Instruments

Notification obligations apply to directly or indirectly held instruments¹ that give their holder the right to acquire, unilaterally under a legally binding agreement, issued shares with voting rights attached of an issuer whose home country is the Federal Republic of Germany, or that grant the holder a corresponding option to acquire such shares (section 38 (1) no. 1 of the WpHG) and for instruments with a similar economic effect (section 38 (1) no. 2 of the WpHG). When the TRL-ÄndRL-UmsG came into force on 26 November 2015, the notification obligations previously governed by sections 25 and 25a of the WpHG (old version) were absorbed into the new section 38 of the WpHG. Section 38 (1) no. 1 of the WpHG corresponds to section 25 WpHG (old version) and section 38 (1) no. 2 of the WpHG corresponds to section 25a WpHG (old version).

Whereas the former requirements of section 38 of the WpHG referred to the option to acquire shares, the new requirements of section 38 (1) no. 2 of the WpHG focus on the similar economic effect of an instrument with the right to acquire shares. Ultimately, there is no substantive change compared with the previous requirement.² As before, the scope of this provision is thus very broad. According to the explanatory memorandum to section 25a of the WpHG (old version) all instruments that effectively or constructively enable the acquisition of shares are covered.³ It is sufficient if the acquisition could follow the economic logic of the instrument.⁴ The term “instrument” is deliberately not defined in section 38 of the WpHG in order to capture all cases that have a similar economic effect to instruments within the meaning of section 38 (1) sentence 1 no. 1 of the WpHG. The term instrument includes in particular call and put options, futures and contracts for difference.

However, there was an amendment of the previous legal position in the case of cash-settled instruments: If, as a general rule, the number of underlying shares must be used for instruments for the calculation under section 38 (3) sentence 1 of the WpHG, the number of shares in case of instruments that provide exclusively for a cash settlement under section 38 (3) sentence 2 of the WpHG is calculated solely on a delta-adjusted basis. The details of delta-adjusted calculations are governed by Article 5 of Commission Delegated Regulation (EU) 2015/761 of 17 December 2014. This stipulates that a generally accepted standard pricing model taking into account the elements relevant for the valuation of the instrument must be used consistently for the calculation. For the other conditions, in particular the factors to be taken into account for the calculation, refer to Article 5 of Commission Delegated Regulation (EU) 2015/761 of 17 December 2014.

An exhaustive list of the instruments covered by section 38 of the WpHG is not possible. The list in Article 13(1b) of Directive Amending the Transparency Directive (Transparency Directive III = [TDIII]), which was added to section 38 (2) of the WpHG, makes no claim to be exhaustive. Nor is the “Indicative list of financial instruments that are subject to notification obligations according to Article 13(1b) of the revised Transparency Directive” maintained and published by ESMA to be regarded as exhaustive.

For this reason, only certain typical scenarios and instruments will be addressed in the following.

Instruments under section 38 (1) no. 1 of the WpHG

• Forwards/futures/call options

  Forwards/futures and call options, provided that they convey not only the right to cash settlement but (also) the right to delivery of the shares, are typical instruments within the meaning of section 38 (1) no. 1 of the WpHG. By contrast, it is irrelevant for classification as an instrument whether or not the instrument is fungible or whether or not the option may be exercised during the entire term (American style option) or only during a certain time or at a certain point in time (European style option). As soon as the party subject to the notification obligation either directly or indirectly holds instruments in an amount relevant for a threshold, a threshold may be triggered even if the exercise period has not yet been reached.

