Collaborative engagement and acting in concert in the interests of sustainable management – a balancing act for investors
The coordinated approach of investors towards companies enables them to exert a combined influence on ESG issues, but it is a balancing act.
Sustainability factors are playing an ever more important role in today's business landscape. (Institutional) investors are making increasing demands in this respect, not least in the interests of their stakeholders. In order to pursue these common goals, it is beneficial for them to enter into dialogue and join forces with their holding companies. However, this form of collaboration also harbours considerable legal risks, especially if it is considered "acting in concert", which can have organisational and financial consequences.
Collaborative engagements as an effective means of strengthening the ability to exert influence
"Collaborative engagements" describe the cooperation of several investors who wish to jointly influence a company's business policy. They can be both formal and informal, although both forms can also be combined. Formal collaborative engagement refers to the exercise of shareholder rights. In particular, this includes exercising the right to vote, the right to ask questions and the right to speak on items relating to ESG at the general meeting, submitting countermotions and their own election proposals (in particular for the Supervisory Board election) and bringing actions to set aside a resolution and actions for annulment. Minority rights such as submission of supplementary resolutions and the convening of an extraordinary general meeting are also conceivable. Informal collaborative engagement, on the other hand, refers to any other type of influence, such as background discussions between investors and the management or supervisory board of a company as well as public/non-public letters to management and media campaigns.
Investors can meet on special platforms to coordinate collaborative engagement. Examples of engagement platforms in European countries include Eumedion (Netherlands), the Investor Forum (UK), Assogestinoni (Italy) and Ethos (Switzerland). In Germany, the Sustainable Finance Advisory Committee of the German Federal Government has established the principles of an engagement platform (Engagement Platform for Sustainable Impact (GEPSI)) and published them in a recent final report. According to this report, however, the implementation of a platform is the responsibility of the investor groups addressed.
Collaborative engagements offer investors significant advantages. In addition to developing a common understanding of complex issues, sharing expertise and formulating the desired corporate measures, the emphasis is on increasing efficiency by pooling resources and avoiding duplication of work. This approach also enables smaller investors to participate more effectively by joining forces with larger groups that have more resources. Another key factor is improved ability to exert influence and legitimacy. Joint efforts increase investors' influence on ESG issues and make their demands more compelling for company management. A stronger group of investors is more likely to be able to develop sound strategies, accelerate sustainable change and work successfully with companies.
Risk: Follow-up obligations and risk of fines for acting in concert
In addition to practical factors such as increased cost and administrative risks, the big problem with collaborative engagements is that the threshold for "acting in concert" may be crossed unintentionally. In Germany, "acting in concert" occurs when the coordinated conduct of two or more shareholders of a listed company fulfils certain attribution criteria of the German Securities Trading Act (WpHG) and the German Securities Acquisition and Takeover Act (WpÜG). If the voting rights of the collaborating shareholders are to be attributed to each other, they must notify the company when certain (aggregated) thresholds (3 %, 5 %, 10 %, 15 %, 20 %, 25 %, 30 %, 50 % or 75 % of the voting rights) are reached in accordance with sections 33 and 34 German Securities Trading Act (WpHG). In addition, sections 35 and 30 German Securities Acquisition and Takeover Act (WpÜG) state that reaching or exceeding a voting right threshold of 30 % triggers the obligation to submit a takeover bid to all other shareholders, which can have considerable financial consequences for the investors involved.
Violations of these obligations are subject to fines (section 120 German Securities Trading Act (WpHG), section 60 German Securities Acquisition and Takeover Act (WpÜG)). Furthermore, loss of rights from the shares concerned (such as dividend and subscription rights) for the period for which the obligations are not fulfilled may be imposed as a statutory sanction (section 44 German Securities Trading Act (WpHG), section 59 German Securities Acquisition and Takeover Act (WpÜG)). The other shareholders can assert the loss of rights, for example in the context of actions to set aside resolutions of the general meeting. This can also have considerable financial consequences, which is why it is particularly important for investors to be aware of the attribution criteria.
When are voting rights attributed on the basis of acting in concert?
