Section 20 AktG: Notification Duties and Loss of Rights.

A holding company builds up a stake in a German stock corporation, an investor consolidates share packages, a founder transfers shares to a family holding. What is often overlooked is a formal requirement with severe consequences: the notification of material shareholdings under section 20 of the German Stock Corporation Act (Aktiengesetz – AktG).

This article explains when section 20 AktG applies, which notifications are required and why a forgotten filing can lead to a temporary suspension of rights.

Section 20 AktG directly concerns shareholdings in a stock corporation (Aktiengesellschaft) with its registered seat in Germany. Equivalent rules apply to a partnership limited by shares (KGaA) and to an SE by statutory reference. Important: it does not apply to shares in an issuer within the meaning of section 33(4) of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG); those are subject to the capital-markets transparency regime (section 20(8) AktG). This article deals only with the regime under stock corporation law.

The legislature wants to ensure that shareholders, creditors and the public are informed about group structures involving stock corporations. The AktG therefore requires every enterprise with a material participation to notify the stock corporation of that participation in text form. The company must publish notifications under section 20(1) and (4) AktG (as well as any later fall below those thresholds) without undue delay in its corporate gazettes (Gesellschaftsblätter) – which always include the Federal Gazette (section 25 AktG). The additional notification under section 20(3) AktG is not subject to that publication duty.

First things first: the sanctions for breach of the notification duty

Before turning to the specific triggering events, it is worth looking at the legal consequences of a failure to notify. They are painful:

Rights attached to shares belonging to an enterprise required to notify under subsection 1 or 4 do not exist, for the period during which that enterprise fails to comply with the notification duty, either for that enterprise or for a dependent enterprise or for another person acting for the account of that enterprise or of a dependent enterprise. This does not apply to claims under section 58(4) and section 271 if the notification was not intentionally omitted and has subsequently been made.

The consequence is far-reaching: all control rights of the materially participating shareholder are suspended for the time being. It may not attend the general meeting, exercise (or have exercised) its voting rights there or assert information rights; it may not have a general meeting convened upon a minority request (section 122 AktG); and it may not challenge resolutions. It also cannot exercise any rights to appoint members of the supervisory board that are tied to its participation. If the shareholder nevertheless votes at a general meeting, the resulting resolution may be challengeable if it depended on that participation.

As regards economic rights, a distinction must be made. The sanction always covers subscription rights in a capital increase or in the issue of debt securities or profit participation rights. In other words, the affected shareholder cannot protect itself against dilution. In the event of a capital reduction by redemption of shares, it receives no redemption consideration (section 237 AktG).

For dividends and the share in the liquidation proceeds, the position is somewhat less severe. If the affected shareholder files the notification after the resolution on profit appropriation has been adopted, or after the claim to liquidation proceeds has arisen, and can prove that the delay was not intentional, the payment claim revives. The catch is obvious: the shareholder must prove the absence of intent. Because the burden of proof lies with the shareholder, even doubts as to whether it at least considered the possibility of a notification duty and accepted a breach of it are enough to prevent the defect from being cured (BGH, judgment of 5 April 2016 – II ZR 268/14, paras. 35 et seq.).

Any payments received without legal basis must be repaid by the shareholder to the company. The management board that caused payment to be made without duly verifying compliance with the notification duties may also be personally liable to the company for reimbursement.

When does the notification duty arise?

Now that enough fear has been generated, here is an overview of the requirements of the notification duty:

• The notification duty applies only to shareholders that qualify as an enterprise (typically holding companies, family companies or acquisition vehicles). The concept must be understood in context: for the purposes of German group law, an enterprise is any legal entity with other economic ties or interests, regardless of legal form or merchant status. Even a private individual who holds majority stakes in other companies may therefore qualify as an enterprise for the purposes of section 20 AktG. A purely private investor without enterprise status is not covered.
• Enterprises to which more than one quarter of the shares in the stock corporation belong (i.e. more than 25%) must notify the company of that fact without undue delay in text form. Section 16(4) and section 20(2) AktG contain attribution rules for shares that are held only indirectly or in relation to which the enterprise merely has a transfer claim or a take-up obligation. If the enterprise is itself a corporation, it must make a separate notification under the conditions of section 20(3) AktG.
• Enterprises holding more than 50% of the share capital or voting rights (a majority participation within the meaning of section 16(1) AktG) must also notify the company of that fact without undue delay in text form.
• If one of the above thresholds is later fallen below, that fact must likewise be notified to the company without undue delay in text form.
• The notification must be recognisable to the management board of the stock corporation as being made in fulfilment of the statutory notification duty. It is therefore not enough, for the purpose of avoiding sanctions, that the management board learns about the material participation by some other route. The rule is applied very strictly: even in entirely obvious cases (including companies with only a single shareholder), the formal notification and publication should not be dispensed with. The trouble often appears only years later, for example when an insolvency administrator seeks repayment of dividend distributions because no notification under section 20 AktG had been made.

Checklist and starting form

In practice, section 20 AktG can be checked in five steps:

1. Is the company an AG, KGaA or SE with its registered seat in Germany and outside the WpHG transparency regime?
2. Does the shareholder qualify as an enterprise, for example as a holding company, family company or acquisition vehicle?
3. Is the threshold of more than 25% or a majority participation reached, crossed or later fallen below?
4. Do attribution rules apply, for example because shares are held indirectly, because acquisition claims exist or because dependent companies are involved?
5. Is the notification in text form and drafted so that the management board can clearly recognise it as a notification under section 20 AktG?

A highly simplified starting form may begin as follows:

[Shareholder] hereby notifies [AG] pursuant to section 20(1) AktG that it directly/indirectly holds more than one quarter of the shares in [AG].

[Optional: At the same time, a majority participation within the meaning of section 20(4) AktG exists.]

Where the shareholder is itself a corporation, it should also be checked whether a separate notification under section 20(3) AktG is required. For notifications under section 20(1) and (4) AktG, the company must also arrange publication in the Federal Gazette.

Section 20 AktG is formal. The consequences of failing to comply are not. Anyone reaching or falling below participation thresholds in a German stock corporation should therefore not treat the filing as a side issue.