Equity Capital Markets: Regulatory Environment in Germany – A Q&A

Reproduced from Practical Law with the permission of the publishers. For further information, visit practicallaw.com.

The following is a summary of the regulatory environment for equity capital markets transactions in Germany in form of questions and answers.

Main Equity Markets/Exchanges and Market Activity

1. What are the main public equity markets/exchanges in your jurisdiction? Outline the main market activity and deals in the past year.

Main Equity Markets/Exchanges

The German security markets are divided into:

  • Regulated markets, largely regulated by EU law.
  • Unregulated markets, governed by the stock exchanges' regulations.

In total there are eight stock exchanges in Germany. The Frankfurt Stock Exchange is by far the largest and most frequented stock exchange, with a turnover share of approximately 90%, while the regional stock exchanges (Stuttgart, Hamburg, Hannover, Düsseldorf, Munich and Berlin (Tradegate Exchange)) play a minor role. The Frankfurt Stock Exchange, as the main stock exchange, comprises a regulated market and an unregulated market (Freiverkehr). The regulated market of the Frankfurt Stock Exchange is divided into the following segments:

  • Prime Standard. The Prime Standard imposes the highest demands on potential issuers. In return, it offers access to a broad international audience of investors.
  • General Standard. In principle, the General Standard offers a more cost-effective listing, as only the legal requirements are reflected in the admission requirements. Mainly national investors (medium-sized and larger companies) invest in the General Standard.

The unregulated market is divided into the following segments:

  • Scale. Although the inclusion requirements for Scale are less stringent than for the regulated market, the Scale segment is a segment with additional inclusion and post-listing requirements within the unregulated market. Scale is particularly attractive for small- and medium-sized companies (the SME growth market).
  • REITs. All shares of REITs that are admitted to trading on the regulated market or that are included in the Quotation Board are eligible to participate on the REITs segment. REITs are:
    • German stock corporations that meet the requirements of the Act on German Real Estate Stock Corporations with Listed Shares;
    • foreign stock corporations that have a legal status comparable to a German REIT.

Only a small proportion of Prime Standard listings is made up of foreign companies (30 out of about 311). On the General Standard and Scale, the proportion of foreign companies is also rather low (18 out of 133 and one out of 47, respectively).

Market Activity and Deals

A total of nine IPOs were recorded on the Frankfurt stock exchange in 2020. In contrast, 16 IPOs had already taken place in as of August 2021. 2020 was characterised by relatively low market activity and many postponements or cancellations due to the COVID-19 pandemic, although there were a number of rights issues and capital increases, in particular in connection with state stabilisation measures related to the COVID-19 pandemic.
However, 2021 has seen increased market activity, and Frankfurt as a market location may benefit from Brexit. Recent trends include increases in: 

  • IPOs.
  • Special purpose acquisition company (SPAC) listings and de-SPAC transactions. 
  • US-listings of German issuers.

Several IPOs were postponed in 2020 and 2021, mainly due to unfavourable valuations as a result of uncertainties related to the COVID-19 crisis and a highly competitive market with a large number of issuers seeking investor interest, in particular in the mid-cap segment. 

Brexit and the associated uncertainties were not seen to significantly affect deals in Germany. 

2. What are the main regulators and legislation that applies to each of the main public equity markets/exchanges in your jurisdiction?

Regulatory Bodies

The competent authority in Germany is the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) (BaFin). Its main tasks are the approval of securities prospectuses and the supervision of the capital markets, in particular:

  • Prevention of insider dealing and market manipulation.
  • Monitoring publications of ad-hoc disclosures, directors' dealings reports and notifications of major holdings or voting rights.
  • Supervising company takeovers.
  • Enforcing financial reporting.

Legislative Framework

Germany is part of the EU, and both German and EU legislation apply to the German equity capital market, as well as the rules established by the stock exchanges, in particular the Frankfurt Stock Exchange.

The key pieces of EU legislation applicable to issuers with shares admitted for trading are:

  • Regulation (EU) 596/2014 on market abuse (Market Abuse Regulation).
  • Regulation (EU) 1129/2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market (Prospectus Regulation), along with its Commission Delegated Regulation (EU) 2019/980 of 14 March 2019 and Commission Delegated Regulation (EU) 2019/979 of 14 March 2019.

