Determination of the compensation of minority shareholders based on the stock market price (BGH, decision of January 31, 2024 (II ZB 5/22) - Vodafone Group plc / Kabel Deutschland Holding AG)

In its decision dated January 31, 2024 in the appraisal proceeding for the review of the adequacy of the compensation and the annual dividend under the domination and profit and loss transfer agreement between Vodafone Vierte Verwaltungs AG and Kabel Deutschland Holding AG of December 29, 2013, the German Federal Court has commented on various questions in connection with the compensation of minority shareholders pursuant to Section 305 AktG and the fixed annual dividend pursuant to Section 304 (2) sentence 1 AktG and has, in particular, confirmed the principles from its WCM decision (decision dated February 21, 2023 - II ZB 12/21).

The German Federal Court confirms that the stock market value of a company is generally a suitable basis for estimating the value of a shareholding and can therefore be used both to determine the compensation of minority shareholders pursuant to Section 305 AktG and to derive the fixed compensation pursuant to Section 304 (2) sentence 1 AktG, provided that there is a functioning capital market for the shares (para. 20 et seq.). According to the German Federal Court this may not be the case if there is a tight market. The German Federal Court does not base the existence of a tight market exclusively on the criteria set out in Section 5 (4) WpÜG-AngebVO or Section 255 (5) sentence 3 no. 3 AktG, but also cites low trading volumes, trading only on a few trading days and a low free float as indications of a tight market. The German Federal Court also points out that stock market prices are not sufficiently meaningful for the value of a shareholding if there are inexplicable price fluctuations or price manipulation or if capital market disclosure obligations have not been complied with. The decision does not go into further detail as to whether, with regard to the required number of trading days, the standard set out in Sections 5 (4) WpÜG-AngebVO and 255 (5) sentence 3 no. 3 AktG should be applied. However, the court does not object to the fact that the lower court (OLG Munich, decision of December 14, 2021 - 31 Wx 190/20) applied Section 5 para. 4 WpÜG-AngebVO – among other criteria – as a benchmark for determining sufficient market depth. Whether the unsuitability of the stock exchange price for determining the beta factor in individual cases can speak for the unsuitability of the stock exchange price as a basis for determining the compensation and annual dividend (see, for example, OLG Frankfurt, decision of February 14, 2024 - 21 W 129/22) is left open by the German Federal Court (para. 39).

Although the German Federal Court emphasizes in the decision that there is no rule/exception relationship between the determination of the value of a shareholding based on stock market value on the one hand and the capitalized earnings value method on the other hand and that each method can be suitable in individual cases both for determining the value of a shareholding and for checking its plausibility (para. 54), it is to be expected that – provided a functioning capital market exists – the judicial determination of compensation and annual dividend on the basis of stock market prices will become the rule. Therefore, the correct determination of the stock market price and, in particular, the correct determination of the three-month reference period will become increasingly important. In this respect, the question arises in particular as to what formal and substantive requirements the announcement of the structural measure must satisfy (see also recently OLG Karlsruhe, decision of April 16, 2024 - 12 W 27/13 para. 61 et seq.) and to what extent it is necessary that the conditions for its implementation are already in place at the time of the announcement of the structural measure. This question can be of considerable importance if structural measures are announced in connection with a public takeover offer and it is unclear at the time of the announcement whether the bidder will obtain the majority required to implement the structural measure, whether offer conditions will be fulfilled (in time), whether the target company will support the implementation of the structural measure or which structural measure will ultimately be implemented if the bidder – depending on its shareholding – announces the implementation of different structural measures. The answer to this question determines whether bidders can use the stock market price which is unaffected by the takeover offer when implementing structural measures and thus avoid that shareholders who do not accept the takeover offer are participating in a takeover premium in connection with the structural measure.

After a brief description of the state of opinions, the German Federal Court leaves the question undecided in the present decision on the grounds that the stock market price was below the contractually agreed compensation during all possible reference periods (para. 32 et seq.). In the present case, the German Federal Court sees the latest possible reference period from the bidder's ad hoc announcement that the offer threshold of 75% has been reached and that the bidder therefore intends to conclude a domination and profit and loss transfer agreement. It is interesting in this respect that the antitrust clearance by the European Commission required for the completion of the takeover offer was only granted after this ad hoc announcement. This indicates that, in the opinion of the German Federal Court, outstanding regulatory conditions at the time of the announcement of the structural measure are not generally decisive for determining the reference period.

The German Federal Court then confirms the prevailing opinion, according to which it is irrelevant for the valuation what price is paid off-market for shares in the company, because pre-acquisition prices generally reflect subjective perceptions of value and motives (para. 50 et seq.). This should not exclude an estimate of the company value based on off-market pre-acquisition prices in special cases (see also OLG Frankfurt, decision of September 13, 2021 - 21 W 38/15). This view is also supported by Section 11a SpruchG, according to which the court can take into account a settlement that is supported by a majority of claimants comprising at least 90% of the share capital held by all claimants. In accordance with the legal concept of Section 11a SpruchG, acquisition prices paid by the other party to the agreement in connection with the conclusion of the company agreement should therefore also be able to be used by the court to estimate the settlement, at least if the acquisition relates to at least 90% of the shares held by minority shareholders.

Finally, with regard to the determination of the fixed annual dividend pursuant to Section 304 (2) sentence 1 AktG, the German Federal Court approves the derivation of the annuity interest rate using the bond-spread-method in the present case (para. 69 et seq.). In the opinion of the German Federal Court, it is not necessary to take into account the risk of the controlled company being depleted due to the implementation of disadvantageous measures being taken during the term of the agreement because the domination and profit and loss transfer agreement in the present case provides for a revival of the put option in the event of a termination of the agreement and thus sufficiently compensates for the risk of depletion.