Germany: foreign investment and the Federal Government

On Wednesday of this week, Germany's Cabinet approved legislation which will, if passed, give the Federal Government the right to veto investment in a German company of 25% or more from outside of the EU or EFTA if it is believed that the investment represents a risk to national security. According to a report in the UK's Financial Times newspaper:

The bill is a reaction to concern in Berlin about the growing weight of state-controlled sovereign wealth funds, the vast investment pools created to manage the currency reserves of fast-growing economies in Asia, Russia and the Middle East. Wednesday’s endorsement by the cabinet marks a significant milestone for the controversial draft, which will now move to parliament for final approval. The decision ends almost a year of protracted work on the text to address fears that it may contravene European Union legislation on the free movement of capital".

Germany: corporate governance code - new edition published

The German Corporate Governance Code was updated earlier this year. A copy of the new version, in English, has been published here on the ECGI website. For a copy of the new version with the changes highlighted in bold, click here.

Directors' liability discharge proposals - report published

Manifest, in conjunction with Morley Fund Management, has published a report titled "Directors' liability discharge proposals: the implications for shareholders". The report, to quote directly from it: 

.... addresses what for many investors has been a largely obscure issue, namely proposals to discharge directors of liabilities that routinely appear on shareholder meetings’ agendas in many European markets. We look at 13 European markets that have resolutions of this type – Austria, Belgium, Denmark, Finland, France, Germany, Greece, Luxembourg, the Netherlands, Portugal, Spain, Sweden and Switzerland; their legal basis and practical implications for shareholders in the voting context".

Europe: the harmonisation of insolvency law

INSOL Europe recently published a report titled Harmonisation of Insolvency Law at EU Law Level: see here (pdf). The report outlines differences between national insolvency laws which create difficulties for companies having cross-border activities or ownership within the EU and identifies areas where harmonisation would be desirable. The report also considers the extent to which the harmonisation of insolvency law could facilitate further harmonisation of company law.

The report contains surveys of the insolvency regimes in the UK, Poland, France, Germany, Spain, Italy and Sweden. References are also made to the law in Belgium and the Netherlands.

Europe: the European Private Company Statute - trade ministers supportive

As noted in this earlier post, on 25 June the European Commission published a proposal for a European Private Company Statute. The European Private Company - or SPE, after its latin name Societas Privata Europaea - will be a new European legal form designed for small and medium sized enterprises. The SPE proposal has recently passed an important hurdle: on 18 July, as reported here, the European industry ministers provided their support. This said, the UK's Financial Times newspaper has reported:

Some EU countries are known to be unhappy with particular aspects of the SPE proposals. The very low minimum capital requirement, for example, has not been greeted warmly by Germany or Austria, where critics claim that this could make it too easy for fly-by-night businesses to incorporate. So there is a possibility that more referrals to national laws could get added in as the statute makes its way through the legislative process. And that leaves many observers guarded about the SPE’s usefulness at this stage".

Germany: corporate governance developments

A the end of June, at the 7th German Corporate Governance Code Conference, Dr. Gerhard Cromme delivered his final speech as chairman of the Government Commission on the German Corporate Governance Code. In his speech, Dr Cromme discussed the development of the Code - widely known as the Cromme Code - and reflected on the German two-tier board model and issues associated with the transparency of business decisions and executive pay.  Regarding the latter, Dr Cromme observed:

In connection with cases of excessive severance payments, there were calls to shorten the term of management board contracts from five years to, say, three years. This would have limited the amount of potential several payments without introducing a severance payment cap. However, we came to the conclusion that the five-year term of office is the greater good - for reasons of planning and reliability alone, but also in the interest of a long-term corporate strategy. Only first time appointments should generally be made for a shorter term. Instead of shortening management board contracts, we introduced suggestions on the severance payment cap in 2007. At the start of this month we took this a logical stage further and upgraded the suggestions to recommendations. This means that non-compliance with this rule has to be disclosed in the annual declaration of conformity. This is transparency which will bear fruit in the long-term and change patterns of behaviour".

Further information about the recommendation on severance pay is available here and a video of the conference is available here. Interestingly, the UK's Financial Times newspaper has reported, in a piece titled "Berlin plans to curb excessive executive pay" (online edition, July 10):

Berlin is poised to crack down on what it considers 'excessive' executive pay in a move that could curtail the use of stock options in Germany. The Christian Democratic Union of Chancellor Angela Merkel has set up a working group that will start work in September on concrete proposals. These are likely to include a tightening of corporate governance rules and corporate taxation possibly as soon as the end of this year. The proposals, to be finalised in the autumn, are likely to make it into law since the CDU has the support of its coalition partner the Social Democratic party. The CDU initiative is intended to target DAX-listed companies, but would also affect executives of foreign companies who live in Germany".

