In connection with the current economic crisis triggered by the coronavirus, the Economic Stabilisation Fund Act (Wirtschaftsstabilisierungsfondsgesetz - "ESFA") entered into force on 28 March 2020 and complements the already existing Financial Market Stabilisation Fund Act ("FMSFA").
The Economic Stabilisation Fund (Wirtschaftsstabilisierungsfonds - "ESF") established by the ESFA serves to cushion the economic impact of the coronavirus pandemic on certain companies in the real economy and is modelled on the Financial Market Stabilisation Fund (Finanzmarktstabilisierungsfonds; SoFFin), which was created in 2008 during the financial crisis with the aim of stabilising and restoring confidence in the financial system.
Article 2 of the ESFA supplements and replaces the previous Financial Market Stabilisation Acceleration Act (Finanzmarktstabilisierungsbeschleunigungsgesetz - "FMSAA") with the new Economic Stabilisation Acceleration Act (Wirtschaftsstabilisierungsbe-schleunigungsgesetz - "ESAA"). The ESAA provides for selective temporary modifications of corporate law which, in order to improve the application of the ESF, facilitate capital measures and transactions which are related to the stabilisation measures granted by the ESF. The legislator justifies the envisaged restrictions on the protection of minorities, which are in some cases substantial, with the special circumstances and with the fact that these special regulations are firmly linked to the stabilisation measures which are only applied under certain conditions and for a limited period of time.
For the scope of the ESF, the planned stabilisation measures, the conditions for application and the planned application process see our Article on the Economic Stabilisation Fund Act.
This article deals with the changes in corporate law resulting from the introduction of the ESAA.
The ESAA is based on the latest version of the FMSAA, which after its entry into force on 18 October 2008 was amended several times in subsequent years.
The main focus of the ESAA lies on adjustments to stock corporation law (both for listed and unlisted companies), but similar to the FMSAA it applies mutatis mutandis to partnerships limited by shares (KGaA) and the European stock corporation (SE) and provides rules for cooperatives. The most important change in the ESAA compared with the FMSAA is the applicability of certain provisions to companies with limited liability (GmbH) and limited partnerships (KG). According to its explanatory memorandum to the FMSAA, the legislator back then saw no reason to extend the law to such legal forms, because decision-making was not typically delayed by public shareholders. In the ESF, which focuses on the real economy rather than the financial market, this view was apparently abandoned.
In particular, the regulations on the GmbH raise some unanswered questions. In addition, the law contains editorial errors and, in some cases, still explicitly refers to companies in the financial sector. Such inconsistencies are certainly due to the fact that the ESAA had to be implemented in a very short time. We therefore anticipate that, as in the case of the FMSAA, amendments to the law will be made in the coming months, also to address the further development of the economy in times of the corona crisis.
2. Changes in Stock Corporation Law
The German Stock Corporation Act provides for relief for various types of capital measures in connection with stabilisation measures pursuant to Section 7 or Section 22 ESFA.
2.1 Utilisation of authorised capital (Section 5 ESAA)
When using existing authorised capital, the executive board may, with the consent of the supervisory board, decide on the content of the rights attached to the shares and the conditions of the share issue and, in this case, must provide the next ordinary general meeting with a written report on the capital increase and the issue of new shares. The possibility of excluding subscription rights is not legally part of such a decision on the conditions of the share issue. An exclusion of subscription rights is therefore only possible if the existing authorised capital provides for corresponding authorisation.
The new shares may be given preferential rights to profits and liquidation priority; in deviation from the current legal situation, the issue of preferred shares without voting rights without an accumulating preference is possible. However, shares issued to the ESF with preferential dividend rights and/or liquidation priority lose these rights when transferred to a third party. In this case, the ESF may determine that the preference shares are converted into ordinary shares with voting rights. The ESF may make advance payments on its contributions that release it from its obligation to make contributions.
