Takeover Tactics | Germany | Global Public M&A Guide

6. Takeover Tactics

[Last updated: 1 January 2025, unless otherwise noted]

6.1 Inside information

A German listed company is obligated to immediately disclose to the public all "inside information" that relates to it, including all material changes in information that has already been disclosed to the public.

"Inside information" means information of a precise nature which has not been made public, relating, directly or indirectly, to one or more issuers of financial instruments or to one or more financial instruments and which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments.
Information shall be deemed to be of a "precise nature" if it indicates a set of circumstances which exists or may reasonably be expected to come into existence, or an event which has occurred or may reasonably be expected to do so, and if it is specific enough to enable a conclusion to be drawn as to the possible effect of that set of circumstances or event on the prices of financial instruments or related derivative financial instruments.
"Information which, if it were made public, would be likely to have a significant effect on the prices of financial instruments or related derivative financial instruments" shall mean information a reasonable investor would be likely to use as part of the basis of their investment decisions.

It is up to the company to determine if certain information qualifies as "inside information". This will often be a difficult exercise, and a large gray area may exist as to whether certain events will need to be disclosed or not.

6.2 In the event of a public takeover bid

In the event of a (potential) public takeover bid, the Takeover Act contains detailed provisions in relation to public notifications and announcements that will have to be made by the Bidder at specific times. These generally start with the obligation to announce the Takeover Decision through the Section 10 Notification (see 5 above) or the obligation to announce an acquisition of Control. Notifications and disclosures generally do not require prior approval by BaFin, with the exception of the offer document, but it is not uncommon to approach BaFin prior to the disclosure.

6.3 Insider dealing and market abuse

The basic legal framework regarding insider dealing and market abuse under German law is set forth in the MAR. The same rules on insider dealing and market abuse apply in all other jurisdictions of the EEA – even though there are sometimes important nuances in interpretation between the different regulatory authorities across the EEA. Also, there may be significant differences in the vigor of enforcement by the different authorities.

In principle, the rules on insider dealing and market abuse remain applicable before, during and after a public takeover bid, albeit that during a takeover bid additional disclosures and restrictions apply in relation to trading in listed securities.

6.4 Common anti-takeover defense mechanisms

As a general rule, the Takeover Act prohibits the management board of a target company from carrying out any actions that could prevent the success of an offer from the time of publication of a Takeover Decision or the acquisition of Control until the publication of the takeover result (no-frustration rule). Certain exceptions apply, notably for actions of an "ordinary and prudent" manager in the specific situation, actions with the approval of the supervisory board and actions based on an authorization by the general meeting.

Despite the no-frustration rule, the management of a target company can use certain strategies to try to fend off a hostile takeover. The table below contains a summarized overview of the mechanisms that can be used by a German target company as a defense against a takeover bid. For some defense measures, there are (to some extent significant) concerns with respect to their legality (most often under general stock corporation law) and/or effectiveness. Hostile takeovers have been the exception in Germany so far. Therefore, defense measures are more often a matter of (controversial) discussion in legal literature than in practice. Except for a few individual cases, case-law dealing with defense measures is very rare.

Mechanism	Assessment and considerations
1. Capital increase (poison pill) Capital increase from authorized capital with or without subscription rights of the shareholders, thereby making the bid more expensive.	Requires an express authorization in the articles of association. To be adopted, it must obtain a majority of 75% of the votes cast at a general shareholders' meeting. The authorization is valid for up to 5 years only, but can be renewed. The authorization may not exceed 50% of the existing share capital. If subscription rights of the shareholders are excluded, the capital increase may not exceed the lower of (i) 10% of the existing share capital or (ii) the amount remaining available under the authorized capital. The issue price may not be significantly below the current stock market price (in practice, this will usually be at or above the bid price). Capital increase from company reserves requires prior approval by general shareholders' meeting under German law. Might be used as defense mechanism in case of foreign incorporated company listed in Germany, e.g., Standard Industries/Braas Monier. It is not permissible to treat the shareholding, if any, of the Bidder differently from the holdings of other shareholders.
2. Share buyback	Uncommon defense mechanism. Share buyback needs to be in accordance with statutory rules, which define very limited cases. Most common case is an express authorization by a general shareholders' meeting. The authorization is valid for up to 5 years only, but can be renewed. The total of directly and indirectly acquired shares may not exceed 10% of the existing share capital. Share buybacks may also facilitate bids. (Note further that the target company may be deemed to act in concert with the bidder in which case there would be minimum price implications.)
3. Sale of crown jewels/ Asset lockup An arrangement affecting the assets of or creating a liability for the company which is triggered by a change in control or the launch of a takeover bid or creating obstacles for the Bidder under merger control law by making an asset unsellable.	Measure has to be in the best interest of company, and not in breach of the no-frustration rule.
4. Convertibles/Options/ Warrants on new shares Convertibles/Options/ Warrants are issued prior to the takeover bid in favor of "friendly person(s)" (without subscription rights of the shareholders) who can exercise their rights and subscribe for new shares.	Generally requires a prior approval by a majority of 75% of the votes cast at a general shareholders' meeting (unless articles provide for 50% majority, which is possible in some cases, but not if subscription rights are excluded). If subscription rights are excluded, the rights to acquire new shares may not exceed 10% of the existing share capital. The exercise price has to be determined when the rights are issued in accordance with applicable rules.
5. Other frustrating actions Actions such as significant acquisitions, disposals, changes in indebtedness, etc.	Measure has to be in the best interest of the company, and not in breach of the no-frustration rule.
6. Shareholders' agreements Shareholders undertake to (consult with a view to) vote their shares in accordance with terms agreed among them.	The shareholders are likely to be considered as "acting in concert". If so, disclosure obligations apply and, if the participating shareholders jointly hold more than 30% of voting rights, an obligation to launch a mandatory bid may be triggered, depending on the scope of the agreement. Assumes a stable shareholder base or reference shareholders.
7. Search for a competing Bidder (a "white knight") or an anchor shareholder who agrees not to tender its shares in the bid ("white squire")	Generally admissible, since adding another Bidder enables the target to guarantee the most favorable terms of offer in the best interest of all shareholders. Further actions to enhance the success of the competing offer are inadmissible. It is, for example, not normally admissible to issue shares from the authorized capital, excluding the subscription right, as a "jump start" for the competing Bidder or "white squire". Financial assistance rules under stock corporation law prohibit the granting of financial support to the "white knight" or "white squire" for the acquisition of shares.
8. Limitations on share transfers Board approval or pre-emptive restriction clauses in the articles of association or in agreements between shareholders.	Very exceptional for listed companies (listed securities are in principle freely transferable; impact on share liquidity). Almost impossible to implement after the company has obtained its listing.
9. Complication of obtaining control of supervisory board Rights for individual shareholders to appoint supervisory board members, staggered terms of office of board members.	Supervisory board nomination right exceptional for listed companies. A staggered board is common, but supervisory board members can be removed in a general meeting with 75% majority (may be reduced to 50% majority in the articles of association).

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