• Securities lending and repurchase agreements

  Rights to recall lent securities under securities lending and repurchase agreements may also fall within the scope of section 38 (1) no. 1 of the WpHG. However, this is only the case if the other conditions have been satisfied, in particular that the right to recall lent securities depends only on the holder of the right or the passage of time. This is not the case, for example, with a non-genuine repurchase agreement (section 340b (3) of the HGB). In such cases, however, section 38 (1) no. 2 of the WpHG may be applicable.
  There is a general problem in connection with section 33 (3) of the WpHG, on the basis of which the focus is on the timing of the settlement of the transaction: on the basis of section 33 (3) of the WpHG, the dates on which the threshold is triggered differ in the lender’s notifications under section 33 of the WpHG and under section 38 of the WpHG, because the right to recall lent securities only arises on delivery (= transfer) of the shares to be borrowed. To avoid any artificial splitting up of the uniform securities lending transaction by two notifications in close succession, BaFin allows the date on which the threshold is triggered by the right to recall lent securities to be brought forward to the date on which the threshold is triggered under section 33 of the WpHG.

• Purchase agreements subject to conditions precedent

  Purchase agreements such as M&A agreements often contain conditions precedent. As with futures and forwards, the notification obligation under section 38 (1) no. 1 of the WpHG depends on the extent to which the purchaser can unilaterally bring about or waive fulfilment of the condition. If section 38 (1) no. 1 of the WpHG does not apply, the conditions set out in section 38 (1) no. 2 of the WpHG still have to be examined in such cases.⁵

Instruments under section 38 (1) no. 2 of the WpHG

• Cash-settled instruments

  These include, but are not limited to, contracts for difference, swaps (in particular cash-settled equity swaps) as well as call options and futures/forwards, to the extent these are cash-settled.
  The extent to which the counterparty hedges the transaction is irrelevant.

• Instruments conveying the right or obligation to acquire shares

  These include in particular the call options not already falling within section 38 of the WpHG and futures/forwards that provide for physical delivery of the shares, but that are subject to an additional condition precedent whose fulfilment cannot be brought about unilaterally by the holder of the call option or the future/forward.
  However, it also includes writing put options that provide for physical delivery.

• Baskets and indices

  Baskets of shares and indices may also constitute instruments. Under Article 4 of Commission Delegated Regulation (EU) 2015/761 of 17 December 2014, holdings of shares in baskets of shares and indices are only included if either the voting rights in a specific issuer held through financial instruments referenced to the basket or index represent one per cent or more of the voting rights attached to shares of that issuer, or the shares of the issuer represent 20 per cent or more of the total value of the securities in the basket or index.

• Convertible bonds

  Because instruments as defined by section 38 of the WpHG must reference shares that have already been issued, convertible bonds only fall within the scope of the provision if the issuer can settle the bond using its treasury shares when the bondholder exercises the conversion right. However, because the holder of the conversion right does not normally have the unilateral right to acquire shares that have already been issued, these instruments are subject to the reporting requirement set out in section 38 (1) no. 2 of the WpHG.

• Non-genuine repurchase transactions

  Unlike genuine repurchase transactions (section 340b (2) of the HGB), non-genuine repurchase agreements (section 340b (3) of the HGB) do not impose any retransfer obligation on the transferee for the previously acquired shares. The transferee is merely entitled to retransfer the shares. In this respect, non-genuine repurchase transactions are similar to a physical put option and thus fall under section 38 (1) no. 2 of the WpHG.

• Cash settled put options

  Cash settled put options must be included by the option writer under section 38 (1) no. 2 of the WpHG. When a put option is entered into, the writer can enable the counterparty to built a position in the share in question that the option writer may have access at a later time.

• Chain financial instruments

  “Chain” financial instruments are also normally instruments within the meaning of section 38 (1) no. 2 of the WpHG: “Chain” financial instruments are instruments whose exercise initially leads to the acquisition of another instrument, and only result in the acquisition of shares with voting rights attached when that second instrument is exercised, for example an option with a future as the underlying.

Other instruments

• Case of a holding company

  In its established administrative practice, BaFin treats as an instrument a right (possibly subject to a condition precedent) to acquire a majority interest in a (holding) company, which in turn holds a notifiable holding of voting shares of an issuer, or a security interest granting a right of separation relating to the shares held by the (holding) company (such as in the case of shares held by the company in trust for the shareholders, section 34 (1) sentence 1 no. 2 of the WpHG). On completion of the acquisition, the acquirer becomes the controlling company and it is attributed all of the voting rights of the (holding) company. In the period before completion of the acquisition, the right to acquire the majority interest in the (holding) company is a notifiable instrument in the amount of the holding company’s share of the voting rights in the issuer.

