Category: Austria

Schoenherr has advised and is representing Cubic (London) Limited (“Cubic”) on a public takeover for all shares not held by San Gabriel Privatstiftung, T.R. Privatstiftung, or the other core shareholders in C-QUADRAT Investment AG (“C-QUADRAT”), an independent asset management company listed on the Vienna stock exchange.  

The public offer was triggered by the January 15, 2016 acquisition by Cubic of a 25.1 percent shareholding in C-QUADRAT. Subsequently, San Gabriel Privatstiftung and T.R. Privatstiftung, Q-Capital, Hallmann Holding, and Laakman Holding Limited as core shareholders sold and transferred their shareholdings, totaling approximately 65.5%, to Cubic. These two transactions and the public offer are subject to regulatory clearances in, among others, Austria and the United Kingdom. 

On April 5, 2016 a public offer was launched with an offer price of EUR 60/share. Following the successful completion of the public offer and clearance of the second transaction, Cubic intends to effect a squeeze out and will delist C-Quadrat.   

Schoenherr advised Cubic on all aspects of the preparation and launch of the public offer. Moreover, Schoenherr, as transaction counsel, also advised on the January 15 acquisition by Cubic and of the subsequent acquisition of shareholdings from core shareholders, as well as the related financings of the transactions.   

The Schoenherr team advising Cubic is led by Partner Christian Herbst and consists of Partner Peter Feyl, Attorney Maximilian Lang, Counsel Sascha Schulz, and Associate Alexander Mazevski.

Editor’s Note: After this article was published Binder Groesswang announced that it had advised Talanx on the sale of its 25.1% stake in C-Quadrat to Cubic Limited. The shares were sold to Cubic for the price of EUR 42.00 euros per share, and thus for a total purchase price of just under EUR 46 million. The Binder Groesswang team consisted of Lead Partner Florian Khol, lawyer Hemma Parsche, and trainee lawyer Christoph Schober.

Binder Groesswang has advised Volksbanken-Verbund on the sale of start:bausparkasse and IMMO-Bank to BAWAG P.S.K. Group. The transaction is expected to close in the fourth quarter of 2016 and is still subject to customary closing conditions and regulatory approvals. The purchase price was not disclosed. Both companies will be integrated into BAWAG P.S.K. Group and fully consolidated.

Start:bausparkasse and IMMO-Bank, which have operated under the group name “start:gruppe” since September 2014, specialize in the housing and real estate finance sector. Within start:gruppe, start:bausparkasse offers various building society savings products, and IMMO-Bank is an Austrian housing construction bank that provides financing for both subsidized and privately financed residential housing construction. 

IMMO-Bank reported a balance sheet total of EUR 1.6 billion as of December 31, 2015, while the balance sheet total of start:bausparkasse amounted to EUR 2.0 billion. 

CEO Gerald Fleischmann, Chairman of the Managing Board at Volksbank Wien AG, commented: “The Volksbanken Group focuses on its core businesses such as deposits, loans and payment services, and relies on strong collaborative partnerships with product specialists such as TeamBank Austria and Union 2/2 Investment Austria GmbH, which have top-level expert knowledge and top quality in their business areas. We also look forward to continuing our successful cooperation with our partner start:bausparkasse. Thus, the Volksbanken have taken another step in becoming an efficient, successful advisory bank.” 

Binder Groesswang advised Volksbanken-Verbund comprehensively on the transaction structure and on the sale of start:gruppe. The firm’s team consisted of Lead Partner Thomas Schirmer, Partners Markus Uitz, Michael Binder, Gottfried Gassner, and Johannes Barbist, Attorney Hermann Schneeweiss, Stephan Heckenthaler, and Stefan Frank, and Associates Hao Chu, Michael Delitz, Cordelia Klauhs, Mona Holzgruber, Markus Cejka, and Veronika Geschev.

Binder Groesswang did not reply to inquiries about counsel for BAWAG on the deal.

Grave professional misconduct as exclusion

Under Austrian (and EU) public procurement law, authorities can exclude economic operators that are considered unreliable and therefore unsuitable to be awarded a public contract.

Accordingly, contracting authorities will exclude from procurement procedures economic operators that have been convicted of either criminal offences (eg, fraud, money laundering or bribery) or other offences relating to their professional conduct. The latter typically excludes bidders that have been convicted of offences in relation to employment conditions, health and safety in the workplace and environmental standards. Both grounds for exclusion require the existence of a final and binding criminal judgment.

Irrespective of the existence of a criminal judgment, public procurement law provides for the possibility of excluding tenderers “who [have] been guilty of grave professional misconduct proven by means which the authority can demonstrate”. While it is clear – at least since the European Court of Justice ruling in Forposta – that grave professional misconduct covers all misconduct which affects professional credibility (eg, offences under labour law regulations or environmental laws), the level and means of proof needed to demonstrate grave professional misconduct are still under discussion.

Jurisprudence

On November 27 2015 the Vienna Administrative Court ruled on the requirements regarding the level of proof needed to demonstrate grave professional misconduct. In the case at hand, the managing director and majority shareholder of the bidder was accused and prosecuted for collusive tendering in his function as a shareholder and managing director of an affiliate of the bidder during a tender procedure conducted by the same contracting authority several years earlier. Against the background of the indictment by public prosecution and the possible exclusion of the bidder from tenders due to a potential future final conviction, the managing director reduced his area of responsibility and, via a shareholders agreement, declared his intention not to interfere with future procurement procedures as proof that the conduct in question would not reoccur.

Despite these measures, the contracting authority excluded the tenderer, arguing that the indictment sufficiently demonstrated grave professional misconduct on the part of the managing director, rendering the claimant unreliable. According to the authority, the self-remedying measures were not sufficiently promising or credible to prevent wrongdoing by the company controlled by the managing director.

The court ruled that the managing director (and subsequently the affiliated company) had been indicted for a crime (collusive tendering) that illustrated grave professional misconduct. On review of the longstanding and extensive criminal investigations, the court found that the indictment provided sufficient evidence for the contracting authority to assume grave professional misconduct on the part of the claimant. As the contracting authority and its affiliates were the aggrieved party in the respective criminal proceedings, it could not reasonably be expected to continue business operations with the tenderer. Regarding the level and means of proof required in relation to the conduct, the court referred to respective German case law¹, stating that a contracting authority need not necessarily wait for a final criminal judgment. In fact, if criminal investigations provide grounds for sufficient and precise suspicion, there is no need to wait for an indictment or a court order to institute proceedings.

The court further concluded that the self-remedying measures taken by the bidder were insufficient to restore its reliability. Effective self-remedying requires immediate personal and organisational measures, including the immediate and complete dismissal of all persons involved, to ensure that they no longer have influence over the business. Therefore, the claimant would have had to implement a clear organisational and personal dissociation from the entity and person in question, making it impossible for the latter to exercise influence by way of internal ownership rights.

Consequences

This ruling is the first by an Austrian procurement authority and court addressing the weight of an indictment. As such, it will likely serve as case law for future rulings with regard to the demonstration of grave professional misconduct.

From a criminal law perspective, the key factor is that an indictment that has been submitted by the prosecution office initiates the main proceedings at the criminal court. The question of guilt can be answered only in the course of the main proceedings. However, according to Austrian criminal law, an indictment is the result of previous criminal investigations which have explored all relevant facts in detail and weighed the interests in favour of and against the perpetrator. Indictments are submitted to the criminal court only if the prosecution is convinced that a conviction is reasonable. As a result, an indictment may be regarded as sufficient evidence to challenge a bidder’s integrity.

As regards the principle of presumption of innocence, the court argued that this does not prevent authorities or parties from taking preventive measures such as ordering pre-trial detention. Hence, this principle does not prevent a tenderer from suffering negative economic effects due to the loss of trust caused by the perpetrator.

According to the ruling, it is irrelevant whether the proceedings ultimately lead to a conviction, nullification of the proceedings or an acquittal, as an indictment is sufficient to demonstrate the tenderer’s unreliability. According to the court, it is important to consider that the period between a criminal complaint and a final judgment can be several years. It would be unreasonable to expect a contracting authority, having knowledge of the perpetrator’s or tenderer’s wrongdoings, to continue a business relationship that shall be based on mutual trust and integrity during that period. As discussed above, according to relevant German case law, even the existence of an indictment may not be necessary if criminal investigations provide sufficient evidence of criminal wrongdoing.

From a procurement law perspective, the ruling has manifold implications for both bidders and contracting authorities. For contracting authorities, it is clear from the case at hand that the level and means of proof required in order to demonstrate grave professional misconduct need not correspond with a final judgment. An indictment, a regulatory decision or a confession involving a bidder can provide sufficient evidence for exclusion. However, contracting authorities should not consider this case to be the final word – in particular, in relation to the level of proof of an indictment – as the relevant collusive tendering was directed against the contracting authority itself and therefore the court may have been more lenient as regards the level of proof. Hence, even in case of an indictment undermining the bidder’s reliability and professional integrity, contracting authorities should at least assess whether the facts and accusations in the indictment are substantiated and conclusive.

