Award proceedings are intended to enable shareholders concerned to apply for a judicial review of the adequacy of a compensation offered to them as part of a structural measure.
1. The Proceedings
Award proceedings date back to a legislative decision of the early 20th century, which was intended to clarify questions of shareholders concerned by a structural measure under corporate law. The objective was to bring about a separation of questions related to valuation (award proceedings) from the judicial review of the structural measure (rescission proceedings), as reviewing the adequacy of compensation payments may result in lengthy proceedings. The separation of these judicial proceedings is intended to prevent the structural measures from being blocked, while granting the burdened minority shareholders sufficient individual protection through the award proceedings.
In 2003, the legislator then introduced the Award Proceedings Act (Spruchverfahrensgesetz – SpruchG) in order to accelerate the proceedings.
2. The Award Proceedings Act
In accordance with Section 1 of the Award Proceedings Act (§ 1 SpruchG), award proceedings are applicable to the review of the adequacy of
- the compensation for and settlement payment to outside shareholders in the case of enterprise agreements (Sections 304, 305 Stock Corporation Act (Aktiengesetz – AktG);
- the settlement payments to former shareholders in the event of an integration of the stock corporation (Section 320b Stock Corporation Act (AktG));
- the cash settlement payments of minority shareholders in the event of a squeeze-out (Sections 327a et seq. Stock Corporation Act (AktG));
- of a supplementary payment or cash settlement payment to shareholders in the event of a conversion of the corporation (Sections 15, 34, 176 et seq., 196, 212 Conversion Act (UmwG));
Furthermore, the Act provides for a so-called common representative (Section 6 Award Proceedings Act (SpruchG)) to be appointed by the court to protect the rights of those persons entitled to file an application who are not themselves applicants. The common representative has the status of a legal representative.
a. Enterprise Agreements (Sections 304, 305 Stock Corporation Act (AktG)
Enterprise agreements are mainly control and profit transfer agreements, agreements to lease operations and agreements to surrender operations (Sections 291, 292 Stock Corporation Act (AktG)). The most frequent form of enterprise agreements are control and profit transfer agreements, i.e. the controlling company makes an agreement with the controlled company, obliging the latter to transfer its profits. Such enterprise agreements require the approval of the shareholders’ meeting with a majority of at least three quarters of the share capital represented. After the resolution of the shareholders’ meeting, reviewers appointed by the principal shareholder stipulate the compensation payments for the minority shareholders. If the controlled company is not fully controlled (100% of the share capital), the agreement as well as the adequacy of the compensation is reviewed by an expert (referred to as contract auditor) according to Section 293b German Stock Corporation Act (AktG).
b. Integration (Section 329b Stock Corporation Act (AktG)) and Conversion (Sections 15, 34, 176 et seq., 196, 212 Conversion Act (UmwG))
The shareholders’ meeting can resolve both on the integration into another company and on the conversion of the company. This is possible on the proviso that
- the main shareholder is the sole shareholder of the company to be integrated and the shareholders’ meeting approves the resolution with a majority of at least three quarters,
- the main shareholder holds 95% in the company to be integrated and adequate compensation is granted, which has to be paid in own shares.
Integration is comparable with a merger under conversion law with the difference that the legal person of the integrated company continues to exist. In the event of a merger, by contrast, the company to be integrated is absorbed by the acquiring company.
c. Squeeze-out (Sections 327 et seq. Stock Corporation Act (AktG))
A squeeze-out includes the compulsory exclusion of the minority shareholders from the company by the main shareholder. In this context, there are three different types of squeeze-out, i.e.
- squeeze-out under stock corporation law (Sections 327 a – 327 f AktG),
- squeeze-out under merger law (Section 62 V UmwG in conjunction with Section 327 f (AktG)),
- squeeze-out under takeover law (Sections 39 a – c Securities Acquisition and Takeover Act (WpÜG = Wertpapiererwerbs- und Übernahmegesetz)).
The prerequisite for a squeeze out is that the main shareholder has a voting share of at least 95% in the company’s share capital (under merger law, 90% are sufficient in special cases). Then, the main shareholder can decide that all remaining shares be transferred to him. In return for this, the main shareholder has to pay adequate compensation to the minority shareholders. In the case of a squeeze-out under stock corporation law or merger law, this requires a resolution of the shareholders’ meeting, which is passed with a majority of at least three quarters of the represented share capital. In the event of a squeeze-out under takeover law, however, no resolution of the shareholders’ meeting and no award proceedings are necessary; instead, the squeeze-out (included the cash compensation offered) is judicially reviewed and ordered, if applicable, by the Regional Court of Frankfurt am Main and/or within the framework of the appeal body of the competent Higher Regional Court of Frankfurt am Main at the request of the main shareholder.
3. Reflections on How to Accelerate Award Proceedings
According to suggestions of the Commercial Law Committee of the German Lawyer’s Association, laws concerning award proceedings should be re-examined for the purpose of further accelerating them. In future, award-proceedings should consist of only one instance (immediate and sole competence of the Higher Regional Courts).
The idea of accelerating the proceedings is actually something to be welcomed. However, the means suggested by the Commercial Law Committee for its implementation would lead to the fact that minority shareholders would be treated even more unequally than before.
According to the German stock corporation law, minority shareholders are obliged on principle to accept a structural measure initiated by the majority of the shareholders. Here, the principle is “tolerate and liquidate”. However, minority shareholders are entitled to full compensation. The award proceedings are intended to guarantee the rights of the burdened shareholders within the scope of their position as shareholders, which is protected by the German Basic Law (Art. 14 (1) German Basic Law (GG)). This means that the legislator would like to offer the shareholders concerned by the structural measure a comprehensive review of the adequacy of the compensation to which they are entitled.
However, this objective of the legislator is questioned if the density of control is reduced at the expense of the minority shareholders, using the argument that the proceedings should be accelerated as a pretext. The Regional Courts, (i.e. the instance suggested to be abolished) have just recently proven that they proceed effectively and make use of their feasible possibilities of accelerating the proceedings available to them, thus advancing the award proceedings. In addition, the Chambers for Commercial Affairs of the Regional Courts are specializing in the conduct and handling of complex award proceedings; here, the commercial judges are contributing their economic expertise especially within the scope of the consultation of specialists.
The abolishment of the stages of appeal, as suggested by the Commercial Law Committee, is therefore inappropriate and improper; the objective of an effective acceleration of the proceedings, which is equitable for all parties involved, would certainly not be reached in this way.
Rather, the regulatory proposals submitted by the Federal Bar Association should be considered, discussed and used. These are, for example:
- Time frame to be set by the court in charge of the award proceedings for the judicial expert to prepare his or her opinion and implementation of obligations to cooperate for the defendant (e.g. with respect to the provision of information and documents relevant for valuation)
- Implementation of an independent judicial expert in the ongoing award proceedings without participation of the debtor of the compensation
- Abolishment of the redress procedure (Section 68 (1) of the Act on Proceedings in Family Matters and in Matters of Non-Contentious Jurisdiction (FamFG)) before the Regional Court so that no redress decision must be awaited if a complaint is lodged.