• Irrevocables

  Irrevocables (also known as irrevocable undertakings) are of relevance particularly in company takeovers, and in this context mean the irrevocable commitment to accept an offer within the meaning of the WpÜG. In practice, irrevocables normally fall under the notification obligation of section 38 (1) no. 2 of the WpHG, as they often do not grant the beneficiary (the bidder in a takeover bid) an unilateral, unconditional right to acquire the shares subject to the irrevocable. In other cases, 38 (1) no. 1 of the WpHG will apply.

• Acceptance of takeover bids under the WpÜG

  Before TDIII was implemented in November 2015, the legal position was that the acceptance of takeover bids under the WpÜG, through which a purchase agreement subject to a condition precedent relating to the shares tendered to the bidder was entered into by the bidder and the shareholder in accordance with the conditions of the offer document, did not represent a notifiable instrument for the bidder because the bidder published the holdings of voting rights attached to the shares tendered to it under section 23 of the WpÜG. Despite the withdrawal of the corresponding provision, BaFin continues to presume in its established administrative practice that there is no notification obligation for the bidder in this case, because the reasons for the exemption continue to apply and, due to the disclosure requirements under the WpÜG, there is no need, for reasons of transparency, for a parallel disclosure requirement under the WpHG.

• Pre-emptive rights in shareholders’ agreements

  Shareholders’ agreements (in particular joint ventures/voting pools/family pools) often contain a range of acquisition or sale agreements between the shareholders. Such agreements may represent instruments if they grant the right to the other shareholders to acquire voting shares (standard case under section 38 (1) sentence 1 no. 2 of the WpHG, unless a case of section 38 (1) sentence 1 no. 1 of the WpHG already exists). By contrast, if the pre-emptive right relates to shares of a (holding) company that in turn holds the notifiable holdings of voting rights, there is a general notification obligation under section 38 of the WpHG in accordance with the administrative practice for the holding company case described above, because each person entitled to pre-emption can become the majority shareholder of the company through the potential acquisition of the other shares of the company (section 34 (1) sentence 1 no. 1 of the WpHG); the same applies if the shareholder entitled to pre-emption has the right to separate the shares the shares held by the (holding) company. Confidentiality clauses in the shareholders’ agreements are not relevant in this context.

  In practice, pre-emptive rights place a special role in shareholders’ agreements aiming to preserve shareholdings in a family unit. In order to safeguard the influence of a family over a listed issuer for future generations, shares are mostly bundled in a family pool or in holding companies, and pre-emptive rights to the shares are granted to the other members or shareholders in the event that a family member leaves the pool or a shareholder withdraws from the (holding) company. In such cases, BaFin does not presume (or no longer presumes) that there is a generally notifiable instrument, regardless of the extent to which the voting rights are in any case already attributable to the shareholders under section 34 of the WpHG, and in particular under section 34 (2) of the WpHG. The transferability to other scenarios must be examined on a case-by-case basis and should be agreed in good time in advance with BaFin.

• Tag-along and drag-along clauses

  Tag-along clauses provide for a shareholder’s co-sale rights if the other shareholder (often the majority shareholder) wishes to sell its shares with voting rights attached. By contrast, drag-along clauses are co-sale obligations. From the view of the beneficiary or obliged shareholder, such clauses are not relevant with regard to section 38 of the WpHG.
  This also applies from the perspective of the shareholder wishing to sell shares, since although selling the shares enables a third party to acquire shares with voting rights attached, this case of an acquisition option by a third party is not covered by section 38 of the WpHG, in contrast to section 25a of the WpHG (old version). In such cases, notification obligation can only arise for the third party.

• Master agreements

  In the case of complex transactions or transactions that contain several partial executions, master agreements are often entered into by the parties that contain fundamental arrangements relating to the overall transaction and form the legal basis for executing the individual transactions.
  If these agreements relate to instruments (options, contracts for difference, etc.) and contain the principal arrangements relating to instruments, especially the (maximum) amount of shares to be acquired, entering into such a master agreement can already represent a notifiable instrument under section 38 of the WpHG.