The issue price is appropriate in any case if it corresponds to the stock market price but can also be lower with the approval of the supervisory board. However, the amount may not be less than the nominal or calculated value of the shares.
Section 5 ESAA in its earlier version generally regulated the "structure of shares" and has retained this heading. Accordingly, the provisions on other capital measures provide for the full or partial corresponding application of Section 5 ESAA.
2.2 Capital increase against contributions (Section 7 ESAA)
Section 16 (4) German Takeover Code (Wertpapiererwerbs- und Übernahmegesetz) applies to the convening of a general meeting which (inter alia) is to decide on a capital increase against contributions in connection with a stabilisation measure. Therefore, a notice period of at least 14 days applies to such a general meeting.
The resolution to increase the share capital requires only a majority of the votes cast (under otherwise applicable law: three quarters of the share capital represented, unless the articles of association provide otherwise). Deviating provisions of the articles of association are irrelevant.
Subscription rights may be excluded in whole or in part if a majority of two thirds of the votes cast or of the share capital represented, or, if half of the share capital is represented, a simple majority, so resolves (under otherwise applicable law: three quarters of the share capital represented). In this context, the exclusion of the subscription right for the admission of the ESF to take over shares shall be permissible and appropriate in any case. This likely presents an irrebuttable presumption of the objective justification of the exclusion of subscription rights as required by the Federal Court of Justice (BGH) in its settled case law.
The general meeting may resolve that the ESF may subscribe to the new shares at a price lower than the issue price if they have previously been offered to the shareholders at the issue price. A prior contribution to the assets may exempt the ESF from its obligation to make a contribution.
2.3 Capital reduction (Section 7 (6) ESAA)
Regarding a resolution on a capital reduction, the same rules on majority requirements and the convening of the general meeting apply as for the capital increase. The right to demand security in accordance with the current German Stock Corporation Act (Aktiengesetz) does not apply, among other things, if the amount of the share capital before a capital reduction is at least reached again by a capital increase resolved at the same time.
2.4 Conditional capital increase (Section 7a ESAA)
To grant conversion or subscription rights, conditional capital can be created with the majority of the votes cast at a general meeting (under otherwise applicable law: three quarters of the share capital represented). Contrary to the current German Stock Corporation Act, the nominal amount of the conditional capital is not limited to 50% of the share capital and is not offset against other conditional capital. Sections 5 (structure of shares), 7 (1) (rules for convening meetings) and (2) sentence 2 (ignorance of contradicting provisions of the articles of association to the contrary) ESAA apply accordingly.
2.5 Creation of authorised capital (Section 7b ESAA)
The creation of authorised capital by resolution of the general meeting also only requires a majority of the votes cast (under otherwise applicable law: three quarters of the share capital represented). Contrary to the current German Stock Corporation Act, the nominal amount is not limited to an amount of 50% of the share capital, and there is no offsetting against other authorised capital. Sections 5 (structure of shares), 7 (1) (rules for convening meetings) and (2) sentence 2 (irrelevance of contradicting provisions of the articles of association) as well as Section 7 (3) ESAA (in case of exclusion of subscription rights) apply accordingly.
2.6 Registration of resolutions of the general meeting (Section 7c ESAA)
The resolutions of the general meeting in accordance with Sections 7, 7a and 7b (ESAA) take effect vis-à-vis third parties upon publication of a resolution which has been applied for entry in the commercial register on the company's website, but no later than upon publication in the Federal Gazette (Bundesanzeiger); entry in the commercial register is not a prerequisite for its effectiveness. In addition, the resolutions and, if necessary, their implementation shall be registered in the commercial register unless they are obviously null and void.
Section 7c ESAA shall apply mutatis mutandis to the resolutions of the executive board and supervisory board on the basis of an authorisation pursuant to Section 1 and 7b ESAA. It remains unclear whether the simplification should also apply if the general meeting decides on the content of share rights and the conditions of the share issue, in particular the scope of the capital increase, when utilising authorised capital in accordance with Section 5 (2) ESAA.
