Shareholder Activism in Germany

Shareholder activism in Germany: the landscape

Shareholder activism in Germany has become a regular feature of the capital markets. Activist investors, often hedge funds with minority stakes of a few percent, campaign for changes in strategy, capital allocation, portfolio structure, governance or board composition at listed companies. Institutional investors and proxy advisers increasingly support well-reasoned campaigns, and environmental and social topics have added a further dimension. German stock corporation law gives minority shareholders a set of tools that activists use systematically: agenda requests, counter-motions and nominations, questions at the general meeting, special audits, and in some cases claims against board members.

At the same time, the German two-tier board system, co-determination and the strong position of the supervisory board shape how campaigns are conducted. The management board is not bound by shareholder instructions, and supervisory board members can only be removed early by a three-quarters majority unless the articles provide otherwise (§ 103(1) AktG). Activists therefore focus on public pressure, private engagement with both boards and the annual general meeting as the main stage.

This briefing explains the legal tools available to activists, the disclosure rules that apply to them, how boards should engage, and how listed companies can prepare.

The activist toolkit under the AktG

The agenda request is the most powerful tool in practice: it forces the company to put an activist's proposal, for example the removal or election of supervisory board members, a special audit or a non-binding resolution, before all shareholders. In a virtual general meeting, the same rights apply, with electronic exercise; see our briefing on virtual general meetings.

Say-on-pay votes on the remuneration system (§ 120a AktG) and on the remuneration report give activists further opportunities to signal dissatisfaction, even though the votes are advisory. A low approval rate is a public message that boards cannot ignore.

Disclosure and acting in concert

Activists must observe the transparency rules of the Securities Trading Act (WpHG). Voting rights reaching, exceeding or falling below 3, 5, 10, 15, 20, 25, 30, 50 and 75% must be notified to the issuer and BaFin within four trading days (§ 33(1) WpHG), and holdings of instruments such as options and swaps are aggregated under separate rules. An investor reaching 10% must also inform the issuer within 20 trading days of the objectives pursued with the acquisition and the source of funds, including whether it intends to influence the composition of the boards or the capital structure (§ 43(1) WpHG), unless the articles opt out.

Coordination between investors raises the question of acting in concert. Voting rights of persons who coordinate their conduct in relation to the issuer on the basis of an agreement or otherwise are attributed to each other for disclosure purposes, and, under the WpÜG, for the 30% control threshold that triggers a mandatory offer. Agreements in individual cases are excluded, but repeated or long-term coordination aimed at a lasting change in the company's strategic direction can count. Activists working with other funds, and companies talking to several investors, must keep these rules in mind. Our page on capital markets covers transparency duties.

Engagement with boards

Most shareholder activism in Germany begins privately, with a letter or meeting requesting changes. The management board and the supervisory board must decide how to respond. Key legal points are:

• Who speaks. The management board represents the company in investor relations. The supervisory board chair may talk to investors on supervisory board topics, such as board composition and executive remuneration, as recommended by the German Corporate Governance Code, but should coordinate with the management board.
• Equal treatment and inside information. Shareholders must be treated equally (§ 53a AktG), and inside information may not be disclosed selectively under the Market Abuse Regulation. Meetings with activists should be prepared with these limits in mind.
• Duty of care. Boards must assess an activist's proposals on their merits, in the interest of the company, and document their deliberations. The business judgment rule protects reasonable decisions taken on an adequate information basis.
• Settlement agreements. Agreements with activists, for example on board seats or strategic reviews, must respect the supervisory board's competence and the general meeting's rights; the company cannot bind future elections.

Defence preparation for listed companies

German law offers fewer structural defences than some other jurisdictions. Poison pills in the US sense are not available, staggered boards are of limited effect, and the board's neutrality duty under § 33 WpÜG restricts defensive measures once a takeover offer is made. Defence preparation therefore focuses on:

• Strategy and communication. A clear, credible equity story, consistent capital allocation and transparent reporting reduce the room for activist criticism.
• Governance hygiene. A balanced, independent and well-qualified supervisory board with a current skills matrix, a remuneration system that investors support and an effective compliance system.
• Shareholder base. Regular dialogue with long-term investors and proxy advisers, so that their support can be mobilised in a contested vote.
• General meeting readiness. Procedures for agenda requests, counter-motions and questions, a well-briefed chair and robust answers to likely questions, since information violations are the most common basis for challenges.
• Legal review of proposals. Quick assessment of whether an activist's request is admissible, whether the thresholds and holding periods are met and whether the company must publish counter-motions.