The key pieces of applicable German legislation and market rules are the:

  • Securities Trading Act (Wertpapierhandelsgesetz), which establishes regulations on the marketing, distribution and sale of securities.
  • Securities Prospectus Act (Wertpapierprospektgesetz), which primarily sets out the prospectus requirements.
  • Stock Exchange Act (Börsengesetz), Stock Exchange Rules (Börsenordnung) and Stock Exchange Admission Rules (Börsenzulassungsverordnung), which together regulate the organisation of the stock exchanges and the specific admission requirements for issuers.
  • German Securities Acquisition and Takeover Act (Wertpapiererwerbs- und Übernahmegesetz), which contains regulations relating to corporate takeovers.

Joining a Market/Exchange

3. What are the main requirements for a primary listing on the main public equity markets/exchanges?

Main Requirements

To be admitted to the stock exchange, the issuer must meet the admission requirements, which are mainly defined by the Stock Exchange Admission Rules. A German issuer must be structured as either a:

  • German Stock Company (Aktiengesellschaft) (AG).
  • German limited partnership on shares (Kommanditgesellschaft auf Aktien) (KGaA).
  • European Stock Company (Societas Europaea) (SE). 

Other possible foreign legal forms include, for example, the Luxembourg SA and the Dutch BV. 

For admission of shares to trading on the Frankfurt Stock Exchange's regulated market, the issuer must demonstrate the following:

  • Existence for at least three years, with proper disclosure of the annual financial statements for the last three years.
  • An expected market capitalisation of at least EUR1.25 million.
  • A total share capital of at least EUR250,000. 
  • A minimum denomination of 10,000 shares.
  • A guaranteed minimum distribution of 10% to 25% of the shares among European investors, depending on the Exchange's requirements in the individual case. Investors holding more than 3% of the shares are not counted towards the minimum distribution. Freefloat after the IPO must be expected to amount to at least 10%.

The admissions procedure begins with a written admission application, filed by the company together with the syndicate bank. The syndicate bank as co-applicant must be: 

  • A credit institution, financial services institution or a company that performs its business activities pursuant to the German Banking Act (Kreditwesengesetz).
  • Admitted for trading on a German securities exchange. 
  • Able to verify having equity capital equivalent to at least EUR730,000. 

The admission requires publication of a securities prospectus. 

The Prime Standard imposes additional obligations to the General Standard, including requiring the issuer to:

  • Not only publish the annual and semi-annual reports but also to submit them to Deutsche Börse AG. 
  • Prepare and submit quarterly reports.
  • Continuously update the corporate calendar and hold annual analyst and investor events.

The unregulated market is divided into:

Scale. The main requirements for inclusion on Scale are:

  • an inclusion document, or in case of a public offer a securities prospectus;
  • a company history of at least two years;
  • an estimated minimum market capitalisation of EUR30 million;
  • a nominal amount of at least EUR1;
  • an at least 20% free float; and 
  • a confirmation with regard to financial analyses must be submitted to Deutsche Börse.

In addition, the issuer must fulfil at least three of the following criteria;

  • a turnover of at least EUR10 million;
  • earnings for the year of at least EUR0;
  • an equity capital of more than EUR0;
  • at least 20 employees; or
  • an equity capital before IPO of at least EUR5 million.

After inclusion on Scale the issuer must (in addition to the Basic Board requirements): 

  • publish ad hoc announcements and directors' dealings notifications;
  • keep insider lists;
  • continuously update the corporate calendar;
  • hold annual analyst and investor events; and 
  • publish the financial analysis, including the initial research and research updates. 

REITs. All shares of REITs that are admitted to trading on the regulated market or that are included in the Quotation Board are eligible to participate in the REITs segment. The management board of the Frankfurt Stock Exchange decides on the inclusion application. The application for participation must contain appropriate documents indicating the status of the REIT. The management of the Frankfurt Stock Exchange verifies the accuracy and consistency of the documents submitted.

Beyond the pure admission requirements, a listed company must also change its internal organisation as follows:

  • The articles of association must be adapted to the capital market standards.
  • A remuneration system for the management board and supervisory board must be implemented.
  • The accounting standards must be adjusted to International Financial Reporting Standards (IFRS).
  • An audit committee must be formed.