This ruling is a warning for tenderers and bidders. First, criminal or regulatory investigations must be taken seriously. In order to ensure that they can continue to participate in tenders, accused bidders should immediately implement self-remedying measures in order to prove their reliability despite the existence of relevant grounds for exclusion, including:

• comprehensively clarifying the relevant facts and circumstances;
• compensating for any damages; and
• taking the necessary structural, organisational and personal measures in order to ensure that the misconduct cannot reoccur.

The latter measure also includes dismissal of or dissociation from any employee, director or shareholder involved in the grave professional misconduct. Dissociation does not necessarily require the sale of shares; it can also be effected through transfer of the shareholder’s property rights to a trust or by requiring him or her to waive all ownership rights. Internally restructuring the implicated departments or portfolios is insufficient.

This article was edited by and first appeared on International Law Office 

(1) For example, the Frankfurt Court of Appeal in 11 Verg 6/4, July 20 2004.

By Johannes Stalzer, Counsel, Heidemarie Paulitsch, Counsel, Schoenherr

An employee was dismissed with immediate effect because he had published in-house information on his Facebook account. In the current decision on this case, the Austrian Supreme Court (“OGH“) confirmed that indiscrete Facebook posts may justify a dismissal (Decision by the Supreme Court, dated 27.11.2014, 9 ObA 111/14k).

Cause of action

The plaintiff was employed with the defendant – a bank – as head cashier. In connection with the unsolved disappearance of the amount of EUR 15,000 at the defendant’s site the employer terminated his employment by giving ordinary notice and put him on garden leave. During the garden leave, the plaintiff was informed by his neighbors about rumours according to which he had embezzled money and was therefore dismissed by the defendant. In order to explain himself, the plaintiff informed his neighbors in detail about the disappearance of the aforementioned amount at the defendant bank, and also pointed out his innocence. In addition, he asked a colleague via Facebook whether or not “the amount of EUR 15,000 had reappeared”. This question was posted in a section that was publicly accessible for all Facebook users. Shortly afterwards, the plaintiff deleted this post. A few days later, when asked by a third person, the plaintiff once again reported about the disappearance of the aforementioned amount of money. As a consequence, the defendant bank terminated the plaintiff’s employment contract with immediate effect.

Court proceeding and court order

The Supreme Court ruled that the plaintiff had violated his fiduciary duty, especially his duty of confidentiality, and therefore realised the cause for dismissal due to unreliability and his untrustworthy actions. Hence, the dismissal of the plaintiff’s employment relationship was justified.

Legal explanations

Difference between ordinary termination (ordentliche Kündigung) and dismissal (Entlassung)

According to Austrian law, an employment relationship may be terminated without specific cause. With the exception of certain legal or contractual limitations, such a termination of employment is at the sole discretion of the contract’s parties. However, an ordinary termination of employment needs to be compliant with certain dates and deadlines. During the termination period, any and all of the employer’s as well as of the employee’s rights and duties arising from the employment shall remain binding.

In contrast to an ordinary termination, a dismissal constitutes a premature termination of the employment relationship. In order for a dismissal to be justified, good cause needs to exist, making continued employment unacceptable to the employer. A dismissal may also be declared during the termination period. In this case, the employee loses his entitlement to continued remuneration until the termination date, and the employment ends immediately.

Fiduciary duty as a material duty of the employee 

Based on a fiduciary duty, employees are generally obliged to maintain the employer’s economic and operational interests. The duty of confidentiality represents one particular form of fiduciary duty, generally relating to company and business secrets. If an employee violates his duty of confidentiality and – as a consequence thereof – his fiduciary duty, the termination cause of unreliability may be realised. An employee’s fiduciary duty continues to apply unchanged during a termination period or a leave of absence.

Unreliability as cause for dismissal 

The courts determine from a reasonable business perspective, whether the employer has objectively and justifiably to fear that his interests are being jeopardised by the employee’s behavior. In contrast to disloyalty as another cause for termination, unreliability may be based on circumstances not directly related to the employment relationship. Revealing company or business secrets publicly constitutes unreliable behavior which may justify a dismissal. It needs to be emphasised that in this regard negligent behavior is already sufficient – neither malice nor the actual occurrence of damage is required.

According to the OGH, the plaintiff had clearly violated his duty of confidentiality in the case at hand. The fact that the Facebook post was deleted shortly afterwards does not affect this assessment. Posts in the public domain of Facebook are, according to the OGH, to be put on the same level as a “request in a daily newspaper”.

