The new EU framework for ‘related party transactions’ and its implementation in Germany
February 2018 | EXPERT BRIEFING | CORPORATE GOVERNANCE
On 20 May 2017, the Amending Directive to the Shareholder Rights Directive (SRD II) was published in the Official Journal of the EU. SRD II follows the general goal of improving corporate governance in companies which have their registered office in a Member State and whose shares are admitted to trading on a regulated market situated or operating within a Member State. In order to enhance transparency and to protect companies’ and shareholders’ interests, SRD II obliges Member States to impose – among other measures – publicity and approval requirements for so-called ‘related party transactions’ (RPTs).
The regulations of SRD II regarding RPTs aim primarily at protecting companies and their shareholders, especially minority shareholders, from the risk of a related party accessing the company’s assets via a transaction – so-called ‘tunnelling’.
For the definition of the related party, SRD II refers to the International Accounting Standards (IAS). The corresponding regulations of the IAS are very detailed and differentiate between natural persons who can be related parties and companies that can be related parties. Companies that are members of the same group are always related parties, which means that each parent, subsidiary and fellow subsidiary is related to the others. According to SRD II, Member States have no discretion as to the definition of a related party. In view of this, it should be sufficient if the implementing acts refer to the provisions of the IAS.
The provisions of SRD II do not apply to all transactions with related parties, but only to those which constitute material transactions. Therefore, the implementing acts will have to regulate two aspects. Firstly, they will need to specify the term ‘transaction’. SRD II does not comment on this, hence each Member State is, to some extent, free to further specify the term. Secondly, the implementing acts will need to specify under which conditions a transaction has to be considered ‘material’. According to Article 9c paragraph 1 SRD II, the following must be taken into account: “(a) the influence that the information about the transaction may have on the economic decisions of shareholders of the company and (b) the risk that the transaction creates for the company and its shareholders who are not a related party, including minority shareholders”. In the interest of practicability, the German legislator might further specify this by stipulating certain thresholds. When doing so, different thresholds for publicity requirements and for approval requirements can be laid down. Generally, the thresholds will probably not be set too low. This is also in the interest of the minority shareholders. First of all, low thresholds would lead to increased administrative expenses, as well as increased costs associated with extraordinary supervisory board or shareholder meetings. Secondly, low thresholds would lead to a large number of public announcements which, again, might lead to information overload, so that individual processes are hardly noticed anymore. The German legislator will also have to ensure that the competence regulations under the German Stock Corporation Act (AktG) are met. According to Section 76 of AktG, the executive board is responsible for managing the business of the stock corporation on its own responsibility. If thresholds were set too low, the supervisory board or even the shareholders meeting would be more closely involved in day-to-day business, which contradicts their general role and is not appropriate. With regard to the German group law in particular, it should be noted that a large number of protective mechanisms are already in place to protect minority shareholders, which also argues against the establishment of low thresholds.
The publicity and approval requirements for RPT provided for in SRD II do generally not apply to “transactions entered into in the ordinary course of business and concluded on normal market terms. For such transactions, the administrative or supervisory body of the company shall establish an internal procedure to periodically assess whether these conditions are fulfilled. The related parties shall not take part in that assessment”, according to Article 9c paragraph 5 SRD II.
In addition, SRD II allows Member States to exempt individual types of transactions from publicity and approval requirements. This is possible under different conditions. With regard to group law, two exemption options are of particular interest. First of all, an exemption is possible for “transactions entered into between the company and its subsidiaries provided that they are [i] wholly owned or [ii] that no other related party of the company has an interest in the subsidiary undertaking or [iii] that national law provides for adequate protection of interests of the company, of the subsidiary and of their shareholders who are not a related party, including minority shareholders in such transactions”, according to Article 9c paragraph 6 (a) SRD II. Secondly, an exemption is possible for “clearly defined types of transactions for which national law requires approval by the general meeting, provided that fair treatment of all shareholders and the interests of the company and of the shareholders who are not a related party, including minority shareholders, are specifically addressed and adequately protected in such provisions of law”, says Article 9c paragraph 6 (b) SRD II. In view of the far-reaching protection mechanisms that the German group law already provides for today, the German legislator will probably make use of the aforementioned exemption options. This applies to the group established by way of contract, as well as to the factual group. With regard to the group established by way of contract, it should be noted that the conclusion of a control-and-profit-transfer-agreement requires the approval of the shareholders meeting with a three quarters majority. Additionally, German group law stipulates a loss absorption obligation by the controlling company, as well as compensation and settlement for outside shareholders. With regard to the factual group, German group law stipulates disadvantage compensation, as well as examinations by external auditors and by the supervisory board.
Publicity and approval requirements
If a transaction represents a RPT and none of the above-mentioned exceptions applies, Member States must ensure that the transaction will be publicly announced. According to Article 9c paragraph 2 SRD II, the “announcement shall contain at least information on the nature of the related party relationship, the name of the related party, the date and the value of the transaction and other information necessary to assess whether or not the transaction is fair and reasonable from the perspective of the company and of the shareholders who are not a related party, including minority shareholders”, says Article 9c paragraph 4 SRD II. In terms of time, the announcement has to be made “at the latest at the time of the conclusion of the transaction”. An obligation to publish even earlier may still arise if information has to be considered inside information in accordance with Article 17 of the Market Abuse Regulation.
Additionally, if a transaction represents a RPT and none of the above-mentioned exceptions applies, Member States shall ensure that the transaction is “approved by the general meeting or by the administrative or supervisory body of the company according to procedures which prevent the related party from taking advantage of its position and provide adequate protection for the interests of the company and of the shareholders who are not a related party, including minority shareholders”. It is to be expected that the German legislator will place the approval requirements under the responsibility of the supervisory board and not under the responsibility of the shareholders meeting. Firstly, there is the danger that certain shareholders would threaten to block important transactions. Secondly, due to its composition, function and procedures, a shareholders meeting is not the appropriate body for monitoring transactions that fall within the scope of the executive board’s management. The convening of an extraordinary shareholders meeting would be difficult and costly, especially in the case of unforeseen or not-to-be-delayed transactions. The supervisory board must probably not be obliged to form a special committee to vote on RPT. The legal status of supervisory board members in Germany already provides for adequate protection of the interests of the company and its shareholders. Members of the supervisory board are solely committed to the company’s interests and are not subject to instructions.
SRD II obliges Member States to impose publicity and approval requirements for RPT. Member States have no discretion as to the definition of a related party, however they can specify under which conditions a transaction will be considered material. It is to be expected that the implementing acts in Germany will not provide for low thresholds here. In addition, the German legislator will probably make relatively extensive use of the exemption options provided for in SRD II, because German group law already offers a high level of protection of minority shareholders, which, in some cases, even exceeds SRD II requirements.
Professor Dr Jochem Reichert is a partner and Thomas Glaser is a lawyer at Schilling, Zutt & Anschütz Rechtsanwalts AG. Dr Reichert can be contacted on +49 621 4257 229 or by email: email@example.com. Mr Glaser can be contacted on +49 621 4257 229 or by email: firstname.lastname@example.org.
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Professor Dr Jochem Reichert and Thomas Glaser
Schilling, Zutt & Anschütz Rechtsanwalts AG