German, Austrian and Swiss Stock Corporation and Capital Market Law Symposium

MPI for Private Law, Hamburg 20.05.2010 - 21.05.2010

An invitation issued by Holger Fleischer led 22 academics from Germany, Austria and Switzerland to Hamburg on 20 and 21 May to discuss current comparative law issues in stock and capital market law and the law of close corporations (GmbH). With the exception of Johannes Semler, who hosted the “Need for Reform in Stock Corporation Law” conference in 1993 (see ZGR Special Edition 12), all the participants represented the younger and middle generations of German language civil law.
The goal of the conference was to broaden cross-border discussion of current and fundamental questions. Recent legal reforms in company and stock corporations law in all three jurisdictions provided both the basis and the need for this discussion. Additionally, increased communication should be sought between Germany, Austria and Switzerland, as the shared language and, in some aspects, very different regulatory systems has the potential to yield very fruitful comparative law results. Following a short welcome from Holger Fleischer, the law of stock corporations was addressed on Thursday, continuing with capital market and GmbH law on Friday.

Shareholder Democracy versus Managerial Powers: Empowering Shareholders or Director Primacy

Hans-Ueli Vogt (Zurich University) presented this topic from the Swiss perspective. He characterised the two key terms “shareholder democracy” and “managerial powers” as the ideal structures for allocating authority, highlighting the parallels and the differences between shareholder democracy and democracy in the political system. After outlining the general stock corporation law references for shareholder democracy, Vogt looked at the annual general meeting in Swiss stock corporation law, asking whether it is adequately equipped to carry out its assigned role as an organ de lege lata. One notable difference to German law was the complete lack of a shareholder fiduciary duty towards the company. De lege ferenda Vogt considered proposals for an expansion and improvement of shareholder democracy, including reducing the threshold for the exercise of shareholder rights, or a more pro-management regulation for the exercise of voting rights, which retains the character of the general meeting as a meeting of the company’s owners. Vogt also clearly stated the limitations of shareholder democracy and its socio-political aspects, which reflects the symbolic power and cultural influence of democratic terminology in Switzerland. Vogt then turned to the matter of administrative powers. After a brief overview de lege lata, he concluded his presentation with some suggested improvements de lege ferenda, proposing an increased responsibility for executive management arguing that increased executive accountability would improve the monitoring capacity of shareholders.

Holger Fleischer then spoke from the German perspective on the subject. He pointed to shareholder participation rights in structural, remuneration and staffing decisions, providing examples of current practice for each. He began with the non-codified competencies of the general meeting (“Holzmüller Doctrine”) and outlined the development in German case law and jurisprudence, referring also to the current positions held in Austria and Switzerland. He highlighted the relationship between on the one hand, law and the right to adopt statutes against case law and codification on the other, presenting the most recent attempt at codification from the Netherlands. De lege ferenda Fleischer raised the question whether a statutory requirement for approval from the general meeting should be introduced for specific kinds of business transaction. After presenting an overview of the Swiss reform proposal Art. 715b E-OR, he presented his position on the debate in Austria and Germany. In discussing shareholder participation rights, he focussed on the opportunities provided by certain statutory clauses and the requirement for AGM approval for remuneration decisions in accordance with §120 (4) AktG. Fleischer noted some limitations may stem from the membership of the supervisory board and in relation to an expansion of approval decisions de lege ferenda regarding the adequacy of corporate management bodies. He did not see a need to implement the findings of the US proxy access debate for participation rights in staffing decisions in Germany, Austria or Switzerland, as shareholder rights on this side of the Atlantic are broader in this area, although he did not rule out specific detailed reforms.

The Flow of Information in Affiliated Companies: Duty of Confidentiality versus the Duty to Supply Information in Corporation and Capital Market Law

Susanne Kalss (Vienna University of Economics and Business) considered the duties of confidentiality as against the duty to supply information: the flow of information reflects the need to balance the interest of the parties involved in a corporation or a holding company. She emphasised that information is in no way an end in itself, rather a requirement for the exercise of rights and duties on the part of company members and particularly, the management. The information system revolves around the executive management board; however, the supervisory board has a role to play as a provider of information. This is very clear in the case of those occupying a dual position in a holding company, particularly when considering the supervisory boards of a subsidiary and the parent company. Susanne Kalss also illustrated the extent to which regulations regarding information and disclosure under corporate law could become a prohibition on the provision of information under insider dealing prohibitions in capital market law.

Gerald Spindler (George August University, Göttingen) then provided a German perspective. He clearly outlined the discrepancy between the legal and commercial perspectives, emphasising that role of “information gatekeeper” played by the executive management of a dependent company must not be overestimated. Spindler, like Susanne Kalss before him, differentiated between the right to demand information (which corresponds to the duty to supply information) and the right to pass on information. He highlighted that there are limitations to this flow of information, particularly for companies operating under control agreements, de facto company groups and in cases of pure dependency according to § 17 AktG. In addition, he highlighted in this context the corporate law limitations on the imputation of knowledge and specifically regulated fields (for example, under the German Banking Act and the German Insurance Supervision Act) and touched on the capital market law and privacy law limitations to the provision of information, completing the overview with information provision considerations for multinational group companies and the SE.

