Voting rights in German companies

When is the notification obligation triggered?

Any natural person or legal entity that holds voting rights or equivalent instruments in German companies is required to notify both the issuer and BaFin of any changes in their holdings that reach, exceed or fall below the following thresholds: 3%, 5%, 10%, 15%, 20%, 25%, 30%, 50% or 75% of the total voting rights of the issuer. The notification must be made without undue delay, which means at the latest within four trading days after the change occurs.

These notification rules are, however, far from straightforward and in many cases render the question whether a notification is required extremely complex.

What are equivalent instruments to voting rights?

The German voting rights disclosure obligations do not only cover voting rights as such, but also instruments that are regarded as equivalent to voting rights. These are instruments that give the holder the right or the possibility to acquire, sell or exercise voting rights, or that have a similar economic effect. The qualification of an instrument as equivalent to voting rights depends on the specific circumstances and often raises uncertainties.

Some examples of instruments that may be equivalent to voting rights are:

• Forward transactions, futures and call-options

• Repurchase agreements and security lending trades

• Letters of intent or irrevocables

• Sales contracts that are subject to are condition precedent

• Baskets and indices

• Capital increases or capital reductions by the issuer or the restructuring of the share capital

• Revival of voting rights attached to preferred shares

• Voting rights attributed to another entity: Such attribution may trigger notification requirements without the concerned party itself holding any shares or voting rights, for example voting rights held by a subsidiary or shares transferred by way of security

• ‘Acting in concert’: The voting rights of otherwise unrelated parties may be aggregated when the parties willingly act in concert.

What are the sanctions for breaching the German voting rights disclosure obligations?

Breaching the German voting rights disclosure obligations can have serious consequences for the holder of the voting rights or equivalent instruments. BaFin can impose the following sanctions:

• A fine of up to EUR 10 million or 5% of the total annual turnover or twice the amount of the economic benefit derived from the breach, whichever is higher
• A suspension of the voting rights for up to six months
• A publication of the breach on BaFin’s website
• A damage claim by the issuer or other shareholders

For example, in August 2022, it fined Bank of America Corporation EUR 5,100,000 for late voting rights notifications. In July 2021, it fined JPMorgan Chase Bank EUR 1,830,000 for the same reason.

How does BaFin proceed in case of a breach?

1. BaFin investigates the breach

BaFin has the authority and the tools to investigate any potential breach of the law on its own. It can use similar methods as the public prosecution in a criminal case. Sometimes, it also works with the police or local authorities to help with the investigation.

2. BaFin informs you of the procedure

While BaFin is not obliged to notify you, it often does so at an early stage of the procedure in order to let that party – often unaware that they may be in breach – know of the notification requirement and potential breach. By contrast, BaFin is under an obligation to hear the affected person.

3. BaFin sets the fine

After the hearing and the evaluation of the breach, BaFin decides how much to fine you. The amount of a BaFin fine depends on the severity of the breach and various other factors. BaFin has a lot of discretion in setting the fine, influenced by EU law. It can impose one of three maximum fines for legal persons under German law, and it usually chooses the highest one.

BaFin follows a three-step process to determine the fine amount, based on the case details and the criteria related to the offence, offender, and the affected party. These are:

(1) calculating a base amount,

(2) adjusting the base amount for the specific guilt of the affected party,

(3) considering the financial situation of the affected party.

However, the criteria that BaFin uses to set a fine are not very clear, even with existing Guidelines. This makes it hard to estimate the size of fines.

How can the fine be reduced?

If a breach of the German voting rights disclosure obligations is detected, it is advisable to act swiftly and cooperate with BaFin to reduce the fine. BaFin may take into account the following factors when determining the amount of the fine:

• The intention or negligence of the breach
• The promptness of the remedy
• The impact of the breach on the market
• The measures taken to prevent future breaches

If you need assistance with the German voting rights disclosure obligations, please contact our experienced team of lawyers who can advise you on the notification requirements, the qualification of instruments, the calculation of thresholds, the notification forms and the communication with BaFin. We can also help you with the defence and mitigation of any sanctions that may arise from a breach.

More information on the settlement procedure can be found here.