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Obligation to inform the target’s works council prior to take-overs

February 2009 - Corporate & Commercial. Legal Developments by Avocado Rechtsanwälte .

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On August 19th, 2008 the Risk Limitation Act (RLA) took effect, which substantially increased the obligations to sufficiently inform the employees of a company to be acquired ("Target") about the acquisition by a prospective buyer ("Buyer"). The official goal of the RLA is to impede takeovers by financial investors such as hedge funds and private equity funds.



Prior to implementation of the RLA, the Target was obligated to notify the Target's works committee (Wirtschaftsausschuss) about the company's prospective business policy only after a take over, i.e., after the Buyer had acquired the whole Target or at least the majority of its voting shares. However, there was no obligation to provide the purchase agreement to the Target's employees or to inform them about a material change in ownership. If there was no works committee because the company employed less than 100 employees, there was no obligation to inform the works council.

According to the RLA, the Target's management must now inform the Target's works committee prior to a take-over if the Buyer acquires more than 30% of the Target's voting rights in case of a publicly listed company or the majority of the voting rights in case of an unlisted company. If there is no works committee, the information must be provided to the works council instead.

The Target's works committee / works council must be provided with sufficient information about the take-over including information about the Buyer, the Buyer's intentions regarding the future business policy and the effects of the take-over for the Target's employees. It should be noted, however, that the information obligation does not extend to business secrets which may do harm to the Target.

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