NB:

[1] In the UK, under Section 188 of the Companies Act (2006), directors' service contracts exceeding 2 years (or those with any fixed or rolling notice period exceeding 2 years) require shareholder approval. This provision applies to all companies.

[2] The UK Combined Code on Corporate Governance (June 2008) provides:

B.1.6 Notice or contract periods should be set at one year or less. If it is necessary to offer longer notice or contract periods to new directors recruited from outside, such periods should reduce to one year or less after the initial period.

Germany: draft copy of revised Code available in English

A copy in English of the draft revised Code published last week by the Government Commission on the German Corporate Governance Code is now available: see here (pdf).

Germany: draft of revised Code published

The Government Commission on the German Corporate Governance Code met last last week to recommend changes to the Code. The changes focus on gender diversity on supervisory boards as well as board training and education. For further information see the press release published following the meeting, available in English here (pdf). A draft of the new Code has not yet been published in English but a copy, in German, is available here (pdf).

Update (3 June 2010): a copy of the draft code, in English, is available here (pdf).

Europe: short selling measures - CESR updates summary of regulators' actions

Following the restrictions imposed on naked short selling by BaFin in Germany (see here), the Committee of European Securities Regulators has updated its very useful summary of the measures taken by its members with regard to short selling: see here (pdf).

Europe: Commission begins infringement proceedings against Germany

The European Commission has begun infringement proceedings against Germany following its failure to comply with the European Court of Justice's decision in Commission of the European Communities v Federal Republic of Germany (Case C-112/05).  The European Court of Justice held that several parts of the so-called "VW law" breached the EC Treaty provisions on the free movement of capital.  Further information is available in this press release from the Commission and this report from the UK's Times newspaper. 

Europe: European Company (SE) - study and consultation

The European Commission has launched a consultation the purpose of which is to test the results of a study by Ernst & Young concerning the operation of the European Company Statute. The following background information is provided in the accompanying press release:

The European Company Statute, commonly known by its Latin name of 'Societas Europaea' or SE, was adopted on 8 October 2001, after more than 30 years of negotiation, and became available for use on 8 October 2004. A total of 431 SEs were registered as at 10 September 2009.

The SE has proved to be very popular in some Member States. Well known examples of successful SEs are Allianz, BASF, Porsche, Fresenius and MAN from Germany, SCOR from France, Elcoteq from Luxembourg and Strabag from Austria. However, in other Member States the SE has not taken off ... In order to determine whether changes are needed to make the SE Statute work better, the European Commission has launched a public consultation. With the review of the SE Statute, the Commission is aiming to increase the use of the SE across the European Union".

For further information, including a summary of the E&Y study report, see here.

Germany: Shareholder Activism + VW Law

A couple of items concerning Germany:

(a) In October 2007, the European Court of Justice held - in Commission of the European Communities v Federal Republic of Germany (Case C-112/05) - that Germany had failed to fulfil its obligations under the EC Treaty by maintaining in force provisions of the so-called "VW Law" under which, inter alia, shareholder voting rights in Volkswagen were capped at 20% and the Federal State and Land of Lower Saxony each had the right to appoint two representatives to the supervisory board. Earlier this month it was reported that EU Commissioner Charlie McCreevey had written to Germany's justice minister because of his concerns over the manner in which Germany proposes to comply with the ECJ decision. McCreevey is reported to have written:

"I am informed that your services are of the view that it is sufficient to eliminate two of the special requirements of the law - mandatory [state] representation on the board and the voting cap - and not the third [the 20% blocking minority] in order to comply with the ruling of the court. ... All three provisions, including the 20% blocking minority ... need to be abolished in order to implement the ruling correctly."

(b) The March 19th issue of The Economist contains an article titled "Raising their voices", which provides an example of successful shareholder activism at TUI.

Postscript (5 June 2008): Today the European Commission began infringement proceedings against Germany for its failure to comply with the ECJ's opinion. See here for further information.

Germany: Commission to focus on supervisory board diversity and professionalism

The Government Commission on the German Corporate Governance Code has published its agenda for 2010: see here (pdf). It will be focusing on improving the professionalism of supervisory boards and developing specific recommendations for appointing more women to such boards. Other matters under consideration are conflicts of interest and board member education.

Germany: the Infineon AG annual general meeting

The annual general meeting of Infineon took place yesterday (a video recording is available here). Hermes and several other shareholders failed to supplant the company's chairman-designate with their preferred candidate. The Financial Times newspaper reports:

Infineon’s rebellious shareholders received a crushing and unexpected defeat on Thursday in their attempt to oust the chairman-designate, as some investors on the losing side alleged that there might have been flaws in the voting procedures. A majority of 72.62 per cent of the shareholders voted against Willi Berchtold, the finance director of a large German car parts maker who had been proposed as chairman by a group of investors".