2.7 Affiliated companies (Section 7d ESAA)
Until the end of 31 December 2021, the provisions of the SCA on controlling companies do not apply to the ESF, the Federal Government, its corporations, institutions and special funds and other related or dependent persons (with the exception of the application of provisions on the representation of employees on the supervisory board of a company controlled by the ESF.
2.8 Capital measures by third parties (Section 7e ESAA)
Section 7e ESAA stipulates that Sections 7 to 7d apply mutatis mutandis in the case of stabilisation measures if the new shares are also or exclusively subscribed by third parties, in particular within the framework of guarantees granted by the ESF.
2.9 Profit participation rights and subordinated bonds (Section 8 ESAA)
Until 31 December 2021 and with the approval of the supervisory board, the executive board of a stock corporation is authorised to issue profit participation rights and now also bonds with a qualified subordination to the ESF. The issuance does not require the approval of the general meeting and the shareholders' subscription rights can be excluded unless a conversion right is provided for. This provision shall apply accordingly to the issue of bonds for which the ESF assumes a guarantee.
2.10 Silent partnership (Section 10 ESAA)
In order to facilitate capital contributions by the ESF as a silent partner, Section 10 of the ESAA stipulates that such payments do not constitute an inter-company agreement pursuant to Section 291 et seq. German Stock Corporation Act and do not require the approval of the general meeting or registration with the commercial register. This applies accordingly if, in addition to the ESF, third parties participate as silent partners or the silent partnership is transferred to third parties in whole or in part.
The agreement may also provide for an exchange or subscription right, whereby the subscription right of shareholders is excluded in the event of conversion. However, this requires the approval or authorisation of the general meeting with a two-thirds majority of the votes cast or of the share capital represented; a simple majority is sufficient if half of the subscribed capital is represented.
Section 6 ESAA refers to the new "Act on Measures in Company, Association, Cooperative and Home Ownership Law to Combat the Effects of the SARS-CoV-2 Pandemic" (Gesetz über Maßnahmen im Gesellschafts-, Vereins-, Genossenschafts- und Wohnungseigentumsrecht zur Bekämpfung der Auswirkungen der SARS-CoV-2-Pandemie
) which facilitates the holding of general meetings, including the possibility of holding general meetings without the physical presence of shareholders (see our Article on changes in German Stock Corporation, Limited Liability Company and Conversion law
Section 7 (7) ESAA provides for joint and several liability vis-à-vis the company for shareholders who delay or inhibit a recapitalisation measure which is necessary for the company's continued existence in order to gain unjustified advantages for themselves. Irrespective of its systematic position, it is to be assumed that the liability applies to all recapitalisation measures and not only to capital increases or decreases.
For European stock corporations (SE) and partnerships limited by shares (KGaA), Sections 5 to 8 of the ESAA apply accordingly.
The ESAA also provides for general simplifications for the acquisition or issue of shares to the ESF and the federal government:
a. The economic committee or works council of a company is not required to be informed in the event of control assumption (holding at least 30% of the (attributed) voting rights) (Section 11 ESAA).
b. The notification obligations for holders of major shareholdings in publicly listed companies and the notification obligations for a major shareholding in financial institutions do not apply (Sections 12, 13 ESAA).
c. If the Federal Government, the ESF or one of their subsidiaries acquires control (i.e. shareholding of ≥30%) of a target company, the investor is exempted from the obligation under the German Takeover Code to publish such information and to make a mandatory offer.
d. Any coordination in the context of stabilisation measures between the Federal Government, the ESF or one of its subsidiaries with persons who hold voting rights in a target company indirectly or as shareholders do not qualify as Acting in Concert.