Transparency of Ownership under Capital Market Law in Light of Modern Financial Instruments

The second day opened with a presentation by Peter V. Kunz (Bern University), who firstly provided an overview of ownership transparency in Switzerland, outlining the basic position of stock market law and the fundamental principles of Art. 20(1) Federal Act on Stock Exchanges and Securities Trading (SESTA). He presented the most recent developments in financial instruments using the examples of cash settlement options and contracts for difference; with legislation showing a definite trend towards a stronger commercial focus in Art. 20 (2) (bis) SESTA and an application of the law consistent with the three takeover cases “Implenia/Laxey”, “Saurer” and “Sulzer”. In his opinion, Kunz identified the question of how far the legal status quo in hostile takeovers favoured the target company. He pointed particularly to the fact that the preventative or guiding effects of the most recent reforms in Switzerland arose more from the legal uncertainty they created rather than the quality of the new regulations.

Gregor Bachmann (Independent University of Berlin) presented the German perspective on this topic. He emphasised that transparency aims at opening up existing power relationships on the one hand, but, with regard to the targeted shareholdings, also guarantees some advance protection. Bachmann listed the most recent legislative developments, from the Transparency Guidelines (2007), the Risk Limitation Act (2008), to the review of a draft bill for the Law for the Improvement of Investor Protection (2010), a draft, he argued, that was sparked by the “Schaeffler/Continental” case. As Kunz had also stated, he argued cash settlement options and commonly used future-trading transactions did not carry a requirement to be fulfilled by shares, but as banks regularly held shares to secure their risks, this approach is often the de facto effect. Bachmann identified however a significantly more methodical and greater legal policy challenge in the attribution of shares and/or voting rights. He explored different potential solutions, presenting alternatives to the latest draft of the bill. In addition to a strengthening of legal sanctions and consequences, he raised the need for more precise definitions. He also proposed, inter alia, that restrictions should be limited to take-over situations or an information model similar to that of the German Banking Act.

Sanctions for Breach of Capital Market Law Duties of Disclosure and Information Provision

Johannes Zollner (Vienna University of Economics and Business) presented the Austrian perspective. His presentation provided a significant contrast to those examining public law considerations (including administrative criminal law and criminal law) and civil law sanctions which in consideration of the prohibition on analogy, could lead to differences in interpretation. Zollner further demonstrated this position by pointing to the periodic recurrence or situation specific removal of disclosure obligations. He introduced to the discussion the regime of norms for disclosure of shareholdings under §§ 91 ff Stock Exchange Act (BörseG) and described the Austrian regulation of ad hoc publicity under 3 48 (1) BörseG. In the context of the civil and corporate regulatory sanctions the Austrian lack of regulatory provisions for the loss of voting rights became clearly apparent, with only the possibility to include an appropriate clause in the articles of association provided by § 124 Austrian Stock Corporation Act.

A German point of view was formulated by Rüdiger Veil (Bucerius Law School) He firstly presented the ‘instrument mix’ developed with the intent of preventing infringements of disclosure obligations. While the fines imposed in Germany are regarded as providing only a minimal deterrent, and their lack of proven effect raises concerns regarding the efficacy of civil law liabilities, Veil did see a strong remedy against the loss of rights in § 28 German Securities Trading Act. This formed the basis of his observations. He ranked the practical significance of the loss of rights as considerable due to the possibility to contest decisions, and also due to the high level of legal uncertainty, particularly with regard to considerations in the attribution of liability. He also criticised three rulings from the High Court, where judges had not taken the time or the given sufficient attention to the loss of rights at hand (LG Köln AG 2008, 336; OLG München AG 2009, 793; OLG Düsseldorf WM 2010, 709). Veil criticised the methodological outcome: giving no scope for a global requirement for the highest level of transparency. Additionally, legal mistakes by those falling under the requirement must be considered. Without putting the loss of rights into question, Veil saw the opportunity for detailed reform; limiting sanctions to a loss of voting rights and in cases of gross negligence were considered as particularly worth striving for.

Extent and Limitations of the Freedom of Establishment in GmbH- Internal Governance

Ulrich Torggler (Vienna University) then set to sound out the dispositive shallows of Austrian GmbH law. He showed a leaning towards a broad reaching freedom of establishment in legal policy. GmbH shareholders do not usually require protection, as they have agreed to their own articles of association. Torggler emphasised his point of view with various examples; e.g. value clauses, and presented the case for their more generous application. One boundary however was not to be crossed: the authority of shareholders to change the partnership agreement is irrevocable.

Lukas Handschin (Basel University) examined the topic from a Swiss federal perspective. Although the AG is still the leading corporate form in Switzerland, Handschin presented some positive aspects of the GmbH, stating that for small and medium sized companies it was gaining in acceptance. He gave four significant reasons for his conclusion: closed corporation membership, flexible internal decision making capacities, the ability to state shareholder duties in addition to the initial financial contributions, and the regime of minority shareholder protection. He provided an overview of the many provisions of Swiss GmbH law, while also providing the Stock Corporation alternatives. A differentiated limitation of freedom of establishment is recognised, for example by Art. 825 OR for compensation claims: while paragraph 1 prescribes compensation to the amount of the true value of company assets for force outs, paragraph 2 provides an alternative ruling (only) for those making a statutory exit. One possible configuration with a broader reaching effect is opened up by the right of veto provided in Art. 807 OR.