Transparency Register – Update 2020 – Updated reporting requirements for “indirect shareholding structures”.

Initial situation

According to § 20 para. 1 sentence 1 AMLA, legal entities under private law and registered partnerships have been required to report their beneficial owner(s) to the transparency register since 2017. The beneficial owners of a company subject to disclosure requirements include any person who directly or indirectly holds more than 25% of the capital shares or controls more than 25% of the voting rights or exercises control in a comparable manner.

The Federal Office of Administration (“BVA“) as the competent legal and technical supervisory authority publishes a regularly updated catalog of frequently asked questions and answers about the Transparency Register to clarify questions of doubt, which contains interpretative notes and examples of reporting obligations (“FAQ“) Since the BVA also acts as a fine authority in this respect, the FAQ of the BVA to be observed by the practice.

With the latest update of the FAQ dated August 19, 2020, the BVA establishes, among other things, new requirements for determining beneficial owners in indirect shareholding structures. As a result of the update of administrative practice, companies subject to notification requirements are therefore required to review and, if necessary, reassess their reports to the Transparency Register.

Practice to date

Indirect shareholding structures are basically characterized by the fact that the shares in a subsidiary (“Subsidiary“) are held directly by a parent company (“Holding“), which is backed by one or more natural persons. According to previous practice, the “beneficial ownership” of natural persons in indirect shareholding structures could generally be determined on the basis of a two-step test. The following characteristics had to be fulfilled:

• Stage 1: Mediation of economic entitlement by the holding company to a natural person behind it, if the holding company holds more than 25% capital shares/voting rights in the subsidiary (or comparable possibility of control)

• Level 2: Controlling influence of the natural person on the holding company, if a natural person holds more than 50% of the capital shares/voting rights in the holding company (or in the case of equivalent control, e.g. through veto and opposition rights).

Updated administrative practice of the BVA

The updated FAQ of the BVA contain significant innovations in this regard:

First, the BVA formally clarifies that veto and/or opposition rights of natural persons can also constitute a controlling influence. This is in line with the previous view of the practice.

Furthermore, the BVA now also equates certain other constellations with a right of veto or objection.

Accordingly, a majority of votes (>50%) of the natural person at the holding level shall no longer be the sole decisive requirement for its controlling influence. Rather, it would be sufficient if the latter could block shareholder resolutions:

1. Accordingly, to the extent that, for example, two natural persons each hold 50% of the voting rights in a holding company and its articles of association provide for a simple majority requirement, in the BVA’s view both natural persons exercise a controlling influence on the holding company, as they could each prevent resolutions from being passed.

2. In addition, according to the BVA, a blocking minority (as a rule >25%) with regard to fundamental resolutions of the shareholders’ meeting shall be sufficient for a natural person to exercise a controlling influence on the holding company and thus to be considered as indirect beneficial owner of the subsidiary.

3. To the extent that the articles of association provide for a majority requirement of more than 75% for the adoption of resolutions, the BVA is of the opinion that shareholdings of 25% or less can also constitute a blocking minority and thus a controlling influence on the holding company.

4. If the articles of association of the holding company provide for unanimity for shareholder resolutions, according to the BVA even every shareholder with voting rights – irrespective of the extent of his voting rights – should be able to exercise a controlling influence on the holding company.

In our opinion, it remains open in the FAQ of the BVA whether the case groups mentioned should also be decisive in the relationship between holding company and subsidiary (level 1).

In our view, however, this should be assumed in view of the now apparent stricter administrative practice of the BVA with regard to indirect shareholding structures. In our opinion, it must therefore be assumed as a precautionary measure that the existence of one of the aforementioned groups of cases is sufficient to affirm the “procurement of economic entitlement” by the holding company to its shareholders. In this sense, a unanimity requirement at the level of the subsidiary based on the articles of association or the existence of a blocking minority in favor of the holding company could already constitute a sufficient connection to (indirectly) establish reporting obligations to the transparency register with regard to the shareholders participating in the holding company.

Criticism of the BVA’s updated administrative practice

The BVA’s view is met with substantive concerns. According to opinions in the literature, it is not compatible with the legal provisions of the AMLA (in particular also when interpreting and assessing the explanatory memorandum to the Act and the relevant EU directives).

First of all, according to the intention of the legislator, the group law understanding of controlling influence is decisive in the case of a multi-level shareholding structure. However, the “prevention rights” ultimately assumed by the BVA or which establish negative control are not intended to convey such a controlling influence.

Even if another form of control were to be allowed – in addition to dominant influence – critics say it is not convincing that this can be exercised through mere “prevention rights.”

Recommendations for practice

With the updates to its administrative practice, the BVA deviates from the widespread procedure for determining beneficial owners in indirect shareholding relationships. The FAQ reflect the legal opinion of the BVA, but as such are not legally binding (internal administrative interpretation). Nevertheless, the significance for the practitioner of the law is great, as the opinion sets out the BVA’s apprehension and sanctioning practice – and thus the safest path in the application of the law.

Taking into account the new requirements of the BVA, the current registration status of the companies subject to reporting requirements must be re-examined and re-evaluated. In the necessary examination, the decisive factor will now also be which resolution majorities and resolution requirements are provided for in the respective articles of association and partnership agreements of the companies involved. If the review and evaluation reveal a need for changes to the reporting requirements, the Transparency Register must be informed accordingly.

The experts in our practice group will be happy to assist and advise you in the required review.