Practical implications

When posting comments on Facebook, a violation of the duty of confidentiality may not be the only legal offence that leads to a justified dismissal. Imprudent comments about superiors or colleagues may realise the termination cause of considerable defamation. The relevant aspect is, whether the employee’s behavior lowers the employer’s reputation.

A dismissal is further justified if an employee jeopardises his position with an employer during a sick leave period. If, the employee documents his behavior on Facebook while off sick, he provides evidence for the misuse of his sick leave.

Finally, depending on the individual case, discriminatory / racist Facebook posts may also lead to a dismissal.

Employees need to be extremely cautious with regard to Facebook posts. Comments or photos harmful to the employer may justify an immediate termination of the employment.

By Stefan Kuhteubl, Partner, and Karolin Andreewitch, Associate, Schoenherr

Linklaters and CMS Vienna are advising investment banks JP Morgan and Citigroup on matters of Austrian law related to the Carinthian Compensation Fund’s offer to the holders of HETA (formerly Hypo Alpe Adria) instruments in the nominal amount of Euro 11.2 billion, as part of the long-awaited debt restructuring of the Heta banking crisis. Skadden Arps, Hausmaninger Kletter, and Abel & Abel are advising Carinthian State Holding, Schoenherr is advising the Austrian state, and bond creditors are being advised by Kirkland & Ellis, Binder Groesswang, Gorg, Dorda, and Wolf Theiss.

The offers were publicly announced on January 20, 2016 at a purchase price equal to 75% of the senior-instruments and 30% of the subordinated-instruments. The offer period lasts until March 11, 2016.

“The volume of more than Euro 11 billion nominal value is not the sole reason for the high complexity of the transaction, but also the fact that more than 200 debt instruments are involved“, said CMS Partner Martin Zuffer, who leads the CMS team on the matter. Zuffer is supported by Partners Daniela Karollus-Bruner, Sibylle Novak, and Robert Keisler, and Attorneys Philipp Mark and Thomas Bohm. Frankfurt-based Partner Peter Waltz leads the Linklaters team.

The Province of Carinthia, Carinthia Landesholding, and the Carinthian Compensation Fund are receiving legal advice in all restructuring matters and in “the individual cases related to the statutory deficiency guarantees” (according to Norbert Abel of Abel & Abel), by himself, and by Partners Mark Kletter and Manfred Ketzer of Hausmaninger Kletter. The Frankfurt/London/New York Skadden Arps team advising on Capital Markets matters was led by Partner Stephan Hutter, and included Partners Katja Kaulamo, Dominic McCahill, Chris Mallon, James McDonald, and Jay Goffman, and Associates Nico Feuerstein, Michael Steiner, Percy Lorenz, and David Quartner.

The Vienna-based Schoenherr team consists of Partners Wolfgang Holler, Sascha Hodl, Thomas Kulnigg, and Ursula Rath, and Associates Stefan Paul Mayer, Miriam Simsa, Stefanie Woess.

Binder Groesswang (in Austria) and Kirkland & Ellis (in Germany) is acting for the largest group of creditors of HETA — the so-called ad hoc group — led by Commerzbank, Pacific Investment Management, and FMS Wertmanagement. The Binder Groesswang team consists of Partners Tibor Fabian, Florian Khol, Christian Klausegger, Gottfried Gassner, and Emanuel Welten, and Senior Associates Therese Frank and Clarissa Nitsch. Munich-based Partner Leo Plank leads the Kirkland & Ellis team. 

Other bond creditors are being advised by a team from Germany’s Gorg law firm, led by Cologne-based Partner Roland Hoffmann-Theinert and including Cologne-based Partners Christian Barenz, and Yorick Ruland, Cologne-based Associate Anne Laspeyres, and Berlin-based Associate Christoph Kunze. 

Still other creditors are being advised by a Dorda team led by Partner Andreas Zahradnik and including Partners Bernhard Muller, Tibor Varga, and Felix Horlsberger, and Associate Christian Schoeller. 

Yet another subset of bond creditors is being advised by a Vienna-based Wolf Theiss team consisting of Partners Kurt Retter, Claus Schneider, and Holger Bielesz, and Consultant Christine Siegl.

A thorough summary of the complex HETA crisis was published in the April 2015 issue of the CEE Legal Matters magazine.

The EU Regulation

Since 9 January 2016, traders established within the Union engaging in online sales or service contracts must provide new information on their websites.

