1. The end of “Deutschland AG” and implications for corporate law
Germany in Danish Business Research
CBS, 4 November 2014
Georg Ringe
Professor of Law, CBS

2. Overview
•German Corporate Governance traditionally known for distinct features, the “Deutschland AG”
–e.g. cross-participations and blockholding of firms
–strong role of banks
•This is currently changing
•Implications for lawmaking?
•Implications for corporate law theory?

3. (1) The traditional view
•Concentrated ownership
–Becht and Boehmer (2003): 82% of listed firms have blockholder (>25%)
–Second largest 7.4% on average
•Network
–The “Deutschland AG”: network of virtually all firms in the country
–Cross-participations and interlocking directorships
–Common macroeconomic orientation

4. (1) The traditional view
•Strong role of banks
–Equity stakes
–Seats on the board
–Longstanding business relationship (“Hausbank”)
–Proxy rights for their clients

5. (1) The traditional view
•Legal rules respond!
Strong minority protection, e.g.
-Shareholder equality
-Duties of loyalty between shareholders
-Specific group law
-Rescission claim against shareholder resolutions
-Limitations of banks’ ability to obtain proxies

6. (2) Winds of change
•Towards dispersed ownership
•More international ownership
•Reduced role of banks

7. (2) Winds of change

8. (2) Winds of change

9. (2) Winds of change
•Towards dispersed ownership
–Other studies confirm signs of an erosion of strong voting blocks, at least for listed / blue chip companies
–DAI 2010: share of dispersed ownership in DAX30 companies has grown from 64.5% in 2001 to 82.6% in 2009
–Andres et al 2011: top five owners reduce 5% stakes from 128 in 1998 to 20 in 2006

10. (2) Winds of change
•Banks reduce their stakes
Vitols (2005): drop in bank ownership from 12-13% share in the 1990s to 8% in 2003

11. (2) Winds of change
•Growing internationalization of ownership

12. (2) Reasons?
•Globalization
–Development of global capital markets led to market pressure on German banks
–Investment banking, M&A promises higher returns and requires “neutrality”

13. (2) Reasons?
•Taxation reform
–Center-left government in 2000 abolished taxation of equity divestitures: clear goal of ending the network of firms
–Weber (2009) confirms link between reform and equity sell-off in the 2000s

14. (3) Implications
•Importance: a “market-led” process
–Global markets push for new ownership patterns
–New ownership structures require different legal rules
–Law is a “business factor”, which decides over the attractiveness of a business environment (“law as a product”)

15. (3) Implications
•Practical implication: law should adjust!
–Minority protection loses some of its salience where shareholders become weaker overall
–Law should now rather address the conflict between management and shareholders (as a whole)
•E.g.: improve shh derivative suits
•Strengthen management accountability
•Improve shh presence at general meetings

16. (3) Implications
•To some extent, German law is living up to expectations
–A number of reform laws over the past years follow this trend
–EU activity facilitates international ownership and promotes improvements for intl. investors
–But could go further:
•Curb related-party transactions
•Promote an active takeover market

17. Summary
•German corporate landscape is changing: the erosion of “Germany, Inc.”
–Growing equity dispersion
–Growing internationalization of investors
•Corporate law is changing too
–Evidence for market forces requiring legal rules
–Changing ownership structure as an effective way to make legal change functional

18. Study available at http://ssrn.com/abstract=2457431
Georg Ringe
Professor of Law, CBS
Email: gr.jur@cbs.dk