• Pledge on shares

  Including in the case of a commercial pledge under section 1259 of the BGB, in which the holder of the pledge has a right of appropriation instead of a right to realise through sale, a pledge on shares is not an instrument under section 38 (1) sentence 1 no. 2 of the WpHG because pledges are agreed solely to secure claims established by other means and the pledgee is not normally entitled to exercise the voting rights.⁶

• Compensation/exchange offers in domination and profit and loss transfer agreements, merger agreements, and similar agreements

  Under BaFin’s administrative practice, domination and profit and loss transfer agreements are also not covered by section 38 of the WpHG. Although such an agreement relating to an issuer gives rise to the obligation under section 305 (1) of the AktG to purchase the shares of the remaining shareholders against a fixed cash compensation at their request, it is highly unlikely in this context that a holding can be built up unnoticed, since the shareholders must consent to the profit and loss transfer and control agreement by a resolution at the general meeting adopted by a 75% per cent majority, and because the agreement must be entered in the commercial register (section 294 of the AktG). There is therefore no need for an additional disclosure obligation via section 38 of the WpHG. This case is similar in this respect to the submission of an offer under the WpÜG, which the German legislator had excluded from the scope of section 25a of the WpHG (old version) (section 25a (1) sentence 4 of the WpHG (old version)).

  The same applies to other compensation offers under company law, for example mergers and similar agreements, to the extent that transparency in the commercial register about such offers is ensured.

• Letter of intent, memorandum of understanding, term sheets, gentlemen’s agreement

  Letters of intent, memorandums of understanding und term sheets entered into prior to the conclusion of a contract typically contain an agreement on certain framework data for the subsequent contract negotiations, for example non-disclosure agreements, agreement on due diligence, possibly exclusive negotiations in a defined period and similar arrangements. Under BaFin’s administrative practice, such pre-contractual agreements are normally not regarded as instruments, even if they relate to the intention to acquire a notifiable package of shares, as an acquisition with regard to the subject of the subsequent negotiations is still too remote. This may be assessed differently if a result of the agreement is that the other party can understand that the purchase of shares is likely. In this respect, in particular apparently non-binding agreements that cannot be enforced in a court (gentlemen’s agreements) can be classified as an instrument if it can be assumed on the basis of the agreement that the intended acquisition of shares will happen.

• Share issues and initial public offerings (IPOs)

  Share issues and IPOs (with or without the issuance of new shares) do not themselves constitute an instrument, but comprise numerous different individual agreements that may fall under the scope of several notification obligations. To answer the question of whether and for whom (underwriting banks, existing shareholders, new shareholders) which notification obligations are triggered, it is also important in the first instance to determine the precise facts, to clarify the issues of who owns the (new and existing) shares in the course of the share issue or IPO, and only then to examine notification obligations, if any, under section 38 of the WpHG. Here, too, the designation of the agreements by the parties will not always be accurate.

  What is important with regard to any notification obligations under section 38 of the WpHG is the distinction between existing and new shareholders. As stated previously in the case of convertible bonds, there is only a notification obligation under section 38 of the WpHG if the right to acquire shares relates to shares that have already been issued. Consequently, if an existing shareholder, for example, exercises its pre-emptive rights before implementation of the capital increase has been registered accordingly has a claim to subscribe for new shares, this does not yet trigger any notification obligation under section 38 of the WpHG. By contrast, however, an existing shareholder holds a retransfer claim subject to the notification obligation if, before the capitalisation measure is recorded in the commercial register, that shareholder has lent existing shares to the banking syndicate by way of a securities lending transaction (over-allotment option, see below).