An attribution of voting rights in accordance with section 34 (2) German Securities Trading Act (WpHG) and section 30 (2) German Securities Acquisition and Takeover Act (WpÜG) occurs when shareholders coordinate their conduct in relation to a target company. Coordinated conduct in this sense is conditional upon the shareholders agreeing on the exercise of voting rights (variant 1) or cooperating in some other way with the aim of permanently and significantly changing the business orientation of the target company (variant 2). This does not apply to agreements in individual matters.
As a basic prerequisite, coordinated conduct first requires a communicative discussion, meaning that mere membership of an engagement platform does not yet lead to attribution. An agreement on the exercise of voting rights (variant 1) relates to formal collaborative engagement regarding voting behaviour at the general meeting. Other interaction (variant 2) relates to other forms of formal (exercising other shareholder rights) and informal engagement. According to the case law of the German Federal Court of Justice (BGH), the intention to exert a concrete and actual influence on the target company is required in each case. In variant 2, the cooperation must be aimed at a permanent and significant change in corporate policy, i.e. the fundamental characteristics such as the business model and the orientation of the business areas (purchasing, development, sales, etc.) and financing structure, and should be implemented through influence under corporate law.
It is often critical whether attribution is ruled out due to an individual exception. According to the case law of the German Federal Court of Justice (BGH), it must be assessed formally whether coordinated conduct only concerns an individual case. In a specialist article from 2023, the German Federal Financial Supervisory Authority (BaFin) used case studies to explain its view on the classification of collaborative engagements as acting in concert. When it comes to individual exceptions, it follows the opinion of the German Federal Court of Justice (BGH). Accordingly, an individual case can always be deemed to exist if the respective coordination of conduct relates to an individual matter and is not part of a (coordinated) overall plan and/or if there is no continuation of the coordinated conduct and there is therefore a lack of continuity. Individual cases can therefore include both individual coordination on different matters and repeated coordination on the same matter: If the conduct is limited to one set of circumstances or if the coordination of various sets of circumstances is only selective and not part of an overall plan, no attribution is made. In ESG matters in particular, collaborative engagement often involves more than just individual measures, meaning that a very careful assessment is required. In particular, if formal and informal types of engagement are combined, this means that the set of circumstances will often no longer be the same, with the result that voting rights are attributed.
Collaborative engagement: recommendations for investors
Investors must first be aware of the possible attribution criteria and potential consequences. In order to minimise the risk of collaborative engagement being classified as acting in concert, the various forms of cooperation should be taken into account when coordinating with other shareholders and the criteria carefully examined. Transparent communication and documentation can be helpful here: clear agreements, minutes and careful documentation of all interactions and decisions can prove in case of doubt that there was no concerted action if this was not the intention. Before entering into collaborative engagements, it is also advisable to seek legal advice in order to develop strategies to minimise risk and secure specific agreements. The case groups of the German Federal Financial Supervisory Authority (BaFin) can provide initial indications as to the attribution criteria. However, as stated by the German Federal Financial Supervisory Authority (BaFin) itself, the characteristics of the change in business orientation and the individual case exception are highly dependent on the circumstances of the individual case and therefore require careful assessment, especially as civil courts are not bound by the Authority's statements.
Furthermore, it remains to be seen how the German legal framework will develop. It is worth noting that the German attribution rules go beyond the European requirements (unlike the Takeover Bids Directive, the German Securities Acquisition and Takeover Act (WpÜG) and the German Securities Trading Act (WpHG) do not focus on the purpose of acquiring control but on the objective of changing the orientation of the business, which means that this includes cooperation already in the run-up to formal agreements to acquire control). In its final report, this also prompted the Sustainable Finance Advisory Committee of the German Federal Government to recommend lowering the legal barriers for collaborative engagement in the interests of forming a standardised approach across Europe. The Association of German Jurists (Deutscher Juristentag) has also discussed possible changes to the law. For example, at the 74th German Jurists Forum recently, a resolution was passed as part of the discussion on whether legislative measures in the area of corporate law are recommended in the fight against climate change, which states that a clarification should be included in the law that coordinated conduct by shareholders does not lead to an attribution of voting rights, at least with regard to a reduction in climate-damaging emissions by the issuer. Furthermore, greater legal certainty would be achieved if an engagement platform was implemented on which dialogue with co-actors and the supervisory practice could be established instead of individual collaboration.
Until then, however, investors will have to take great care when treading the fine line between collaborative engagement and acting in concert within the existing legal framework.
