The end of “Deutschland AG” and implications for corporate law

Germany in Danish Business Research

CBS, 4 November 2014

Georg Ringe

Professor of Law, CBS

Overview

• German Corporate Governance traditionally known for distinct features, the “Deutschland AG”

– e.g. cross-participations and blockholding of firms

– strong role of banks

• This is currently changing

• Implications for lawmaking?

• Implications for corporate law theory?

(1) The traditional view

• Concentrated ownership

– Becht and Boehmer (2003): 82% of listed firms have blockholder (>25%)

– Second largest 7.4% on average

• Network

– The “Deutschland AG”: network of virtually all firms in the country

– Cross-participations and interlocking directorships

– Common macroeconomic orientation

(1) The traditional view

• Strong role of banks

– Equity stakes

– Seats on the board

– Longstanding business relationship (“Hausbank”)

– Proxy rights for their clients

(1) The traditional view

• Legal rules respond!

Strong minority protection, e.g.

- Shareholder equality

- Duties of loyalty between shareholders

- Specific group law

- Rescission claim against shareholder resolutions

- Limitations of banks’ ability to obtain proxies

(2) Winds of change

• Towards dispersed ownership

• More international ownership

• Reduced role of banks

(2) Winds of change

(2) Winds of change

(2) Winds of change

• Towards dispersed ownership

– Other studies confirm signs of an erosion of strong voting blocks, at least for listed / blue chip companies

– DAI 2010: share of dispersed ownership in DAX30 companies has grown from 64.5% in 2001 to 82.6% in 2009

– Andres et al 2011: top five owners reduce 5% stakes from 128 in 1998 to 20 in 2006

(2) Winds of change

• Banks reduce their stakes

Vitols (2005): drop in bank ownership from 12-13% share in the 1990s to 8% in 2003

(2) Winds of change

• Growing internationalization of ownership

(2) Reasons?

• Globalization

– Development of global capital markets led to market pressure on German banks

– Investment banking, M&A promises higher returns and requires “neutrality”

(2) Reasons?

• Taxation reform

– Center-left government in 2000 abolished taxation of equity divestitures: clear goal of ending the network of firms

– Weber (2009) confirms link between reform and equity sell-off in the 2000s

(3) Implications

• Importance: a “market-led” process

– Global markets push for new ownership patterns

– New ownership structures require different legal rules

– Law is a “business factor”, which decides over the attractiveness of a business environment (“law as a product”)

(3) Implications

• Practical implication: law should adjust!

– Minority protection loses some of its salience where shareholders become weaker overall

– Law should now rather address the conflict between management and shareholders (as a whole)

• E.g.: improve shh derivative suits

• Strengthen management accountability

• Improve shh presence at general meetings

(3) Implications

• To some extent, German law is living up to expectations

– A number of reform laws over the past years follow this trend

– EU activity facilitates international ownership and promotes improvements for intl. investors

– But could go further:

• Curb related-party transactions

• Promote an active takeover market

Summary

• German corporate landscape is changing: the erosion of “Germany, Inc.”

– Growing equity dispersion

– Growing internationalization of investors

• Corporate law is changing too

– Evidence for market forces requiring legal rules

– Changing ownership structure as an effective way to make legal change functional

Study available at http://ssrn.com/abstract=2457431

Georg Ringe

Professor of Law, CBS

Email: gr.jur@cbs.dk