The Regulation (EU) No 524/2013 (“Regulation”) on online dispute resolution for consumer disputes (“ODR”) applies directly in all member states and does not require transposition by the member states (with the exception of some provisions that apply from an earlier date according to Article 22 of the ODR).

This Regulation aims to create an ODR platform at the EU level and in particular establishes the technical conditions for the newly implemented ODR platform.

What does the ODR platform offer?

ODR offers a simple, efficient, fast and low-cost out-of-court solution to disputes between traders and consumers arising from online sales and service contracts. The ODR platform provides general information regarding the out-of-court resolution. The website can be accessed electronically and free of charge in all the official languages of the European Union’s institutions.

Information obligations 

Article 14 of the ODR contains the relevant provision for all traders engaging in online sales or service contracts and online marketplaces established within the Union.

In order to ensure broad consumer awareness of the existence of the ODR platform, all traders are obliged to:

• provide on their websites an electronic, easily accessible link to the ODR platform; it is advisable that not more than 2 clicks are necessary to access this link;
• inform consumers about the existence of the ODR platform and the possibility of using the ODR platform to resolve their disputes (this applies only to those traders that are committed or obliged to use one or more alternative dispute resolution entities to resolve disputes with consumers). This information shall also be provided, where applicable, in the general terms and conditions applicable to online sales and service contracts;
• state a company email address to ensure that customers have a first point of contact.

The link to the website http://ec.europa.eu/consumers/odr/ has already been activated. While the ODR platform will only be operational as of 15 February 2016, the information obligations already apply as from 9 January 2016.

Not in all cases…

ODR does not apply to those disputes between consumers and traders that arise from sales or service contracts that are concluded offline or to disputes between traders.

Sanctions

Violations of the abovementioned obligations can trigger penalties of up to EUR 750 and can encourage competitors to apply for cease and desist orders.

Comment

To support the functioning of the European market — especially for online business — and in order for consumers to have confidence in and benefit from that market’s digital dimension, consumers must have access to simple, efficient, fast and low-cost means of resolving disputes which arise from the online-based sale of goods or supply of services. This is all the more pertinent for consumers’ cross-border transactions. It remains to be seen if the ODR platform in practice proves to be an adequate tool for achieving these goals.

A list of alternative dispute resolution entities already operative in Austria can be found here: http://www.verbraucherschlichtung.or.at/2016/01/09/staatlich-anerkannte-verbraucherschlichtungsstellen/

By Wolfgang Tichy, Partner, and Serap Aydin, Associate, Schoenherr

Incentivizing employees to increase their performance is a basic management principle. Already decades ago, theory and practice have started to use incentives that align employees’ with shareholders’ interests to solve the principal-agency conflict described in corporate finance theory.

One way to achieve this is to grant employees a participation in the shareholder value. Such schemes are commonly referred to as Employee Stock Ownership Plans (ESOP). ESOP are now as popular as never. There are various ways to implement such programs. The following paragraphs provide a brief overview on corporate, tax and commercial cornerstones of ESOP relating to small and medium enterprises (SME) and start-up companies in Austria in the most common form of an Austrian limited liability company (GmbH).

Why ESOP in SME and start-ups?

ESOP try to align employees’ interests with the interests of the shareholders, thus to maximize the shareholder value. Being non-cash remuneration further increases the attractiveness of ESOP for companies. In certain structures, employees even have to purchase their own shares, thereby generating positive cash-flows for the company. These and other factors make ESOP a viable employee incentive scheme especially for early-stage start-up companies or established SME.

Below, we present common mechanics and tax issues of ESOP in Austria, followed by a short analysis of the most typical models: the direct or indirect ownership in real shares and contractual claims in the form of phantom stock.

Common mechanics of ESOP for SME and start-ups

The basic idea for ESOP in start-up companies and SME is that employees receive a participation in the (potential) future success. Employees take part in future value increases of the company by receiving a monetary benefit if the company finally succeeds.

The value of start-up companies or SME is not immediately available as is the case with publicly traded companies. Therefore, only certain models are appropriate for such companies. Stock option or virtual stock option plans generally require a reference share price and are for that reason not suitable. Employees of companies not publicly traded may therefore receive either a real share (directly or indirectly) or a virtual share in the company. To bond the employee to the company, such interests are often subject to future conditions, e.g. the continuous employment or a vesting period during which the interests fully accrue over time.

