Shareholder approval for corporate acquisitions – the Commerzbank/Dresdner Bank case

The German Federal Court of Justice (BGH) in a recent decision involving the acquisition of Dresdner Bank AG by Commerzbank AG from Allianz SE (BGH, decision dated February 7, 2012 – II ZR 253/10) indirectly addressed the much-debated issue of under which circumstances shareholders must approve of material acquisition transactions.

1. Background

Ever since the Federal Court of Justice in its famous Holzmüller decision thirty years ago ruled that the shareholders’ meeting of a German stock corporation has a mandatory say on certain material corporate measures, efforts have been made (including by the Court itself in subsequent decisions) to specify the applicable materiality standard. In essence, the so-called Holzmüller doctrine provides that the management board – in contrast to the general rule that it independently decides on matters concerning the business of the company – is compelled to seek the affirmative vote of the shareholders if certain requirements are met. Specifically, if material structural measures with a significant effect on the stock corporation’s business are at stake, the management cannot reasonably expect to have the exclusive right to decide on the matter without involving the shareholders’ meeting (despite the absence of a specific statutory provision to that effect). The legal consequences of this have since been subject to intense discussion in the German legal literature. According to the prevailing view, the approval requirement does not apply to disposals, and an approval is generally only necessary if the transaction in question affects at least 75% of the balance sheet assets of the stock corporation.

Despite the clarifications brought by post-Holzmüller decisions of the Federal Court of Justice, there has remained a level of uncertainty with respect to certain transactions involving German stock corporations (e.g. spin-offs, acquisitions, and restructurings). The topic is of high practical relevance as involving the shareholders’ meeting of a stock corporation in the context of a transaction often constitutes a major obstacle for its (timely) completion. In particular, there is a high likelihood of shareholders challenging the resolution and thereby further delaying its effectiveness. The management, when structuring a transaction, therefore often considers alternative structures that do not require the involvement of the shareholders’ meeting in order to mitigate the impact such a lengthy process would have on the stock corporation.

2. The Commerzbank/Dresdner Bank case

Discussion of this issue intensified again when the two-step acquisition of Dresdner Bank by Commerzbank in 2008 (in essence, an acquisition of 60% of Dresdner Bank shares against issuance of new shares followed by the acquisition of the remaining 40% against cash payment and a subsequent intra-group merger of Dresdner Bank with and into Commerzbank) resulted in shareholder litigation based on, among other things, the argument that the transaction would have required the approval of Commerzbank’s shareholders’ meeting. The transaction coincided with the Lehman Brothers insolvency, and in its aftermath the German government became a shareholder of Commerzbank. The court of first instance in 2009 sided with the plaintiff shareholders based on the argument that Commerzbank’s higher debt ratio resulting from the transaction was equal to a material alteration of its capital structure (an entirely new argument in the discussion), which in turn led to the German government acquiring a stake in Commerzbank and the controlling influence over it. On appeal, the court of second instance in 2010 reversed the decision as it did not see a Holzmüller situation - Commerzbank’s corporate purpose as set forth in its articles of association specifically provides for the acquisition of interests in other companies and the relevant thresholds in terms of materiality of the transaction had not been met. The Federal Court of Justice finally ruled on the matter and, without providing the hoped-for clarification (specifically, whether or not the approval requirement in case of an acquisition – in contrast to a spin-off – is generally not applicable), dismissed the lawsuit for other reasons (namely that the Commerzbank management board and supervisory board did not “clearly” breach the law by not involving the shareholders’ meeting, which was the applicable standard in the specific procedural situation).

3. Consequences

The majority of the commentators rejects the view that an acquisition transaction by a stock corporation requires the approval of its shareholders. Unlike the situation in a spin-off as in the Holzmüller case, an acquisition rarely represents a comparable fundamental change and typically does not have a profound dilutive effect on the rights of the shareholders. In light of the continued uncertainty, however, the management of a stock corporation, in order to avoid personal liability, is well-advised to thoroughly evaluate (e.g. by obtaining a legal opinion) whether the impact of a contemplated acquisition on the shareholders is grave and, thus, triggers – as an exception – the consent requirement.