Vodafone to acquire Kabel Deutschland: German shareholders might go to court to increase compensation - an uncommon long German tradition explained by our German Partner (DSW)

Vodafone and Kabel Deutschland intend to enter into a domination and profit and loss transfer agreement under German law. After having acquired a majority stake in Kabel Deutschland last year, Vodafone now intends to secure full powers and responsibilities by asking for Kabel Deutschland shareholders approval of this agreement.

But what does this mean to Kabel Deutschland shareholders?

Kabel Deutschland will generally no longer show any balance sheet profit for the corresponding fiscal year. The right of Kabel Deutschland's shareholders to decide about the use of any balance sheet profit generally ceases to exist as of that point in time. Aside from the above, the conclusion of the domination and profit and loss transfer agreement has no legal effects on the shareholdings of the outside Kabel Deutschland shareholders. In particular the voting rights and other participation rights linked to their shares continue to be governed by the articles of association of Kabel Deutschland and the statutory provisions. However, if a large portion of the outside Kabel Deutschland shareholders will accept the offer for the compensation, the number of the Kabel Deutschland shares held in free float will decrease further. This can have the consequence that a normal trading of Kabel Deutschland shares on the stock exchange is no longer assured. The resulting further reduction of the liquidity of the Kabel Deutschland shares could lead to greater fluctuations in the share price. In addition, Kabel Deutschland might no longer fulfil the respective criteria for remaining in stock exchange indices currently containing the Kabel Deutschland shares. This applies especially for Kabel Deutschland remaining in the MDAX.

As compensation for the loss to decide about the profit distribution, Vodafone offers a recurring compensation payment of EUR 3.77 gross per share to the outside Kabel Deutschland shareholders. Shareholders who do not want to remain in the company can sell their shares to Vodafone and will receive a cash compensation of EUR 84.53 per share.

Both compensation components have been reviewed by an auditor and have been assessed as being “adequate”.

However, if shareholders do not consider one or both parts of the compensation as being adequate, German law gives them the right to enter a legal action, the so-called Spruchverfahren, to let the court decide on the appropriateness of the compensation offered. This kind of legal action has a long tradition in Germany and statistics show that in more than 90 percent of all cases brought to court, the compensation offered by the major shareholder has been increased significantly, on average by 20 percent to 25 percent.

If one Kabel Deutschland shareholder would bring such an action before court and the court adjudicates a legally binding higher cash payment and/or recurring compensation payment for each Kabel Deutschland share, all outside shareholders are entitled to demand a corresponding payment in addition to the compensation which they have already received. The same would be true in case of a court settlement.  

Kabel Deutschland shareholders who are interested in further information can contact the German ECGS partner, DSW at christiane.hoelz@dsw-info.de.

To acquire the full ECGS report about Kabel Deutschland,  EGM to be held February 13th, 2014, visit shop.ecgs.com or contact ocourade@ecgs.com