Germany: Infineon chairman-designate offers to serve for one year if elected

More on the dispute concerning the chairmanship of Infineon. The Financial Times newspaper reports: "Infineon offered a partial climbdown to hostile investors on Wednesday when the German chipmaker’s chairman-designate said he would only serve one year of his five-year term if elected".

Germany: English translation of the Commission's revised code published

The Government Commission of the German Corporate Governance Code published a revised edition of its code earlier this year. A copy, in English, of the revised code has now been published: see here (html) and here (pdf). A copy of the code with the changes highlighted is available in English here (pdf). 

Germany: 'say on pay' at Siemens and ThyssenKrupp

Reuters reports that Siemens and ThyssenKrupp will be providing shareholders with an advisory 'say on pay' vote on remuneration at their forthcoming annual general meetings. Both companies' supervisory boards are chaired by Gerhard Cromme, the former chairman of the German Corporate Governance Code Commission. The companies' AGM notices - available here (pdf) and here (pdf) - contain further information.

It appears that Siemens and ThyssenKrupp have not waited for shareholders to exercise their right to request such a vote, which was introduced last year by the Gesetz zur Angemessenheit der Vorstandsvergütung (VorstAG, Act on the Appropriateness of Management Board Remuneration, about which see here). 

Germany: battle over supervisory board chair at Infineon

The Financial Times newspaper reports that Germany "is braced for its first proxy fight at blue-chip company". The company is Infineon and one of it shareholders - UK based Hermes - has submitted a proposal that would, if supported at the company's forthcoming annual general meeting, see Hermes' preferred candidate elected to the chairmanship of Infineon's supervisory board.

Germany: 'say on pay' arrives and other remuneration reforms

The German Bundestag yesterday adopted the Gesetz zur Angemessenheit der Vorstandsvergütung (VorstAG, Act on the Appropriateness of Management Board Remuneration). The Act introduces important changes concerning the composition of management board remuneration and the manner in which it is determined by the supervisory board. It also introduces 'say on pay' in Germany, i.e., a non-binding advisory vote on remuneration for listed company shareholders. 

Further information about the Act has been published here (in English) by the Federal Ministry of Justice, from where the following summary of the Act's provisions is taken:

In future, there must be an appropriate relationship between the remuneration of the management board of a public limited company and the management board's performance, and this remuneration may not exceed the usual (sector or country-specific) level of remuneration in the absence of special reasons.

The remuneration structure of listed companies must be oriented towards sustainable corporate development. Components of the remuneration package that are variable should be based on assessment criteria covering a number of years; the supervisory board should provide the possibility of introducing caps in the event of unusual developments.

Share options may be exercised at the earliest four years after the option was granted. This is intended to give managers who benefit from such schemes a greater incentive to act with sustainable goals in mind and in the interests of the company.

The supervisory board's right to subsequently make cuts in the level of remuneration in the event that the company's situation worsens has been extended. Explicit statutory regulation is necessary in this respect since this constitutes an interference with existing contracts. An example of 'worsening' in this sense would be where a company is forced to make redundancies and is unable to distribute profits; in such a case, continuing to pay the agreed remuneration to the management board members would be inequitable for the company in question. There is no requirement of insolvency to enable this. The possibility of reducing pensions is restricted to the first three years following the board member's departure.

A decision concerning remuneration of a board member may - unlike at present - no longer be delegated to a committee of the supervisory board but must be made by the supervisory board in a plenary meeting. This will contribute to making the determination of remuneration more transparent.

The liability of the supervisory board has been increased. If the supervisory board determines a level of remuneration that is inappropriate, it thereby makes itself liable to compensation vis-à-vis the company. This rule makes it clear that determining an appropriate level of remuneration is one of the most important duties of the supervisory board and that it is personally liable for any violations of its obligations.

Companies are required to disclose more extensive information regarding remuneration and pension payments made to management board members when they discontinue their board activity, be it premature or under normal circumstances. This will enable shareholders to gain a better insight into the extent of agreements entered into with members of the management board.

If the company takes out so-called 'directors and officers liability insurance' (D&O insurance), something which is common practice, a mandatory deductible amount must be agreed. This amount must not be lower than one and a half times the amount of annual fixed remuneration. This is intended to promote business conduct that is focused on greater sustainability.

In future, the general meeting of shareholders of a listed company will be able to give a non-binding vote on the system of management board remuneration. In this way, an instrument for controlling the existing executive remuneration system is put at shareholders' disposal, which enables them to express their approval or disapproval thereof. Thus pressure will be exerted on those responsible to act particularly conscientiously when determining management board remuneration.

Lastly, former management board members may not become a member of the supervisory board within a two-year period following their departure from the management board, in order to prevent any conflict of interest arising. This restriction period rule does not apply if election to the supervisory board takes place at the instigation of shareholders who hold more than 25% of voting rights in the company. This balanced rule permitting exceptions is designed to take account the interests of family-run companies, in particular".