As the German Federal Financial Supervisory Authority (BaFin) rarely intervenes in the discussion of current legal topics, its latest statement published on March 30, 2023 in its BaFinJournal under the (here translated) title "Collaborative Engagement and the Attribution of Voting Rights: When Does It Get Tricky?" is all the more significant. In this statement, the BaFin examines forms of collaborative engagement with high practical relevance for attribution constellations under securities law.
CONSEQUENCES OF ACTING IN CONCERT
Institutional investors often consult with each other on ESG issues to most effectively represent their positions to the companies in which they invest.
However, this practice can cause problems under certain circumstances due to the fact that such agreements may meet certain attribution requirements of the German Securities Trading Act (WpHG) and the German Securities Acquisition and Takeover Act (WpÜG), potentially giving rise to widespread organizational and financial consequences for investors.
Such attribution could for instance trigger voting rights notification obligations, whose noncompliance may be sanctioned under the WpHG by fines and even the suspension of voting and dividend rights under certain circumstances. Moreover, if shareholders involved are attributed 30% or more of the voting rights of a listed company, the parties involved are subject to an obligation to make a mandatory offer that can be enforced by the BaFin.
LEGAL FRAMEWORK: PREREQUISITES FOR ACTING IN CONCERT
Acting in concert occurs when shareholders or their subsidiaries coordinate their behavior in relation to a listed stock corporation. Coordination in this context means that the parties involved agree on the exercise of voting rights or otherwise cooperate with the aim of permanently and significantly changing the corporate direction of the company. Agreements and other coordinated behavior in individual cases are excluded. The requirements for acting in concert are identical under the WpHG and the WpÜG.
Variant 1: Agreement on the Exercise of Voting Rights
Coordinated behavior in the form of an understanding on the exercise of voting rights exists if a shareholder and a third party agree on the exercise of voting rights for a company in which they are invested. The agreement may be formal or informal, express or implied, with the aim of exerting actual and concrete influence over the target company.
Variant 2: Permanent and Significant Change of Corporate Direction
“Acting in concert in other ways” is also a form of coordinated behavior if it occurs with the aim of permanently and significantly changing the corporate direction of the company. In contrast to agreeing on the exercise of voting rights, “acting in concert in other ways” refers to the attempt of exerting influence over the issuer by joint agreement and strategy under company law, in particular outside the annual shareholders’ meeting. As before, for attribution purposes, actual exertion of influence is not necessary; the mere intention to do so suffices.
According to the BaFin, whether a concerted practice to permanently and significantly change the corporate direction of the company occurred should not be assessed abstractly. It should depend on an examination of all the circumstances of the individual case, which must always also include an assessment of the parties’ intended changes in relation to the previous direction of the company.
One-off Agreement: BaFin Agrees with View of Federal Court of Justice
The question of whether a particular behavior constitutes an individual case becomes relevant if the parties involved reach an understanding with regard to a target company. If the understanding between the investors does not involve a voting agreement, yet aims to change the corporate direction of the company, the prerequisites for the individual case exception must be examined.
According to the case law of the German Federal Court of Justice (BGH), the determination of whether an agreement constitutes an individual case requires a formal assessment (BGH judgments of December 13, 2022, II ZR 9/21 and II ZR 14/21, para. 88 and 90 respectively), in which special consideration shall be given to the frequency of the voting behavior. The BaFin concurs with this view.
Generally, an individual case is deemed to exist if the coordinated behavior relates to an individual matter and is not part of a (coordinated) overall plan or lacks the element of continuity.
LEGAL ASSESSMENT OF CASE STUDIES BY BAFIN
In its statement, the BaFin analyzes different case studies with regard to the attribution of voting rights based on coordinated behavior.
Possible Attribution of Voting Rights on the Ground of Coordinated Behavior
According to the BaFin’s legal assessment, voting rights may be attributed on the ground of coordinated behavior if, for example, several investors jointly publicly demand changes at a company (for example in an open letter or a press release) and announce their individual voting intentions for the next annual shareholders’ meeting as an escalation mechanism.
The BaFin will treat such voting intentions that are jointly discussed and announced as an escalation mechanism as a voting agreement even if each investor individually and independently determines how it will exercise its voting rights. As such voting announcements make sufficiently specific reference to items of a shareholders' meeting and reflect a joint position of the investors, the BaFin considers the joint fixing of the voting intentions to constitute a voting agreement.
The individual case exception applies if the voting agreement concerns voting behavior for a specific single shareholders' meeting. However, if the investors’ objectives are considered to constitute an attempt to permanently and significantly change the corporate direction of the company, the individual case exception will no longer apply.
Behavior That Is Not Regarded as Coordinated Behavior
Both the discussion of ESG issues between investors as well as the joint discussion between investors and members of the company’s executive bodies are not regarded by the BaFin as coordinated behavior that can lead to the attribution of voting rights. The same applies to joint letters from investors demanding change to members of the company’s governing bodies. Nor does the BaFin see any coordinated behavior in discussing escalation strategies after a company has refused to make changes.
Finally, if an investor representative makes statements on ESG issues at an annual shareholders’ meeting and mentions the fact that the position they represent is also shared by other investors, the BaFin does not consider this as sufficient for assuming coordinated behavior.
Against the background of a possible attribution of voting rights on the ground of “acting in concert,” intentional ESG agreements between investors at listed companies must always be evaluated in advance from a legal perspective. In its statement, the BaFin has indicated that it will increasingly examine and address these constellations in the future.