Sustainability plays a central role for many institutional investors. Environmental, social and good corporate governance issues, often abbreviated as ESG, are therefore frequently high on the agenda when investors talk to representatives of the companies in which they invest. Investors often discuss their positions among themselves in order to be able to represent their views on sustainability as effectively as possible. This communication can vary in extent, from non-committal discussions on sustainability issues to agreeing on a joint approach vis-à-vis the governing bodies of a company.

The problem with this is that such agreements can fulfil certain criteria for the attribution of voting rights under the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG) and the German Securities Acquisition and Takeover Act (Wertpapiererwerbs- und Übernahmegesetz – WpÜG). This can have far-reaching organisational and/or financial consequences.

If, for example, cooperation by shareholders means that the voting rights in a listed company held by the shareholders in question are to be attributed to the other shareholders involved in the cooperation, then under sections 33 and 34 of the WpHG, these voting rights must be reported when certain threshold levels¹ are reached. If, as a result, the shareholders reach or exceed the control threshold of 30% of voting rights, they are even required to make a mandatory offer to all other shareholders pursuant to sections 35 and 30 of the WpÜG. If they violate these obligations, they risk losing the rights connected with the shares in question (section 44 of the WpHG, section 59 of the WpÜG) as well as a fine (section 120 of the WpHG, section 60 of the WpÜG). The other shareholders can assert the loss of rights, for example as part of appeals against resolutions of the general meeting of the affected stock corporation.

Against this background, it is understandable that institutional investors seek the greatest possible legal certainty with regard to the consequences of their agreements under securities trading or takeover law.

This article therefore classifies forms of collaborative engagement that are particularly relevant in practice according to their relevance to criteria for the attribution of voting rights under securities law.

Legal framework: when is a group acting in concert?

Attribution of voting rights based on coordinated conduct, better known as acting in concert, is covered by section 34 (2) of the WpHG and section 30 (2) of the WpÜG. Shareholders or their subsidiaries are deemed to be acting in concert if they coordinate their conduct with regard to a stock corporation. Acting in concert in this sense means that the parties involved reach an understanding on the exercise of their voting rights or otherwise collaborate with the aim of bringing about a lasting and material change in the issuer’s business strategy. This does not include agreements in individual cases.² According to rulings of the Federal Court of Justice³ (Bundesgerichtshof - BGH), formal assessment is required to assess the question of whether specific agreements concern only individual cases. This means that the frequency of coordinated conduct must be taken into account. This also applies when an individual agreement has sustained or lasting consequences for the target company in terms of its business policy. According to the BGH, formal assessment of individual cases is called for by the wording of the law and aspects of legal certainty, but also by the meaning and purpose of the relevant provisions.

Agreement on an individual case: BaFin follows view of the BGH

BaFin follows this view. In its opinion, an agreement concerns only an individual case if the coordinated conduct relates to a specific case that concerns an individual matter and is not part of an overall (coordinated) plan, or if there is no factual relationship between cases (Fortsetzungszusammenhang) and therefore no continuity to the coordinated conduct.⁴ However, the question of whether a particular conduct constitutes an individual case is only relevant if the parties involved actually coordinate their conduct with regard to a target company. For example, membership of or participation in a general engagement platform (see info box) does not necessarily mean that shareholders are acting in concert, as this alone would not normally satisfy the criteria for acting in concert.

The following analysis of case studies is merely BaFin’s legal assessment. Civil courts that decide on appeals against resolutions taken at general meetings are not bound by these statements and may therefore reach a different assessment. Furthermore, the legal assessment of abstract case studies is limited to the specific activities described in the example. In the actual cases on which these examples are based, the facts are much more complex and far-reaching.

In BaFin’s opinion, an abstract assessment cannot determine whether coordinated conduct aims for a lasting and material change in a company’s business strategy. In order to examine whether this criterion has been met, the changes intended by the parties involved must always be considered in relation to the previous business strategy of the company in question. For example, the decision to switch to renewable energies exclusively, as an individual ESG topic, may be irrelevant for the business strategy of a diversified group. However, if an energy company chooses to discontinue its use of nuclear power and fossil fuels, this could constitute a lasting and material change in the company’s business strategy.

The following statements are therefore limited to a legal assessment of the case studies from the point of view of whether or not the parties involved reached an agreement on the exercise of voting rights. However, even where an agreement between parties does have a significant impact on a company’s orientation, it still needs to be considered whether or not the case can be classified as an individual case. This will also be discussed in more detail below.

Case studies and their legal assessment

Example one:

Several investors meet, for example in a conference call, to discuss specific ESG topics, such as a company’s climate strategy, the protection of human rights in the supply chain or controversies at a company in which they invest. The goal is, for example, to achieve a more ambitious climate strategy or improved processes for protecting human rights in the supply chain. The investors decide to have a joint meeting with the chair of the supervisory board or the management board of the company.⁵ They do not discuss or agree on any plans to exercise voting rights (they do not plan to file shareholder proposals; do not agree to escalate the topic). This group is run on an engagement platform.

BaFin’s assessment:
There is no understanding on the exercise of voting rights. Such an understanding would only be deemed to have been reached if the parties unanimously assumed that in exercising their voting rights they would be exerting an influence on the target company.

If there is no voting agreement, an examination of whether or not the exception for individual cases applies is only relevant if the investors intended to change the business strategy of the company in question. The one-off meeting of the investors with executive bodies of the company constitutes an individual case.