Activist campaigns often target conglomerates with underperforming divisions, companies with excess cash or under-levered balance sheets, and companies with governance concerns. Special audit requests are a recurring escalation tool, because they create pressure and public attention even when the court ultimately rejects them. Companies should therefore be ready to explain promptly, with evidence, why the facts alleged do not justify suspicion of serious misconduct, and to assess whether a voluntary review by an independent adviser would be the better response.

How campaigns unfold

Campaigns of shareholder activism in Germany tend to follow a recognisable pattern, and each phase has its own legal questions:

1. Stake building. The activist acquires shares and instruments, usually staying below the first notification threshold of 3% for as long as possible, and must observe the insider dealing prohibition if it receives non-public information.
2. Private approach. A letter or meeting with the chief executive or supervisory board chair sets out the activist's thesis. The company must decide whether to engage and who participates.
3. Public campaign. If private talks fail, the activist publishes an open letter, a presentation or a website, often timed before the general meeting season. Statements must not be misleading, or they may constitute market manipulation.
4. General meeting. Agenda requests, counter-motions, nominations, questions and votes against discharge or remuneration resolutions put the activist's case to all shareholders.
5. Escalation or settlement. Special audit applications, challenge actions or claims against board members on one side, negotiated outcomes such as board changes or strategic reviews on the other.

Boards that understand this sequence can respond proportionately at each stage rather than reacting to every public statement, and can involve advisers before positions harden.

Legal limits for activist investors

Shareholder activism is legitimate, but activists are subject to legal limits. Under the Market Abuse Regulation, they may not trade on inside information obtained in confidential talks with the company and may not disseminate false or misleading signals about the issuer. Short positions combined with public criticism are subject to the transparency rules of the EU Short Selling Regulation.

Shareholders also owe the company and fellow shareholders a duty of loyalty, which the courts have used to limit abusive challenge actions; claims for damages are possible where a shareholder uses its rights to extort special benefits. Activists who coordinate with others must monitor acting-in-concert rules, because an unintended attribution of voting rights can trigger disclosure breaches with the loss of voting rights under § 44 WpHG, or, at 30%, a mandatory offer. Companies, for their part, should check notifications carefully, because voting rights from shares for which notifications were not made do not exist for that period and votes cast on them can make resolutions challengeable.

Trends in shareholder activism

Several trends shape shareholder activism in the current German market. Campaigns increasingly target mid-cap companies, not only the largest issuers. Environmental, social and governance themes feature in campaigns by both traditional activists and long-term investors, for example demands for climate transition plans or votes on sustainability reporting. Virtual and hybrid general meetings have changed the dynamics of the meeting itself, with pre-submitted statements and video speeches. Finally, activists frequently combine public campaigns with M&A theses, calling for spin-offs, sales or mergers, which brings takeover law and the rules on squeeze-outs and delisting offers into play.

Illustration: a hypothetical activist fund acquires 3.2% of a listed German industrial group and notifies the holding. It writes to the supervisory board chair demanding a spin-off of a division. When the board rejects the proposal, the fund, together with an investor holding a further 2.5%, submits an agenda request for a non-binding resolution and nominates two supervisory board candidates. The company examines whether the 5% threshold and the 90-day holding period are met, whether the investors are acting in concert, and how to respond to the nominations in its own proposals.

How TRW & Co helps

We advise listed companies, their management and supervisory boards on shareholder activism: preparedness reviews, response strategies, engagement with investors, agenda requests and counter-motions, general meeting preparation, special audit and information proceedings and challenges to resolutions. We also advise investors on the legal framework for their engagement, including disclosure and acting-in-concert rules. Our corporate governance team works with litigation and capital markets colleagues. Contact us to discuss your preparedness.