e. Inter alia, the following applies to the submission of public offers by the Federal Government or the ESF:
i. the acceptance period may not be less than two weeks (according to otherwise applicable law: four), the further acceptance period shall not apply;
ii. the threshold value for a squeeze-out under takeover law is 90% (instead of 95% as stipulated by the current laws);
iii. the minimum consideration to be paid in the event of takeover bids is based on the weighted average domestic stock exchange price during the last two weeks prior to the announcement or announcement of the intention to take over. However, this does not apply if this value is higher than the weighted average domestic stock exchange price during the period from 1 March to 27 March 2020, which is decisive in such case;
iv. the takeover consideration does not need to be increased in the event of a higher consideration paid in parallel and subsequent acquisitions.
f. Shares issued to the ESF do not require admission to the regulated market. However, this no longer applies if such shares are transferred to third parties (Section 15 ESAA).
g. The provisions of the first to third parts of the German Law against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen) do not apply to the ESF; in particular, all German provisions on merger control, on the prohibition of agreements contrary to cartel law and on the abuse of a dominant market position do not apply (Section 16 ESAA). The provisions of European merger control, however, remain applicable. According to the legislator's justification on the FMSAA, German merger control was to be excluded since the time required for such control would run counter to the purpose of the fund at the time, which was to achieve stabilisation as quickly as possible.
h. The ESAA also provides for restrictions on freedom of contract (Section 18 ESAA). If the ESF acquires, changes or sells a shareholding, this does not constitute a material reason for the termination of a contractual obligation (e.g. so-called change-of-control clause) and does not lead to an automatic termination of contractual obligations; corresponding contractual provisions are invalid. According to the unchanged wording of the law, this should only apply to companies in the financial sector, but this is probably an editorial mistake.
i. Claims for compensation or indemnification in employment contracts of members of executive bodies or other service contracts are ineffective, as far as these would grant claims due to participations of the ESF in companies.
j. The implementation of stabilisation measures must be in line with the requirements of state aid law. Stabilisation measures must therefore be notified to the European Commission. In order to prevent each individual stabilisation measure from having to be notified as individual aid, the Federal Government will notify the ESFA and the ESAA as a whole to the European Commission (just as it did at the time of the financial market stabilisation with the FMSFA and FMSAA).
3. Changes in GmbH and limited partnerships
With the introduction of the ESAA and in contrast to the FMSAA, GmbH and limited partnerships, in particular GmbH & Co KG, are also included. In the explanatory memorandum to the FMSAA, the legislator back then had taken the view that in the case of the aforementioned company forms, decision-making was not typically delayed by public shareholders.
The inclusion of regulations on the GmbH is now justified within the framework of the ESAA by the fact that in the real economy larger companies are also often constituted as GmbHs. According to the legislator simplifications are required, albeit to a lesser extent since the law on limited liability companies is less rigid in form and more flexible.
In accordance with Section 9a (1) of the ESAA, resolutions on the capital increase or reduction, the creation of authorised capital and the exclusion of subscription rights require a simple majority of the votes present, irrespective of any provisions to the contrary in the articles of association (in accordance with the law otherwise applicable or, in the case of the exclusion of subscription rights in accordance with the prevailing opinion: three quarters of the votes cast). Sections 7c sentences 1 and 2 and 7 (2) ESAA apply accordingly to the registration of such resolutions with the commercial register, so that the resolution becomes effective vis-à-vis third parties as soon as the resolution applied for registration is published on the company's website. The reference to Section 7 (2) ESAA does not appear to make sense, as the provisions set out therein are already contained in Section 9a (1) ESAA. On the other hand, a corresponding application of Section 7 (3) sentence 4 ESAA (permissibility and appropriateness of the exclusion of subscription rights) is not provided for.
Section 9a (2) ESAA refers to the simplifications for the adoption of shareholder resolutions created by the new "Act on Measures in Company, Association, Cooperative and Home Ownership Law to Combat the Effects of the SARS CoV 2 Pandemic" (see our Article on changes in the German Stock Corporation, Limited Liability Company and Conversion Law). In deviation from the current Law on Limited Liability Companies (GmbHG), resolutions can be passed in text form or in writing without the consent of all shareholders. These simplifications, however, cannot be applied to resolutions on capital increases or reductions and the creation of authorised capital, as these require notarisation by a notary.
