On 19 June 2009, the German Parliament (Bundestag) passed legislation which aims at limiting remuneration of the members of the management board (Vorstand) of German stock corporations (Aktiengesellschaften (AG)). The act comes as a reaction to the financial market crisis and targets what is perceived as misguiding incentives for senior management. It requires that any remuneration structure is aimed at improving the long-term business development of the relevant corporation.

While the act does not contain an absolute or relative upper limit for remuneration, it requires remuneration to be customary in the circumstances and in comparison to similar companies and to ultimately mirror performance of the management board. Also, any variable component must be assessed on the basis of a multi-year period and must be granted subject to specific caps in cases of "extraordinary developments".

Under the terms of the act, the members of the supervisory board (Aufsichtsrat), the corporate body that is responsible for determining management board remuneration, may be held personally liable where the remuneration is not adequate. In addition, the act provides that management board remuneration will now generally be reduced if the corporation suffers what the act refers to as "extraordinary developments" – circumstances that would make it unfair to continue to pay full remuneration, such as a loss making situation, salary/wage reduction at the level of the general work force and mass dismissals. Moreover, the mandatory holding period for stock options has been increased from two to now four years.

The act additionally aims at strengthening responsible behaviour of management by providing for a deduction of 10% of the damages claim or up to one and a half times annual fixed salary in respect of D&O (director and officer) insurance for senior management. Existing D&O insurances must be generally be amended by 1 July 2010.

Also, to enhance transparency, remuneration for the management board may no longer be determined by a committee of the supervisory board but must instead be approved by the entire supervisory board.

On 3 July 2009, the German Federal Council (Bundesrat) accepted the so-called Bad Bank Act (Gesetz zur Fortentwicklung der Finanmarktstabilisierung (Act) and it is expected that the Federal Council will consent to the Act in its plenary session on 10 July 2009. The Act aims at stabilising the position of banks and other financial institutions by allowing them to offload specific "toxic" assets and thus relieving future pressures on their equity.

The first "bad bank" concept set out in the Act allows credit institutions and financial holding companies, as well as their domestic and foreign subsidiaries (banks), to transfer specific "toxic" assets to bad bank special purpose vehicles (SPVs). Such assets include:

Any structured securities to be transferred must have been acquired by the bank on or before 31 December 2008.

In consideration for the transfer of those assets, the bad banks will issue bonds to the transferring entity which will be backed by those assets. These bonds are eligible for guarantees from the German Financial Market Stabilisation Fund (SoFFin) if all the following criteria are satisfied:

The banks will be obligated to make annual compensation payments to the bad bank during the term of the SoFFin guarantee. Those payments will be calculated as the difference between the transfer value of the toxic assets and the underlying value determined by SoFFin, divided by the number of years making up the term of the guarantee and may only be made from future distributable profits.

Moreover, in return for guaranteeing the bonds, the bad bank must pay fair market remuneration to SoFFin over the term of the guarantee. In addition, if the annual compensation paid to the bad bank over the term of the SoFFin guarantee is not sufficient to compensate for losses from the transferred assets, any unsettled losses (including those incurred after the maximum term of the SoFFin guarantee of 20 years), must continue to be discharged from distributable profits of the transferring entity on a preferred basis.

In addition to the SPV bad bank concept, the Act also allows banks to apply to SoFFin for the creation of a so-called "liquidation institution" (Anstalt in der Anstalt (AIDA)) to which not only toxic assets, but all forms of illiquid securities as well as non-strategic business units, can be transferred (in all cases, provided that the bank had already acquired those assets on or before 31 December 2008). Transfers can take the form of spin-offs (Abspaltung or Ausgliederung) and asset deals. Apart from an actual transfer, AIDAs can also guarantee, acquire sub-participations in, enter into trust arrangements or issue derivative securities in respect of toxic assets, other illiquid securities and non-strategic business units.

The shareholders/members of the bank, or, where the bank is an SPV or a subsidiary, the shareholders of the SPV or the subsidiary are generally jointly and severally liable (gesamtschuldnerisch) for any losses incurred by an AIDA. This does not apply where one or more of the banks is a Land or where a bank is a listed company; in the former instances, there will be no joint and several liability while in the latter instance, the transferring entity is required to balance losses from the distributable profits (that is, money reserved for dividends to its shareholders). The AIDAs may additionally demand adequate compensation from the Banks.

It is additionally necessary that the Banks have a sound business model and adequate financial gearing. Responsibility for personnel, pensions and other employment benefits remains with the Banks.

Finally, when applying for the creation of an AIDA, the Bank must set up a liquidation plan in re-spect of the “toxic” assets, other illiquid securities and business units and any expected liquidation proceeds must at least cover the estimated new liabilities, administrative expenses and taxes.

The second German stimulus package (Konjunkturpaket II) which provides for, among other things, specific subsidised loan guarantees, was adopted on 20 February 2009 in response not only to the general economic condition, but also to the temporary European Union framework for state aid measures which were implemented as part of the European economic recovery plan to further encourage access to finance and to reduce the current high risk of aversion on the part of banks. The key provisions of two forms of subsidised loan guarantees are highlighted below.

The second German stimulus package comprises, among other things:

While the European Commission has, in the past, made the grant of any such subsidised loan guarantees subject to individual approval by it, it has now stipulated specific requirements under the temporary framework which, if satisfied, automatically make the grant of any subsidised loan guarantees permissible (that is, compatible with the common market on the basis of the applicable provisions of the EU Treaty). The main requirements are:

Since its introduction, numerous distressed German enterprises have applied for government and KfW support under the stimulus package, including blue chips such as Porsche, Opel, Schaeffler, Arcandor and Infineon - with only a few (such as Heidelberger Druck and Heidelberg Cement) having succeeded so far because of the high bars to participation. These require that:

In line with its name, the deficiency guarantee covers exactly that: any shortfalls in respect of repayment of the principal amount outstanding under the guaranteed loan facility, including scheduled interest accrued on it, as well as fees, and so on, plus default interest capped at 3% over the applicable German base interest rate (Basiszinssatz) after specific events defining the deficiency (Ausfall) have occurred. In particular if:

In addition, using the KfW special programme for large companies as an example, the subsidised loan guarantee granted by KfW work such that KfW refinances the loan to the distressed company for the lenders, with the lenders, in specifically defined circumstances, only being required to promptly repay 50% of the refinanced amount to KfW. These circumstances are either: