Through several legal measures, the German Government has been keen to strengthen shareholders' rights by implementing more severe transparency requirements. Accordingly, the Ministry of Justice intends to prevent investors from the unidentified acquisition of shares in German-listed stock corporations. According to a ministry spokesman, the threshold of notification shall be reduced from 5% to just 3%. According to Section 21 of the German Securities Trade Act, investors who acquire a stake in a listed German stock corporation amounting to 5% or more are obliged to notify the target company and the German Financial Supervisory Authority (BaFin) within seven days of completing the acquisition.

The new 3% threshold is part of the discussion about the proposed transparency law which shall transform a European Union (EU) directive into national law. However, the directive does not provide for a specific threshold of notification, leading to some variation of that threshold among member states.

Additionally, the directive obliges listed stock companies to release insider information within the entire EU. The ministry's intention to lower the current threshold to 3% is based on recent incidents surrounding Deutsche Boerse. Last year, UK hedge fund The Children's Investment Fund (TCI) – a shareholder of Deutsche Boerse – asserted that Deutsche Boerse had to withdraw its bid for the London Stock Exchange. As a result of TCI's actions, German vice chancellor Franz Muentefering described foreign hedge funds as " heuschrecken" – locusts, grazing from one company to the next, leaving them exhausted.

The new law will not focus on hedge funds in particular, however, but on any investors. As well as the new minimum threshold of 3% – which complies with the minimum threshold of the respective UK law and the following applicable thresholds of 10%, 25%, 50% and 75% – additional thresholds of 15%, 20% and 30% will be established under the proposed law. The Federal Council of Germany will resolve the new law by 24 November, while the new law will take effect from 20 January, 2007.

Disclosure requirements for listed companies will also be extended. Notices on voting rights, financial reports and insider information will be disclosed Europe-wide. The issuer shall be obliged to ensure relevant information is effectively published via newspapers and electronic media. Additionally, the issuers will have to submit annual reports, half-year reports and interim reports of the board of management if the company does not publish any quarterly reports. Companies must guarantee the accuracy of their financial reports by way of an oath on the balance sheet. Finally, the issuers must provide information required by shareholders to exercise their shareholder rights to a central institution, including the time, place and agenda of shareholders' meetings. In the future, such information will be available to everyone.

Such moves can be seen as part of a larger campaign by the German authorities to strengthen shareholder protection rights by making accessible a significantly higher amount of issuer-related information to minority shareholders. Since August 2005, the management board of stock corporations have been obliged to reveal the names and individual salaries of its board members – a measure which sparked controversy in a country that agonises over the gap in pay between management and staff.

Many companies opposed the new rules and argued that they should be allowed to decide for themselves whether to make their executives' pay a matter of public record. In this regard, the itemisation of the benefits into performance-based and fixed components as well as components with incentives (such as stock options) is now required. This segmentation followed the recommendations of the Corporate Government Codex, provisions intended to strengthen the control rights of shareholders through increased transparency.

Furthermore, the disclosure requirements include benefits which have to be paid to the affected board member if he or she quits. For this reason, pensions and redundancy payments are included, as these payments often reflect the majority of total benefits. With knowledge of senior management's pay, shareholders can assess management's attitude and decision-making in takeover situations.

The required information must be attached regularly to the annual accounts and group accounts. Listed stock corporations must indicate the management board's salary and benefit structure in the management report. In particular, shareholders decide whether the management board must reveal individual income or not. The requirements for such non-disclosure is a three-quarters majority resolution by shareholders in the general meeting.

Such a resolution is effective for a maximum of five years, with a new resolution required after expiration. The Government says the disclosure of the individual income and benefits packages of board members will further the information rights of shareholders, who must know whether the supervisory board has over-seen the income of board members appropriately. In turn, the supervisory board must ensure the salaries and benefits on offer to management relate to the financial situation of the company and individual performance of its board members.

Advocates for shareholders' rights have hailed the draft legislation as an important victory in the fight to tighten corporate governance guidelines. However, a number of industry leaders have criticised the law, arguing that investors would gain little insight from the disclosure of individual managers' pay deals.

The Government is also preparing a bill regarding the supervision of the German reinsurance market, which currently holds at least 25% of the global market. New supervisory laws would provide more legal certainty and ensure transparency by strengthening the powers of BaFin.

Meanwhile, efforts to continue to improve economic conditions in the corporate environment, with proposed amendments to the German Law Regulating Transformation of Companies (GLRTC) set to facilitate cross-border mergers of German corporations.

According to Brigitte Zypries, the Minister of Justice, small and medium-sized companies will be the primary beneficiaries of the changes, with cross-border deals much easier to complete than before. Previously, high transaction costs have meant only large companies have been able to accomplish cross-border mergers under applicable German law.

In addition, the bill aims to provide more flexibility for medium-sized German companies to become more competitive in Europe and worldwide. The proposed law will mean a German GmbH will be easily able to merge with a French societe a responsabilite limitee or a British plc. For the realisation of a cross-border merger, a mutual merger schedule, a merger report and a merger review were required.

However, the protection rules regarding minority shareholders and creditors must still be taken into consideration. If these conditions are finally met, a German corporation can file for a mergers certification with the appropriate registration office. Then, the registration in the external commercial register can be realised simply by providing the German mergers' certification to the registration office. The proposed bill would implement into German law the corporate part of EU Directive 2005/56/EG regarding the merger of corporations from EU members. After having implemented the required amendments, the GLRTC will be applicable to domestic mergers as well as to cross-border mergers.

Despite these efforts to facilitate cross-border mergers – which will provide relief for only a handful of companies – the requirements to reveal management salaries and new disclosure requirements regarding listed stock corporations demonstrate that the German authorities remain committed to further strengthening shareholders' rights by way of increasing transparency.

Christian von Sydow is a partner and Oliver Beyer an associate at McDermott Will & Emery Rechtsanwaelte Steuerberater.