Pursuant to Section 9a (3) ESAA, a shareholder may be excluded from the company with a majority of three quarters of the votes present in return for a settlement if this is necessary for the success of a stabilisation measure. In this context, the lower limit of the settlement payment shall be based on a company value determined by an expert opinion. The exclusion becomes effective upon adoption of the resolution, a separate action for exclusion is therefore not necessary and the exclusion is not subject to the condition precedent of payment of the settlement.
i. Since resolutions on a capital increase or reduction or the creation of authorised capital can already be passed with a simple majority of the votes present, the exclusion is the method of choice in particular if majority shareholders resist stabilisation measures.
ii. Section 9a (3) ESAA is likely to be a special form of the exclusion of a shareholder for good cause recognised in case law. The important reason is that the shareholder concerned refuses to pass a stabilisation measure that is necessary for the survival of the company.
The exclusion is always ultima ratio
and only to be applied if no other suitable and reasonable possibilities exist. With this in mind, the question arises as to why the legislator did not provide for simplification of milder methods, such as the transfer of the share concerned to a trustee or partial redemption. Considering the wording, it is also disputable whether a partial exclusion also benefits from the provision. Before an exclusion is made, it should in any case be thoroughly examined whether other, milder methods cannot be used.
iv. According to the prevailing opinion, an exclusion is subject to the condition that the settlement to be paid can be made from the free assets of the company. In the current crisis situation, especially when the need for a stabilisation measure is at stake, this is unlikely to be possible in many cases. In individual cases, it must therefore be examined whether, for example, a contribution of the remaining shareholders to the company must be made before exclusion.
v. Although the law stipulates that the lower limit of the settlement payment is based on the enterprise value, it does not specify the method by which this lower limit is to be determined. In case law, the capitalised earnings value method is usually used. According to this method, the liquidation value is only to be applied to low-income companies if the company is actually to be liquidated. However, this is not the case if the other shareholders seek a stabilisation measure. The date of the resolution is to be used as the basis for determining the value.
vi. According to the prevailing opinion, the shareholder affected by the exclusion has no voting right in the resolution but must be heard.
Sections 7e, 7f and 8 ESAA apply to GmbHs accordingly.
3.2 Limited Partnerships
The legislator justifies the inclusion of provisions on the (GmbH & Co.) KG with the fact that the unanimity principle applies to partnerships and that the provisions are intended to prevent individual minority shareholders from preventing necessary recapitalisation measures. For this reason, Section 9b ESAA stipulates that a simple majority of the shareholders participating in the resolution is sufficient in the case of resolutions of companies in the real economy that decide on the admission of the ESF as a limited partner. It remains unclear why this should not also apply to companies in the financial sector, as only Section 9b ESAA contains such restriction. No further simplifications are currently planned.
4. Insolvency Act
Further simplifications are provided for in insolvency law. Under Section 17 of the ESAA, legal acts in connection with stabilisation measures cannot be contested under the provisions of the German Insolvency Code at the expense of, among others, the ESF and the Federal Government and the legal successors who assume the rights and obligations arising from the privileged claim or security. Provisions on shareholder loans do not apply to such cases either. Furthermore, the legal principles of hidden contributions in kind do not apply.
In times of the corona crisis, the legislator created far-reaching simplifications under the ESAA, which, should however be improved, in particular with regard to GmbHs and limited partnerships. It remains to be seen how the legislator will react to further development of the crisis.
The ESFA and thus also the ESAA can be found online on the website of the Federal Law Gazette (in German language)
A synopsis that traces the changes of the ESAA to the last version of the FMSAA can be found online at: https://www.buzer.de/gesetz/8395/v237925-2020-03-28.htm (in German language)
We always keep an eye on all legal developments connected with the corona crisis. Please feel free to contact one of our experts at any time if you have questions regarding the Economic Stabilisation Fund or the current crisis.