The appetite in the market for public takeovers is getting stronger in Germany. Shortly after the German Takeover Act was enacted in 2002, almost all takeovers in Germany were coordinated upfront with both major shareholders and the management of the target; they typically ended with acceptance levels well above 75% – or even 95% – of the shares. The latter threshold is required for a squeeze-out of the remaining minority shareholders which had been permitted by a new law which was also enacted in 2002. At least in concept, the 75% threshold is relevant under German corporate law for structural measures such as a merger or the implementation of a domination and profit transfer agreement, which is necessary to establish a fiscal unity between the acquirer and the target for tax purposes. In the event of a leveraged financing, the 75% threshold is also of specific importance from the perspective of the financing banks, because the most common acquisition structures involve such structural measures in order to allow the provision of upstream security as well as access to the cash flow of the target.

But times have changed dramatically since 2002. Now, we see hedge funds appearing almost immediately on the scene after a takeover is announced. It has therefore become difficult for a bidder to achieve the high acceptance levels of the past. At the same time, financing banks have become comfortable with lending money, even for the acquisition of a 50%-plus-one share stake with a view to more sophisticated debt push-down concepts recently developed, which usually involve a super dividend to be distributed by the target following the takeover. Even more importantly, due to significantly larger private equity funds and strategic investors now having considerable war chests at their disposal, large targets are becoming a greater focus of potential takeovers.

As high market capitalisation typically comes with widely-held stock, a bidder in these cases is not in a position to ensure the acquisition of a majority stake by approaching major shareholders in advance and, thereby, concurrently 'block' the target for other potential bidders.

As a result of these developments, the German market is now set for the opportunity of competing bids, which was until very recently unprecedented in Germany. Yet in Spring 2006, Merck KGaA withdrew its bid for Schering, prior to actually launching the offer when faced with a counter-bid announced by Bayer. The situation of competing bids for publicly-listed targets occurred for the first time under the German Takeover Act only at the end of 2006 in relation to Techem as target, and a second time shortly thereafter at the beginning of 2007 in relation to REpower. While in the first case the competing bidders were both private equity funds, two strategic investors were involved in the case of REpower. Interestingly, the competing bidders in both instances finally agreed on a joint takeover of the target after first having tried to outbid each other. In the case of Techem, however, even such joint takeover was unsuccessful because the relevant minimum acceptance thresholds set by the bidders were not achieved.

The provisions of the German Takeover Act regarding competing bids and, in particular, the procedures for several subsequent increases of the offer price of the respective offers during a bidding war are not very detailed. At the same time, however, they are rather complex because of their interplay with the general provisions governing offer revisions. While the underlying principles are similar to those set forth in the City Code for Takeovers and Mergers in the UK, the particulars differ and are associated with both open questions and some surprising effects. These include the following: first, unlike the UK where the takeover panel can order that competing bidders simultaneously post their final offer revisions ('guillotine'), no such procedure exists under the German Takeover Act. In theory, this leaves room for a bidder to bring himself to a position where he is the one who can amend, and, in particular, increase his last offer.

However, there are a couple of open questions as to the applicable time limits for offer increases in the situation of competing bids. They result from the interplay of the following two general rules: the first rule shall ensure that shareholders have at least two weeks for their decision on the acceptance of an offer after its final revision. To this effect, an offer revision which occurs within the last two weeks of the acceptance period leads to a two-week extension of the acceptance period and the bidder is then blocked during such extension for further revisions. The second rule is specifically designed for the situation of competing bids and aligns the acceptance period of the offer which has been published first to the acceptance period of a subsequently published competing offer.

It is unclear with a view to the wording of the law, whether such alignment also applies vice versa, if the acceptance period of the first offer is extended under the first rule as a result of a respective offer revision. However, in the Techem case this has been assumed by BaFin, the federal agency supervising takeovers in Germany. Likewise, it is unclear whether the two-week extension in the event of offer revisions is, if such extension is applied to both of the competing offers, also blocked for further revisions of both offers.

A second point which leads to rather surprising effects is the regulation of so-called parallel acquisitions – this term is used for the acquisition of shares in the target by the bidder outside the offer at above the offer price. For example, under the German Takeover Act, such parallel acquisitions lead to a respective increase of the offer price of a takeover offer by operation of law. Such automatic increase of the offer price raises the question of whether the bidder is yet required to publish a formal offer revision and, accordingly, is subject to the general restrictions and requirements applicable to an offer revision. Surprisingly, BaFin has accepted (first during the takeover of Schering and also in the Techem and the REpower case) that this is not the situation and hence the bidder is allowed to increase his offer without formal offer revision simply by way of parallel acquisitions. This means that such increase can, in particular, be effected even at the very end of the acceptance period without leading to an extension of the acceptance period.

A further aspect, which is most relevant in the situation of competing bids, is the following: if the bidder is not obliged to a formal offer revision in the event of parallel acquisitions, he can increase his offer without triggering a right of withdrawal for shareholders who have at that time already accepted a (now possibly less attractive) competing offer. In light of the obvious adverse effects of such interpretation of the law to the interests of the shareholders, it remains to be seen whether BaFin changes its practise in this regard in future cases.

In any event, it is to be expected that the technique and practice of competing bids under the German Takeover Act, which are a relatively untested area of the law, will need to be developed further.