Example two:

Several investors meet to discuss specific ESG topics, such as a company’s climate strategy, the protection of human rights in the supply chain or controversies at a company in which they invest. Their goal is, for example, to achieve a more ambitious climate strategy or improved processes for protecting human rights in the supply chain. The investors write a letter to the management, i.e. to the chair of the supervisory board or the management board. In this letter, they point out the problems and call for changes, such as the formulation of a strategy to reduce emissions. The investors jointly sign the letter. They do not discuss or agree on any plans to exercise voting rights. This group is run on an engagement platform.
BaFin’s assessment:

There is no understanding on the exercise of voting rights.

If there is no voting agreement, an examination of whether or not the exception for individual cases applies is only relevant if the investors intended to change the business strategy of the company in question. Where investors coordinate conduct in order to write a one-off letter to a company’s executive bodies, this constitutes an individual case.

Example three:

Building on the first example: the investors did not consider the discussion with the company to be satisfactory because the company’s representative did not promise to make any changes. The investor group discusses possible escalation strategies. This may include speaking out in favour of or against the re-election of members of the supervisory board or other resolutions on this topic.

Case A) Although they discuss exercising voting rights, there is no explicit agreement or tacit understanding to vote in concert.

Case B) A member of the group makes a motion to add this to the agenda of the general meeting. Although they discuss exercising voting rights, there is no explicit agreement or tacit understanding to vote in concert.

BaFin’s assessment:
Case A) The discussion of possible voting on resolutions at the general meeting does not in itself constitute an understanding on the exercise of voting rights.

Case B) The exercise of other shareholder rights, for instance the request for an addition to the agenda pursuant to Section 122 (2) of the German Stock Corporation Act (Aktiengesetz – AktG), does not in itself constitute an understanding on the exercise of voting rights.

If there is no voting agreement, an examination of whether or not the exception for individual cases applies is only relevant if the investors intended to change the business strategy of the company in question. If, after finding the results of their discussion with the company (example 1) to be dissatisfactory, the investors again coordinate their conduct in order to request an addition to the agenda for a specific annual general meeting, this would (again) constitute an individual case.

Example four:

Several investors formulate a joint public position, for example an open letter or press release (similar to example two, letter to the supervisory board) regarding a specific company. In this statement, they set out demands regarding, for example, changes to the supervisory board, remuneration or the admission of shareholder proposals or other specific ESG topics. The investors exchange views on this for the purpose of formulating the statement, they discuss and develop plans to exercise voting rights as an escalation. However, the decision is made individually by each investor.

BaFin’s assessment:
The joint specification of plans to exercise voting rights (a decision made individually and independently by each investor) constitutes a voting agreement as the statement (e.g. open letter or press release) refers with sufficient clarity (express or implied) to items of a general meeting and reflects a joint position held by the investors.

Coordination regarding the exercise of voting rights at a specific general meeting constitutes an individual case. If the objectives as proposed by the investors constitute a change in business strategy, the influence exerted on the company could constitute an individual case in itself. This case is connected to the voting agreement for the specific general meeting (another individual case). From the start, there is a factual relationship (Fortsetzungszusammenhang) between these cases (referred to as an “escalation” in the case study). Due to this factual relationship between the two individual cases, the exception for individual cases would not be applicable.

Example five:

At a company’s general meeting, an investor representative, in agreement with other investors, takes a position on specific governance or sustainability issues, for example the composition of the supervisory board, the remuneration of the management board, the company’s climate strategy or the protection of human rights in the supply chain. In doing so, the representative mentions not only that they hold this opinion personally, but that other investors (whose voting rights they do not represent!) also share this perspective. While the individual investor’s intention to exercise voting rights/their voting behaviour is mentioned, voting behaviour is not coordinated with the other investors.

BaFin’s assessment:
The announcement of one's own intention to exercise voting rights in a certain manner in resolutions of the general meeting does not constitute an understanding on the exercise of voting rights.

If there is no voting agreement, an examination of whether or not the exception for individual cases applies is only relevant if the investors intended to change the business strategy of the company in question. Participation in a general meeting constitutes an individual case.

Example six:

Several investors agree to draft and submit a request for an addition to the agenda of a general meeting as an escalation vis-à-vis a company that, in the investors’ view, has not set out sufficiently ambitious climate targets. In this request, they demand a reduction in CO2 emissions. The intention to exercise voting rights is clearly recognisable as the applicants rally behind this request. The intention here is explicitly not to take over the company, but to bundle investor interests.

BaFin’s assessment:
The joint submission of a request for an addition to the agenda constitutes a voting agreement if the objective of the request is for the general meeting to pass a specific resolution. This is because the request explicitly refers to items of a general meeting and reflects a joint position of the investors.

If the voting agreement is made with regard to a request for an addition to the agenda of a specific general meeting, this constitutes an individual case.

Table: Collaborative engagement: Overview of case studies

The following overview summarises the above case studies and their legal assessment.
Case	Coordinated conduct	Voting agreement	Individual case exception
* If the required changes aim at a lasting and material change in the business strategy
1	Discussion of ESG topics among investors, joint discussion between the investors and members of the company’s governing bodies	no	yes
2	Discussion of ESG topics among investors, joint letter from investors to members of the company’s governing bodies to demand changes	no	yes
3	After the company refuses to change in Case 1, investors discuss escalation strategies	no	yes
4	Collectively, investors publicly demand change at a company and formulate their individual intentions to exercise their voting rights at the next general meeting as an escalation mechanism	yes	yes
			no*
5	Statement on ESG topics by an investor representative at a general meeting, mentioning that their position is also shared by other investors	no	yes
6	Agreement between investors to submit a joint request for an addition to the agenda at a general meeting and to uniformly exercise their voting rights on this agenda item	yes	yes

Footnotes: