can also be transferred to a supervisory board committee. If approval is refused, the Executive Board can submit the business to the Annual General Meeting for voting (Section 111b (4) sentence 1 AktG new version). Transactions with related parties requiring approval must be made public immediately (within four trading days) (section 111c (1) sentence 1 AktG nF).

practical Tips

• If consent is required, a fairness opinion may be obtained to avoid liability.
• The notice must contain all the essential information for an assessment of appropriateness, i.e. at least the nature of the relationship with the related parties, names of these people and the date and value of the transaction.
• The information must also be made publicly available on the company's website for a period of at least five years.

3. Identification of shareholders ( "Know your Shareholder") and communication with shareholders

Extensive rights and obligations of listed companies for the identification and information of their shareholders have also been newly introduced, most of which are in addition to the existing regulations on shareholder communication (§§ 67a ff. AktG nF).

Stocks of listed companies are often held through a complex chain of intermediaries. In order to enable companies to still identify their shareholders, they are granted an information right against the intermediaries regarding the identity of the shareholders. The law now passed regulates the content of this claim in accordance with Section 67d AktG nF by referring to the Implementing Regulation (EU) 2018/1212 of the European Commission of September 3, 2018 (implementing regulation). Similar regulations are already known in German law for registered shares (see Section 67 Paragraph 1 Clause 2 and Paragraph 4 AktG), but they are new for bearer shares, which approximates the bearer share to the registered share. However, the legislature has not provided any obligation to identify shareholders at certain intervals.

practical tip

• To secure the necessary majorities, the shareholder structure is regularly analyzed in the share register in the run-up to a general meeting.
• With the introduction of Section 67d AktG, this possibility now also exists for listed stock corporations with bearer shares. The information can be limited to a certain minimum participation.

Listed companies also have the obligation to provide their shareholders with information about corporate events within the meaning of Article 1 No. 3 of the Implementing Ordinance (Section 67a (1) and 6 AktG nF). A corporate event is a measure initiated by the issuer or a third party that involves the exercise of the rights associated with the shares and can influence the underlying share, such as a profit distribution or a general meeting. The information on this must be transmitted to the intermediary in the case of bearer securities (in the case of registered shares to those entered in the share register) (Section 67 a (1) sentence 1 AktG nF). The intermediaries involved then have the obligation to forward the information received to the shareholders (Section 67a (3) AktG nF).

practical tip

• The new regulations on shareholder information only apply to general meetings that are convened from September 3, 2020.

4. Transparency obligations for institutional investors, asset managers and voting rights advisors

Institutional investors, asset managers and voting rights advisors should focus more on the interests of investors (§§ 134a ff. AktG nF). For this purpose, transparency and disclosure requirements with regard to investment behavior and the business model, dealing with conflicts of interest and cooperation with other shareholders are standardized. However, institutional investors and asset managers are only subject to these obligations set out in sections 134b to 135 AktG nF if they are authorized in Germany or, in the case of a capital management company (KVG), if either the KVG itself or the fund it manages is authorized in Germany and invests in shares that are traded on a regulated market (Section 134 a (2) AktG nF).

Institutional investors and asset managers must also publish a so-called participation policy, i.e. a description of their engagement as shareholders (section 134b (1) AktG nF). In addition, they must also report how they implement this policy or why they deviate from it in individual cases (so-called “comply or explain”) and also document their voting behavior at general meetings (Section 134b (2) to (4) AktG new version). The previously non-public voting guidelines will thus be visible to all issuers and can be used to prepare the proposed resolutions for the Annual General Meeting.

practical tip

• Before a general meeting, the publications of voting rights advisers, asset managers and institutional investors relevant to the company should be analyzed in order to achieve the majority of resolutions necessary for the general meeting.

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