• Over-allotment option (greenshoe)

  An over-allotment option or “greenshoe” is frequently agreed in connection with an IPO or the placement of new shares on the market by underwriters, granting the underwriters access to additional shares in order to service additional demand for shares or use them for price stabilisation. As a rule, this option to access additional shares is implemented by way of a securities lending transaction, which generally features an obligation to return the borrowed shares. If the underwriters exercise this option, this may trigger notification obligations for the lender, normally an existing shareholder, under sections 33 and 38 of the WpHG. Due to potential notification obligations for the underwriter, section 36 of the WpHG must always be observed (see I.2.6.3).

  To the extent that the underwriter exercises the greenshoe, the terms and conditions of the agreement entitle it to pay cash compensation to settle the securities lending transaction instead of returning the borrowed shares. The consequence thereof for the notification obligations applicable to the lender (often the existing shareholder that makes its shares available) is that it must notify its claim for retransfer against the underwriter as an instrument under section 38 (1) sentence 1 no. 2 of the WpHG, because it cannot control whether it will actually receive shares or not.

• Instruments in connection with prime brokerage See I.2.5.12.5 above.

Other conditions

An instrument is directly held if it is held by its owner, i.e. if the instrument is owned by a person. In the past, an instrument is indirectly held if it is held by subsidiaries or in administrative trust (Verwaltungstreuhand). In addition to these two criteria, cases of acting in concert and authorisation as proxy are also covered as indirect holdings by the notification obligation of section 38 of the WpHG in the course of European harmonisation. The notification obligation applies when the position concerned hypothetically reaches, exceeds or falls below the thresholds of 5, 10, 15, 20, 25, 30, 50 or 75 per cent, i.e. whenever the holder of the instrument is entitled or, as the case may be, ceases to be entitled to acquire a corresponding quantity of shares with voting rights attached.
Holdings that exceed or fall below notification thresholds and fall below or exceed the thresholds again within one day also generally trigger a notification obligation under section 38 of the WpHG. In such cases, however, BaFin allows the amounts exceeding and falling below the thresholds to be netted. By contrast, netting long and short positions, such as call and put options, is not permitted (section 38 (4) sentence 2 of the WpHG).
If different instruments within the meaning of section 38 of the WpHG refer to shares of the same issuer, the holder of the instruments must aggregate the voting rights attached to these shares (section 38 (4) sentence 1 of the WpHG).

Special case: Call options under section 34 (1) no. 5 of the WpHG

Instruments that are already covered by section 34 (1) sentence 1 no. 5 of the WpHG (e.g. call options conferring rights in rem) are only included once in the calculation of the aggregate holding of voting rights. Generally, each case described in section 34 (1) sentence 1 no. 5 of the WpHG is also an instrument under section 38 of the WpHG. However, this is not necessarily the case the other way around, as rights in rem must be conferred for attribution in accordance with section 34 (1) sentence 1 no. 5 of the WpHG, which is specifically not what is required by section 38 of the WpHG.

Special case: Claims to retransfer under intragroup securities lending transactions

As a general rule, claims to retransfer under securities loans must be aggregated (section 38 (4) sentence 1 of the WpHG). BaFin allows an exception to this in cases where only a single retransfer claim needs to be notified if shares between different group companies are essentially retransferred within a group by way of further securities lending transactions, and the individual securities lending transactions arising between the group companies concerned are effectively deemed to be a single group securities lending transaction. A condition for this assumption is that the existence of the individual securities lending transactions is dependent on the other securities lending transactions. For this purpose, it must be ensured, based on the agreements or the mutual understanding of the parties, that the retransfer of the shares from the “final borrower” or the right to recall the shares of a lender triggers and brings about the immediate maturity of the other retransfer claims with the result that the chain of securities lending transactions as a whole must be reversed. That means that the securities loans must have substantially the same terms. Another condition is that the parties are able to distinguish the securities lending chain from other (securities lending) transactions in the same underlying, and that above all there is no netting of reciprocal claims.

Sections 36 and 37 of the WpHG apply mutatis mutandis to instruments held (section 38 (1) sentence 2 of the WpHG).

Section 33 (2) of the WpHG also applies to the holding of instruments at the date of the initial admission of the shares to trading on an organised market.

Footnotes: