By a resolution of the Annual General Meeting on May 5, 2010 under Item 9 of the Agenda, the Management Board is currently authorized, upon the approval of the Supervisory Board, to issue by May 4, 2015, bonds carrying conversion or option rights and/or convertible participation rights (referred to hereinafter jointly as "bonds") with conversion or option rights and/or conversion obligations for registered shares in the Company, once or several times. Accordingly, bonds carrying conversion and/or option rights can be issued up to a nominal value of EUR 10,000,000,000, with or without a defined period, and be equipped with conversion or option rights and/or conversion obligations for shares in the Company in a proportionate share of the capital stock of up to EUR 250.000.000. Under certain circumstances, the Management Board shall be authorized to exclude subscription rights, upon the approval of the Supervisory Board.
To date, the Management Board has made partial use of this authorization and, in 2011, issued a bond carrying a conversion right in the nominal amount of EUR 500,000,000 under simplified subscription right exclusion pursuant to § 186 (3), sentence 4 of the German Stock Corporation Act. To be able to continue issuing bonds in the future, the administration proposes to the Annual General Meeting a new authorization. The current authorization to issue bonds shall - unless fully utilized - be cancelled. The Conditional Capital 2010 created for the previous authorization is to be amended to such an extent that it is available for servicing the conversion or option rights of holders of bonds (including participation rights), which are issued on the basis of the authorization to issue bonds (including participation rights) to be resolved under Agenda Item 8.
We believe that setting the maximum issue volume allowed by the authorization at EUR 10,000,000,000 again would be useful in light of the five year term of the authorization. The authorization provides for granting holders of bonds conversion or option rights to shares of the company with a proportionate amount of capital stock of up to EUR 230,000,000. The number of shares required to settle the obligations arising from the exercise of option or conversion rights of a bond with a specific issue volume depends on the market price of Allianz shares at the time the bond is issued or the time period immediately preceeding the conversion.
Adequate capital resources are an important prerequisite for the Company’s development. By issuing bonds carrying conversion or option rights, the Company can obtain low-interest capital. The issue of convertible participation rights allows the interest rates to be based, for example, on the Company’s current dividend. The Company benefits from the conversion or option premium. The option of bringing about a conversion at the market rate of the Allianz share at the time of conversion by a conversion obligation gives the Company security for the transformation of convertible bonds to equity.
Shareholders will generally be given subscription rights when bonds carrying conversion or option rights and convertible participation rights are issued.
The Management Board shall, however, upon an issue against cash contributions, be authorized in corresponding application of § 186 (3), sentence 4 of the German Stock Corporation Act to exclude these subscription rights, upon approval of the Supervisory Board, if the issue price of the bonds is not substantially lower than their market value. This can be a suitable way to take advantage of favourable stock market conditions and to place bonds quickly and flexibly at attractive conditions on the market. Achieving the most beneficial outcome possible from an issue especially in volatile markets depends on the ability to respond at short notice. Terms that correspond as much as possible to market conditions can generally be secured only if the Company is not tied for too long. In the case of issues with subscription rights, a considerable discount is generally required due to the long offer period. Although § 186 (2) of the German Stock Corporation Act allows the subscription price to be published (and, as such, the terms and conditions of bonds carrying conversion or option rights) up to the third day before the end of the subscription period, there still exists, due to the volatility of the equity markets, a market risk over several days leading to discounts when determining the terms and conditions of the bond and, hence, resulting in terms that are not close to market conditions. Furthermore, an alternative placement with third parties is more difficult or entails additional effort, given the uncertainty surrounding the subscription behaviour. Finally, the Company cannot react to changes in market conditions at short notice when granting subscription rights, given the duration of the subscription period. This could lead to the Company procuring capital on less favourable terms.
Shareholders’ interests are protected by the bonds being issued on terms that are not substantially lower than the market value. The market value must be determined using recognised finance-mathematical methods. When determining the price, the Management Board will take into consideration the prevailing conditions on the capital markets and keep the discount on the market value as low as possible. This would result in the computed value of the subscription rights being close to zero, thereby ensuring that the shareholders will not suffer any material economic disadvantages from the exclusion of subscription rights.
If the Management Board carries out what is known as a book-building process, it can also set terms in line with the general market environment and thereby largely avoid dilution. In book-building, investors are invited to submit bids on the basis of provisional bond terms and conditions, specifying among other things what they consider to be a fair market interest rate and/or other economic components. When the book-building period ends, the investors’ bids are evaluated in order to determine the terms that still remain unresolved at that point in time, such as interest rate, according to supply and demand. This ensures that the total value of the bond issue is in keeping with conditions prevailing in the market. By conducting a book-building process, the Management Board can ensure that shares are not appreciably diluted by the exclusion of subscription rights.