The main divergence for foreign issuers, apart from their national legal requirements, is the regulator competent to approve its prospectus. First-time issuers must determine their home member state, which, in case of share issuances, is the jurisdiction in which its registered seat is situated. For secondary issues, issuers from the EEA who have already had their prospectus approved by their state of origin can benefit from the EU passport and have their prospectus, if still current, notified to BaFin without the need for an additional prospectus in Germany, as long as it contains a German-language translation of the summary.

International issuers who are not admitted to trading in Germany or the state of their principal distribution can only be admitted if it is credibly shown that these admissions were not prevented for reasons relating to the protection of the public.

Minimum Size Requirements

See above, Main Requirements.

Trading Record and Accounts

See above, Main Requirements.

Minimum Shares in Public Hands (Free Float)

See above, Main Requirements.

4. What are the main requirements for a secondary listing on the main public equity markets/exchanges?

Main Requirements

The requirement to publish a prospectus does not apply to the admission of securities that are fungible with securities already admitted to trading on the same regulated market, provided the shares represent less than 20% of the number of securities over a period of 12 months.

There is also the option of compiling a type of short prospectus known as an EU recovery prospectus if the issuer has already been listed on a regulated market for a certain period of time. After the wave of lockdowns in Europe triggered by the COVID-19 pandemic, this was introduced in an attempt to simplify equity raising through secondary issuances of shares. See Question 12.

Otherwise, the requirements for a primary listing and a secondary listing of shares on Frankfurt Stock Exchange are generally the same (see Question 3), except that the issuer can use a shorter prospectus in a secondary listing. The key difference compared to a "normal" prospectus is that information that the issuer has already disclosed can be omitted. This applies in particular to:

  • Disclosures on the business and financial position.
  • Disclosures on financial information.
  • Presentation of business activities. 

The disclosures on equity capitalisation can also be shortened considerably. However, a new section must be created on the information that was already published in accordance with the Market Abuse Regulation. In practice, issuers often do not make use of a shorter prospectus in order to meet investor expectations.

If the securities of an issuer are already admitted to a regulated market, these often can be included in the over-the-counter market of another German stock exchange without meeting additional requirements.

Minimum Size Requirements

See above, Main Requirements.

Trading Record and Accounts

See above, Main Requirements.

Minimum Shares in Public Hands (Free Float)

See above, Main Requirements.

5. What are the main steps for a company applying for a primary listing of its shares? Is the procedure different for a foreign company and is a foreign company likely to seek a listing for shares or depository receipts?

Procedure for a Primary Listing

The IPO process typically begins with the selection of the advisors, in particular legal counsel to the issuer and a financial advisor. In a second step, an issuer typically selects joint global co-ordinators who, in turn, appoint their own legal advisors. These legal counsels conduct a thorough due diligence, for which the issuer prepares a (virtual) data room. The results of the due diligence form the basis for drafting the securities prospectus, reflecting the equity story prepared by the joint global co-ordinators with the issuer.

Often, additional joint bookrunners for the marketing of the shares are appointed by the issuer and form a syndicate of underwriters together with the joint global co-ordinators. 

Analyst presentations and research reports prepare investors for the pre-marketing phase, in which early-look meetings, deep-dive sessions and pilot fishing meetings are conducted. At the same time, the securities prospectus is filed with the competent regulator and, after three to four rounds of comments, approved before the bookbuilding period starts. 

The final offer price and volume are usually determined on the basis of the orders collected in the order book by the joint bookrunners and published after the expiration of the offer period by an ad-hoc release. Afterwards, the capital increase is registered in the local commercial register. 

After the final admission of the company's shares to trading, the shares are delivered to investors against payment of the offer price. If needed, stabilisation measures may follow after the settlement and the closing of the transaction.

Procedure for a Foreign Company

There are no material differences with regard to the process followed for foreign issuers, other than in relation to the financial data to be submitted and the reporting standards, depending on the country of origin of the issuer.

6. What are the main steps for a company applying for a secondary listing of its shares? Is the procedure different for a foreign company and is a foreign company likely to seek a secondary listing for shares or depository receipts?

Procedure for a Secondary Listing

Secondary listings are commonly listed on an unregulated market, so that no prospectus is required. However, if the shares are to be admitted to another regulated market or shares are to be publicly offered in connection with the secondary listing, a prospectus must be prepared and approved by BaFin or by the competent national authority, when applicable. In any case, the requirements under national corporate law must be met, and resolutions, such as those of the shareholders' meeting, management board and/or supervisory board, must be passed.

Procedure for a Foreign Company

There are no differences with regard to the admission requirements for foreign issuers.

Equity Offerings: Public

7. What are the main ways of structuring an IPO?

The main ways of structuring an IPO are as follows:

  • Regular IPO. This involves the issuance of new and existing shares to investors and their admission to a regulated market, usually the Frankfurt Stock Exchange. A public offer in Germany is often combined with a private placement in foreign jurisdictions, including the US market under Rule 144A. The shares offered usually derive from a capital increase of the issuer (new shares) and the holdings of existing shareholders (existing shares). The final number of shares sold is determined at the end of the bookbuilding. Sometimes, the offering also includes an "upsize option", meaning the possibility to increase the total amount of shares sold in the offering, usually by adding further existing shares to the offering. For stabilisation purposes, the existing shareholders usually grant a loan to the underwriters of the transaction, enabling them to over-allot shares in the offering and, for a period of 30 days thereafter, to either purchase shares or re-deliver bought shares back in the market to stabilise the market price (known as a "Greenshoe" option). 
  • Direct listing. In comparison to a regular IPO, a direct listing process is considered to be faster and less expensive. However, in Germany, an investment bank must apply for the admission to trading together with the issuer, which means that a bank must also be involved and paid in a direct listing. Banks must also take responsibility for the contents of the securities prospectus required for purposes of the listing. Therefore, even if the issuer has access to a sufficient number of investors to generate the required freefloat, it will need the assistance of an investment bank. Given the bank's potential liability for the security prospectus, it will require a full due diligence, comfort letters and legal opinions to reduce its liability risk. Therefore, the bulk of the costs incurred in preparation for an IPO cannot be avoided by a direct listing.
  • Reverse merger. In a reverse IPO deal, which is similar to a de-SPAC transaction, the issuer merges with a target, usually by buying the target's shares against a contribution in kind. Again, this process is often considered to be less expensive and faster than a regular IPO, given that no further marketing measures are necessary, and the issuer is not dependent on positive market conditions as the price is subject to bilateral negotiations. However, typically, new capital is required, so new shares must be sold in connection with the reverse merger. If this capital increase is of a certain size, the issuer must publish a prospectus, entailing a full due diligence and therefore similar costs as in a regular IPO.
8. What are the main ways of structuring a follow on equity offering?

Structure of a follow on equity offering

There are two main ways to structure a subsequent equity offering:

  • An offering with subscription rights. In a rights issue, the existing shareholders are offered the option to subscribe for new shares on a pro rata basis according to their existing shareholdings (to prevent dilution of their shareholdings) during a subscription period. Under the Stock Corporation Act (Aktiengesetz), shareholders have a subscription right, unless the general meeting of shareholders (or board of directors, if authorised by the general meeting in advance) decides to exclude these rights. A rights issue is considered to be a public offering in Germany and therefore requires publication of a prospectus for the listing of the new shares.
  • An offering without subscription rights. A private placement of new shares from a capital increase excluding the subscription rights of shareholders is typically limited to up to 10% of the existing share capital (in case of German issuers, due to corporate law restrictions) or 20% (in case of foreign issuers). This can be structured as a private placement and subsequent listing, without a need for a securities prospectus. The new shares are offered in an (accelerated) bookbuilding with qualified investors. Therefore, the process is very efficient, faster and less costly than a rights issue.

Impacts of the COVID-19 pandemic

Following the COVID-19 pandemic, a number of changes were made to ease the regulatory burden for issuers. This included, among other measures, the "COVID-19 Act", which allows for shareholders' meetings to be held online. This Act will expire in August 2022, but negotiations about a permanent legal implementation are in progress. In addition, there is currently the possibility of using an EU recovery prospectus with simplified disclosure requirements, until December 2022. See Question 12.

9. What are the advantages and disadvantages of rights issues/other types of follow on equity offerings?

In a rights issue, existing shareholders are protected against dilution. However, the process is fairly long and costly for the issuer, with a higher transaction risk and a larger discount to the market price than in a placement of new shares without subscription rights.

In the case of 10% capital increases with exclusion of subscription rights, the requirements for the exclusion of subscription rights are relatively high (in particular requiring a close-to-market placement) and the maximum volume is limited. In addition, retail investors cannot participate, and existing shareholders are diluted. However, for the issuer it has the advantage of a fairly quick and efficient process with less transaction risk.

Advisers and Documents: Public Equity Offering

10. Outline the role of advisers used and main documents produced in a public equity offering. Does it differ for an IPO?

In an equity offering, whether an IPO or a subsequent rights offering, the following documents are typically required:

  • Prospectus.
  • Underwriting or placement agreement.
  • Cornerstone investor agreements or firm commitment letters.
  • Lock-up agreements.
  • Comfort letters by the auditors.
  • Legal opinions by the legal advisors.
  • Disclosure letters by the legal advisors.
  • Various company announcements regarding launch, pricing and closing of the offering, as well as further technical announcements on any stabilisation, major shareholders or directors' dealings. 
  • Listing application to the Frankfurt Stock Exchange.
  • Investor and analyst presentations.
  • Corporate resolutions.
  • Publicity guidelines.
  • Research guidelines and research reports (these are less common in rights issues but typical in IPOs).
  • Subscription certificates, bank certificates and global certificates for the new shares.
  • Subscription offers (in rights issues only).

In contrast, only very few documents are required in a capital increase with exclusion of subscription rights/private placement. These include the following:

  • Underwriting or placement agreement.
  • Legal opinions by the legal advisors.
  • Various company announcements regarding launch, pricing and closing of the offering, , as well as further technical announcements on major shareholders or directors' dealings. 
  • Listing application.
  • Sometimes investor presentations.
  • Corporate resolutions.
  • Subscription certificates, bank certificates and global certificates for the new shares.

In an equity offering, underwriters' and issuer's counsel, in particular, are involved, as well as the issuer's auditor. In addition, investor relations and IPO (financial) advisors and financial communication consultants may be engaged.

Equity Prospectus/Main Offering Document

11. When is a prospectus (or other main offering document) required? What are the main publication, regulatory filing or delivery requirements for a public offering?

Prospectus (or Other Main Offering Document) Required

A prospectus must generally be published for a public offering of securities. However, there is no prospectus requirement if:

  • Shares are sold for a total consideration of less than EUR8 million.
  • The offering is addressed solely to qualified investors.
  • The offering is addressed to fewer than 150 natural or legal persons per member state other than qualified investors.
  • The offering has a minimum denomination/minimum order size of EUR100,000.

Main Publication, Regulatory Filing or Delivery Requirements 

The application for admission to the Frankfurt Stock Exchange must be filed together with other documents including, in particular, the: 

  • Securities prospectus and approval certificate.
  • Resolutions of the management board and supervisory board.
  • Subscription certificate and bank certificate. 
  • Global share certificate.
  • Audited annual financial statements for the last three years.

Once the application is successful, the shares are admitted to trading and delivered to investors.

12. Are there any circumstances in which reduced disclosure obligations apply in respect of the prospectus (or other main offering document)?

There are simplified prospectus requirements for secondary issues of securities (see Question 4). In addition, reduced disclosure obligations apply to: 

EU recovery prospectuses. An EU recovery prospectus can be used for the public offering of new shares, as well as for their admission to trading on a regulated market.

Issuers whose shares have already been admitted to trading on a regulated market or an SME growth market without interruption for at least 18 months are eligible. The total number of new shares that can be issued within 12 months is limited to a maximum of 150% of the existing shares.

The simplified requirements include:

  • a description of the main risks to the issuer and the shares;
  • annual and semi-annual financial statements for the last 12 months prior to approval of the prospectus;
  • trend information and a minimum 400-word statement on the current and forecast economic and financial impact of the COVID-19 pandemic on the issuer;
  • a declaration of any receipt of state aid;
  • an overview of capital resources and debt, not older than 90 days.

The procedure takes less time and allows companies a possibility to raise equity quickly with little effort in terms of prospectus law.

The prospectus is further substantially shorter than a regular IPO prospectus and cannot have more than 30 pages (DIN A4). The BaFin must also approve the prospectus in seven days (instead of ten days), so the entire process is considerably simpler compared to a regular IPO-prospectus. The new prospectus regime is intended to help EU companies raise capital to meet their financing needs in light of the COVID 19 crisis.

The regulations allowing for the EU recovery prospectus have only been in effect since February 2021. Some of the practicalities, in particular regarding the scope of disclosure letters and opinions, still remain to be fully determined.

EU growth prospectuses. Issuers have the option of drawing up a growth prospectus if they have not previously issued securities that have been admitted to trading on a regulated market and they are either:

small- and medium-sized enterprises (SMEs);

issuers not exceeding a certain size; or

offerors of SME securities.

(Article 15(1), Prospectus Regulation.)

SMEs are companies that meet at least two of the following three criteria, as measured by their annual or consolidated financial statements:

  • an average number of employees in the last year of less than 250;
  • a total balance sheet total of no more than EUR43 million;
  • annual net sales of no more than EUR50 million.

For already listed companies, the term "SME" as defined in the Prospectus Regulation also includes companies whose average market capitalisation, based on the year-end listing, was less than EUR200 million in the last three calendar years.

Companies whose securities are or will be traded on an SME growth market and whose average market capitalisation was less than EUR500 million can also use EU growth prospectuses.

In addition, the preparation of an EU growth prospectus is possible for companies whose public offering of securities corresponds to a total consideration in the EU of no more than EUR20 million over a 12-month period, provided that: 

  • no securities of these issuers are traded on a multilateral trading facility; and
  • their average number of employees in the last financial year was fewer than 499 persons.

The EU growth prospectus is structured as follows:

  • table of contents;
  • special summary;
  • indication of the information incorporated by reference in the prospectus;
  • registration document;
  • securities note.

In comparison to the regular IPO prospectus, these items only need to be covered in a less complex and detailed way.

13. What are the main exemptions from the requirements for publication or delivery of a prospectus (or other main offering document) for a public offering?

See Questions 11 and 12.

14. What are the main content or disclosure requirements for a prospectus (or other main offering document) for a public offering? What main categories of information are included?

The prospectus usually consists of the following parts:

  • Summary of the prospectus.
  • Risk factors.
  • Information on the offering.
  • Information about the shares.
  • Reasons for the offering, use of proceeds and total issue costs.
  • Dividend rights and dividend policy.
  • Information about anti-dilution measures.
  • Capitalisation and indebtedness.
  • Management's discussion and analysis of the net assets, financial position and results of operations.
  • Market and competitors.
  • Description of the business.
  • General information about the issuer.
  • Regulatory framework.
  • Information on the company's capital.
  • Information on the governing bodies of the company.
  • Major shareholders.
  • Recent developments and outlook.
  • Historical financials according to IFRS or similar standards under relevant national statutes for the last three years before the offering.

Financial information must be prepared in accordance with international accounting standards and, in specific cases, with the national accounting standards of an EEA member state in the case of issuers from the EEA or the equivalent accounting standards of a third country.

15. How is the prospectus (or other main offering document) prepared for a public offering? Who is responsible and/or may be liable for its contents, and what are the main sources of liability in respect of the prospectus (or other main offering document)?

Responsibility

Responsibility for the content of the prospectus must be expressly assumed by the:

  • Offeror. 
  • Issuer. 
  • Other joint applicants for admission (that is, the involved banks). 
  • Guarantor, if any. 

The persons responsible for the prospectus are generally liable for incorrect and/or incomplete material information in the prospectus under the Securities Prospectus Act. The onus to show that the prospectus was correct or complete lies with the issuer and other persons responsible for the prospectus, which makes prospectus liability a powerful weapon.

Preparation of prospectus

The prospectus is essentially prepared on the basis of extensive due diligence, usually by using a data room accessed by counsels to the issuer and to the underwriters. The financial information contained in the prospectus is reviewed by the auditor for the purposes of issuing a comfort letter to the underwriters and the issuer. This is followed by various submissions to the BaFin as the responsible approval authority (usually up to three or four times). After its approval, the prospectus is published at the beginning of the public offering.

