Wider disclosure of shareholdings in Germany – AND inclusion of stock options.

As of January 2007, the rules on shareholdings disclosure in Germany have changed. They raise both an opportunity AND an obligation for issuers.

A shareholder acquiring more than 3% of the voting rights of an issuer publicly traded in Germany must publicly disclose if it exceeds or falls below this threshold.

The 3% threshold follows the UK minimum; previously the German level had 5%. Under the new rules, a shareholder must publicly disclose an acquisition or disposal of voting rights whereby the proportion of voting rights held by such shareholder reaches, exceeds or falls below the thresholds of 3%, 5%, 10%, 15%, 20%, 25%, 30%, 50% and 75%.

First the opportunity. For purposes of calculating the percentage held, investors must disclose any stock options which can be exercised and transferred into voting stock unilaterally by the holder. The acquirer must notify the issuer, the German regulator (BaFin) and the company who must tell the market by disseminating such information to the media Europe-wide. The inclusion of stock options as “material” will create more transparency for companies – and the market – on who the issuers' major shareholders are. And it will make it more difficult (for hedge funds for example) to acquire covertly major holdings in the voting rights of a public company.

Now the compliance obligation - Europe-wide publication. In the future, insider information, information on directors’ dealings, financial reports and other information that must be publicly disclosed, may be required to be disseminated by the issuer to a European-wide audience rather than only within Germany, depending on who the shareholders are and where they are located.

Federal Legislation. The disclosure requirements for publicly traded issuers will no longer be stipulated on a state level by one of the 8 Germany exchanges, but in the future will be included in the federal German Securities Trade Act. Accordingly, in the future the BaFin rather than the exchange authorities on the state level will be responsible for enforcing it. It is not clear yet how they will do this, or what penalties might be applied.

This raises again the issue of knowing who and where your shareholders are. If the issuer is unaware of this, he may – unknowingly - be in breach of the new rules on transparency.