Moreover, shareholders can maintain their share of the capital stock of the Company through purchases on virtually the same terms and conditions via the stock exchange. This ensures reasonable protection of their economic interests. This authorization to exclude subscription rights pursuant to § 186 (3), sentence 4 of the German Stock Corporation Act, shall only apply, however, to bonds carrying rights to receive shares corresponding to a proportionate amount of the capital stock not exceeding 10% in the aggregate, neither on the date on which this authorization takes effect nor on the date of exercise of this authorization.
The sale of treasury shares shall be counted towards this limitation, if the sale occurs during the term of this authorization to the exclusion of subscription rights pursuant to § 186 (3), sentence 4 of the German Stock Corporation Act. In addition, shares issued during the term of this authorization from Authorized Capital shall be counted towards this limitation, provided that subscription rights are excluded pursuant to § 186 (3), sentence 4 of the German Stock Corporation Act. These provisions serve the interests of shareholders by minimising the dilution of their investment as much as possible.
Moreover, the Management Board shall be authorized, upon the approval of the Supervisory Board, to exclude subscription rights with respect to fractional amounts. Such fractional amounts can be the result of the amount of the relevant issuing volume and the need to fix a practicable exchange ratio. In such cases, excluding subscription rights simplifies the execution of the capital increase.
Furthermore, the Management Board shall be given the authority to exclude, upon the approval of the Supervisory Board, the subscription rights of the shareholders in order to grant the holders of conversion or option rights or the holders of mandatory convertible bonds (or the holders of mandatory convertible participation rights) the same subscription rights which they would be entitled to if they were to exercise their conversion or option rights, or following fulfilment of a conversion obligation, as applicable. Instead of lowering the option or conversion price, this ensures that holders of option or conversion rights already existing at this point in time or the holders of mandatory convertible bonds (or the holders of mandatory convertible participation rights) can be offered subscription rights as dilution protection. Providing bonds with such a dilution protection is standard market practice.
Bonds can also be issued against contributions in kind if this is in the interest of the Company. In such cases, the Management Board shall be authorized to exclude the subscription rights of the shareholders with the approval of the Supervisory Board provided that the value of the contribution in kind is appropriate in relation to the theoretical market value of the bonds as calculated using recognised financial mathematical methods. This makes it possible to use bonds in individual cases as acquisition currency, for example when acquiring companies, interests in companies, or other assets. In negotiations, there may well be situations in which consideration is to be provided in a form other than cash. This option will increase the Company’s competitive position with respect to potential acquisition targets and increase its flexibility to take advantage of opportunities with respect to the acquisition of companies, interests in companies, or other assets, while maintaining its liquidity levels. This can also be advantageous when optimising the financing structure. The Management Board will carefully examine each case on its merit to decide whether to make use of the authorization to issue bonds carrying conversion or option rights against contributions in kind to the exclusion of subscription rights. It will only do so if such an action is in the interest of the Company and, thus, of its shareholders.
The sum total of shares which are to be issued in connection with bonds, which altogether in accordance with this authorization or in exercise of the authorization set out in Agenda Item 9 of the Annual General Meeting dated May 5, 2010 had been issued to the exclusion of the subscription right, shall, taking into account shares issued during the term of this authorization from the Authorized Capital 2014/I subject to the exclusion of the subscription right, not exceed a proportionate amount of the capital stock of EUR 233,728,000 (equivalent to 20% of the current capital stock). This restriction ensures an upper limit on the exclusion of subscription rights, and limits possible dilution for the shareholders excluded from subscription rights.
The proposed amendment of the Conditional Capital 2010 is needed to meet the obligations arising from the conversion or option rights issued with the bonds or to fulfil conversion obligations on shares of the Company, to the extent that the bonds were issued against cash. Other forms of fulfilment can also be used for the conversion or option rights/conversion obligations instead, for example the delivery of treasury shares or shares from authorized capital.
The obligations arising from conversion or option rights from bonds issued against contributions in kind cannot, however, be met by using conditional capital. In such cases, the Company must turn either to treasury shares or to an increase of capital stock against contributions in kind. For an increase of capital stock against contributions in kind, the Authorized Capital 2014/I, as proposed for resolution under Agenda Item 6, will be available. The claims under the bond must be included as a contribution in kind, whereby the valuation review must also include confirmation that the claim is not impaired, and that the underlying contribution in kind was appropriate to the issue price.
The Management Board will report on the extent to which it has made use of the authorization to issue bonds at the respective next Annual General Meeting.