The realization of such future benefit generally depends on a predetermined trigger event. Since the interests in the company have to be valued, such trigger event is often an exit scenario where a change of control or a comprehensive asset sale of the company occurs at which the value of the entire company becomes available – in the form of the purchase price for the company’s business or its shares. The amount of the benefit realized by the employee for such interest is in this case linked to the exit price of the (other) shareholders, resulting in an alignment of interests of the employee with the shareholders.

Companies may grant such interests only to executives or crucial employees. However, the inclusion of certain (but not all) employees into ESOP implies the risk of alleged discrimination. Consequently, also other employees could request being accepted to such scheme. Hence, the selection of beneficiaries under the ESOP should be objectively justified and documented thoroughly.

Common tax issues

Any benefit received by the employee upon grant leads to taxable employment income subject to progressive income tax rates (up to 50% ¹ or 6% tax rate on bonus payments). Such benefit equals the difference between the consideration paid (if any) and the market value of the interest at the time the employee receives beneficial ownership of the interest.

Austrian tax law provides for an exemption for benefits received under an ESOP (ESOP exemption) in case the employee receives shares in the employer or a related group member of the employer (each being a corporation or cooperative). Any taxable benefit from such grant may be exempt from income tax up to EUR 3,000 annually if the ESOP and the employee meet certain requirements.²

Any (additional) benefit received after the grant date or at the trigger event is also taxable and either subject to progressive income tax rates or the preferential investment income tax rate of 27.5% ³, depending on the underlying interest.

Apart from taxable income of the employee, there are also other tax-related criteria not dealt with in this article, which determine the attractiveness of an ESOP. Further tax issues may be whether benefits to the employee are deductible by the employer for income tax purposes and whether the set-up or execution of the ESOP triggers additional taxes.

Real shares in a GmbH

The transfer of real shares in a GmbH requires the form of a notarial deed, transfer restrictions in the articles of association (AoA) must be complied with. Employees can be granted beneficial ownership in new shares (via capital increase) or existing shares (from current shareholders); each option requires the involvement of (usually at least the majority of) shareholders and a notary. The level of complexity at granting existing shares increases with the number of shareholders, in particular if they are expected to decrease their shareholding proportionally. Employees as shareholders are entitled to certain statutory information and control rights.

These rights make ESOP in the form of real shares in a GmbH for the majority shareholder(s) by far less practical than, for instance, in a stock corporation with publicly traded shares and more limited minority rights.

Being a shareholder does not automatically make the employee participate in any exit profit. In order for the employee to get a share of the pie, it must be ensured that he can sell his share at the same conditions as the other shareholders. For this purpose tag-along rights or put options can either be included in the company’s AoA or in a shareholders agreement. The AoA’s benefit of enforceability vis-à-vis third parties must be traded off against the disadvantage of publicity (in the companies register).

From an income tax perspective, benefits received by the employee at grant may qualify for the ESOP exemption. Any (remaining) taxable benefit is subject to progressive income tax rates. Subsequent income from holding (dividends) and from transferring the shares at exit (realized gains) results in investment income being generally subject to the preferential 27.5% tax rate.

Indirect (pooled) shareholding through a partnership

A further way to structure an ESOP – and which we see becoming more popular – is to pool employees’ interests in a pure holding company (for tax reasons), which in turn owns shares in the GmbH. Thus, the employee holds shares in the operating GmbH only indirectly. For the following reasons, the holding company is typically a limited partnership: limited liability of employees (as limited partners), limited control rights of the employees towards the GmbH (through interposition of the partnership), transparency of the partnership for income tax purposes (treating employees under the ESOP as if they would hold shares in the GmbH directly).

The limited partnership requires at least one general partner, which is responsible for the management of the partnership. In order to facilitate entry and exit of employees to and from the ESOP, a “master limited partner” can pool, distribute to and redeem partnership interests from employees.

As with direct shareholders, being an indirect shareholder does not by itself create a participation in an exit profit. To realize any benefits in this case, the AoA of the GmbH or a shareholders agreement on the level of the GmbH can foresee tag-along rights or put options in favor of the limited partnership. Any profit of the partnership will be allocated to the employees as limited partners.

Income tax consequences for employees as beneficial owners of the participation are comparable to holding direct shares. Any benefit received at grant date is subject to progressive income tax rates. However, it is not entirely clear whether the grant of such participation qualifies for the ESOP exemption, since it may require a direct shareholding in the GmbH or a related group member. Subsequent income from holding (dividends) or transferring the shares (realized gains) results in investment income being generally subject to the preferential 27.5% tax rate.

Phantom stock

In the case of phantom stock (also called virtual shares), the employee does not get corporate ownership rights in the company. Instead, he receives a contractual claim against the company which becomes due upon a trigger event and the amount of which is based on the value of the company.

A phantom stock plan is implemented by an act of the managing directors, backed by a shareholder resolution (especially if the shareholders are obliged to fund the plan). To evidence the contractual right and to symbolically create phantom stock, companies typically issue physical certificates; these are, however, not tradeable securities. The issue of phantom stock requires no upfront payment by the employee.

Commercial terms under phantom stock plan can be detailed almost at will: vesting/cliff periods and good/bad leaver events are simply included in the plan’s terms and conditions and determine if, when and to what extent payments will eventually fall due. In order to fund the payments in case of a share sale exit scenario (where not the company, but its shareholders receive the proceeds), the selling shareholders must be obliged to contribute part of their sale proceeds to the company. Payment streams may be short-cut if the purchaser is instructed to pay directly to the company. Such payments result in final shareholder contributions at exit.⁴

From an income tax perspective, the employee does not receive any benefit at the time of the grant, as she may not dispose of her claims under the phantom stock plan. The employee realizes a benefit only at the time she receives a cash settlement upon the trigger event. Such benefit is not exempt from income tax under the ESOP exemption, since no real shares are transferred. Any benefit is subject to progressive tax rates.

In case of real shares, the benefits of tax efficiency for the employee must be weighed up against the drawbacks regarding implementation and manageability. To the contrary, phantom stock plans do not provide tax efficiency for the employee, but are easier to implement and to manage. The indirect shareholding takes a middle position between direct ownership in real shares and phantom stock. 

1. As of 1 January 2016, the top tax bracket for income tax is temporarily increased from 50% to 55% for income above EUR 1 million until 2020.
2. Requirements: (1) The employer grants such benefits to all employees or a certain group of employees, (2) in case the shares are securities, they must be deposited with a domestic credit institution or administered by an entity determined by both the employer and the works council and (3) the employee holds such shares for a period of at least five years, if he has not disposed of the shares at or after termination of the employment contract.
3. As of 1 January 2016, the preferential investment income tax rate increased from 25% to 27.5%.
4. After 31 December 2015, Austrian capital contribution tax (equalling 1% of the contribution) is not levied any longer.

By Mario Johannes Perl, Associate, and Manuel Ritt-Huemer, Associate, Schoenherr

Ceyda Akbal Schwimann is Head of the Turkey Practice at the Specht & Partner law firm in Austria. Schwimann, who is Turkish, began her career in White & Case’s Istanbul office, and she still spends significant amounts of time in Istanbul, where Specht & Partner has an office.

C.A.S.: I studied law at Galatasaray University in Istanbul. Following my traineeship in Istanbul, I received the Jean Monet Scholarship and pursued an LL.M. at the University of Cambridge. During my studies, I focused mainly on international law. After my LL.M. studies, I started work at White & Case in Istanbul. In 2008, I decided to look for job opportunities in Austria for private reasons. Although I had a few other job offers, I decided on Specht & Partner for various reasons – among others, the firm’s entrepreneurial approach and its plans to expand its practice to CEE, Russia, and other former Soviet Union countries.

C.A.S.: This was an unexpected development. When I was back in Turkey after my LL.M. studies in England, I was determined to pursue my career in Turkey, where I am qualified to practice. Moving abroad was no option until I met my future husband – which is why the decision to come together took me quite a while.

C.A.S.: As far as I know, I am currently the only Turkish-qualified lawyer in Austria. There are some Turkish-speaking Austrian lawyers but this does not bring the same type of expertise. The advantage of coming from Turkey is the network of co-workers, the contacts with the business partners and legal community in Turkey, and experience with the Turkish legal system. Furthermore, although practicing in Turkey from Austria is very challenging, I feel the trust of clients in having an attorney on board who understands their concerns, needs, and approach, and thus can offer tailor-made solutions compliant with the Turkish system. As part of both Turkish and Austrian legal systems I am seen as a trusted person both by our clients and their counter-parties. This brings an advantage especially when we deal with crisis situations.

C.A.S.: The biggest challenge is the level of involvement of an Austrian client in the legal work, even sometimes in the preparation of briefs for Turkish courts. It takes a while to gain the full trust of an Austrian client. Until then clients tend to comment on every detail of the legal work, compare the Turkish system with different – mostly Austrian – legal systems, and propose solutions which do not always fit with the Turkish system. Such comments are mostly helpful to come up with creative solutions,  but sometimes not. After trust is established the relationship is robust. It is easier and, mostly, pleasant to work together.

C.A.S.: Not really. Already in Turkey I worked mainly with foreign clients, among others, Austrians. 

C.A.S.: I enjoy the experience with CEE countries in proximity to Austria because of their similarity to Austria; likewise, I encountered interesting and unique situations in more remote countries such as Azerbaijan, if it is considered as part of CEE. The combination of Turkish and Russian influence makes Azerbaijan very interesting and I enjoy Azeri language for its similarity to Turkish.

C.A.S.: I enjoy hanging out and playing with my little daughter in Liechtenstein Park in the 9th district of Vienna. It is a lovely park with lots of playing possibilities for children. 

This Article was originally published in Issue 2.4. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Yesterday, the European Court of Justice (ECJ) followed Advocate General Yves Bot’s recommendations in the ECJ Case C-362/14 (Maximilian Schrems vs Data Protection Commissioner) and declared the Commission’s US Safe Harbour Decision invalid.

In brief, Schrems, an Austrian law student, challenged Facebook’s practice of storing personal data on U.S.-based servers, a practice that allegedly allows the NSA, or similar United States intelligence organizations, to have easy access to the personal data of EU citizens.

Schrems had filed a complaint with the Irish Data Protection Commissioner since Facebook has its European presence in Ireland. The Irish Data Protection Commissioner, however, dismissed Schrems’ complaint on the grounds that the “Safe Harbour” scheme prevents the Commissioner from evaluating whether the complaint was reasonably justified. The decision on “Safe Harbour”, which was released by the European Commission in 2000 (Decision 2000/520/EC), basically states that a U.S.-based company that has successfully completed a “Safe Harbour” self-certification procedure is deemed to ensure a data protection level that is adequate to meet European requirements. As a consequence, Safe Harbour-certified U.S. companies are allowed to receive personal data from European companies (or individuals) without further restrictions, such as the need to obtain approvals from European data protection authorities. Since Facebook is a Safe Harbour-certified company, and thus allegedly ensured an adequate level of data protection consistent with EU requirements, the Irish Data Protection Commissioner basically claimed that the legitimacy of storing Facebook data in the United States could not be assessed under national Irish data protection law. Schrems challenged this ruling in Ireland’s High Court and the case ultimately ended up before the ECJ, the EU’s highest court.

The ECJ has now ruled that the existence of a Commission decision on a third-country data protection adequacy level does not prevent national supervisory authorities from exercising their examination obligations. According to the Court’s ruling, the Irish Data Protection Commissioner is therefore required to examine Mr Schrems’ complaint and to decide on the legitimacy of Facebook’s transferring of data to the United States.

The most interesting element of the ECJ’s ruling, however, goes beyond the matter of Facebook’s data transfers: The ECJ has ruled that the “Safe Harbour” scheme is invalid. However, in doing so, the Court refrained from making a statement on the adequacy of the “Safe Harbour” scheme in and of itself. Rather, the ECJ took a critical view of the fact that U.S. national security, public interests and law enforcement entitlements have primacy over the Safe Harbour principles and that the Commission’s decision on Safe Harbour did not contain any findings on the consequences arising from this primacy. In essence, the Court reasoned that adequacy with European data protection law, which requires any interference with the protection of personal data to be performed in a limited and proportional manner and which asks for effective judicial protection, cannot be ensured if there are no findings on the question of whether the third country’s law complies with these requirements. In other words: The ECJ declared the Commission’s Safe Harbour decision invalid due to the decision’s incomplete findings.

In assuming this stance, the ECJ did not really make a statement on whether U.S. domestic law is adequate. Nor has the ECJ introduced obstructions to potential negotiations of a new Safe Harbour agreement. Rather, the Court’s ruling gives guidance on the findings required for a new Commission decision in order to sufficiently “ensure” that the third country’s data protection level is adequate and – no less important – to give the ECJ the opportunity to examine the accuracy of such a new decision.

Yet, apart from the abovementioned considerations regarding a new Safe Harbour decision, the ECJ’s ruling certainly has an impact on the other international data transfer concepts, such as the concept of Standard Contractual Clauses. The Court’s considerations on the Commission’s improper findings might apply in a similar manner to the Commission’s decisions on the Standard Contractual Clauses. It will therefore be of particular interest to see how the national supervisory authorities react to the ECJ’s rulings not only with respect to Safe Harbour, but also with respect to the concept of Standard Contractual Clauses and, not to mention, Binding Corporate Rules. 

By Günther Leissler, Counsel, Schoenherr