Liability

The persons responsible for the prospectus are liable under both criminal and civil law for an incorrect prospectus. In addition, the management bodies of those responsible for the prospectus can be held personally responsible for damages towards their respective companies. The liability is not governed by EU law but is subject to national laws.

Marketing: Public Equity Offerings

16. How are offered equity securities marketed? What are the main legal/regulatory restrictions on marketing activities?

Marketing activities

Shares are marketed in various phases. Before approval and publication of the prospectus, pre-marketing takes place only to a limited group of potential, qualified investors through early look, deep-dive and pilot fishing meetings, as well as through the financial analyses of the accompanying banks. After the publication of the prospectus, the key marketing phase begins. The issuer's management board members then visit qualified investors and hold personal meetings to answer questions in the "roadshow".

Regulatory restrictions

Marketing materials must be recognisable as such. In any marketing advertisement or presentation, reference must be made to the published prospectus and the possibility of viewing it. In addition, the content of the advertising must not be incorrect or misleading and must be consistent with the information in the prospectus. Otherwise, there is a risk of liability.

17. Outline any potential liability for publishing research reports by participating brokers/dealers and ways used to avoid such liability.

To avoid the risk of liability, pre-deal research reports typically do not include a specific recommendation to buy or sell the shares, or a specific pricing.

Bookbuilding: Public Equity Offerings

18. Is the bookbuilding procedure used and in what circumstances? How is any related retail offer dealt with? How are orders confirmed?

The bookbuilding procedure for determination of the final price and volume is commonly used for equity offerings. The final price and volume are not included in the prospectus. A price range and description of the way to determine price and volume is sufficient, and a bookbuilding can therefore be conducted.

After the publication of the prospectus, the joint global co-ordinators, together with the joint bookrunners, take the lead in co-ordinating the bookbuilding. During the offer period, both institutional and retail investors can submit their orders. The offers are collected in an order book. After the offering period, the pricing is agreed between the company and the selling shareholders (if any) in consultation with the joint global co-ordinators. Once the offer price has been set, the shares are allotted to investors on the basis of the purchase offers then available. The final price and volume are published by means of an ad hoc release.

Underwriting: Public Equity Offerings

19. How is the underwriting for an equity offering typically structured? What are the key terms of the underwriting agreement and what is a typical underwriting fee and/or commission?

The underwriting agreement is entered into between the issuer, the underwriters and the selling shareholders shortly before the publication of the prospectus. It includes the obligation for the underwriters to purchase existing and newly issued shares on a best-efforts basis. The participating underwriters also undertake to subscribe to the new shares of a German issuer, since German issuers must issue new shares to a third party. The issuer (as well as the selling shareholders, in certain cases) provides certain representations and warranties, and indemnifies the underwriters from future claims of liability. In addition, the company undertakes not to initiate another share offering or similar measures, and the existing shareholders undertake not to sell their shares for a period of usually 12 to 24 months after the IPO (a "lock-up" period).

Timetable: Public Equity Offerings

20. What is the timetable for a typical equity offering? Does it differ for an IPO?

The IPO process is variable and depends on the issuer and the individual transaction details. It can generally be divided into the following phases:

Preparation phase. The preparation phase consists of all aspects necessary to prepare the issuer internally for the IPO. It can take several months, depending on the necessary re-organisation, and implies strategic considerations as well as an initial assessment of the issuer's objectives. A detailed IPO-readiness assessment will also take place.

Implementation phase. During the second phase, which takes two to four months, the issuer selects its IPO team and undertakes the required corporate governance structure adjustments. The first preparations of the upcoming due diligence process are initiated, as well as the production of a first draft of the prospectus.

Placement phase. In a further step, the equity story is prepared, accompanied by early look, pilot fishing and deep-dive meetings, and the prospectus is finished, approved and published. The offer period and the bookbuilding process then commence. After the expiry of the offer period, the final offer price and volume are announced publicly, and the new shares are issued.

Listing and closing. In this final phase, the shares are admitted to trading. The issuer must comply with the post-listing obligations from then onwards. 

Stabilisation: Public Equity Offerings

21. Are there rules on price stabilisation and market manipulation in connection with a public equity offering?

Despite the general prohibition on market manipulation, stabilisation measures are explicitly allowed for a limited period of time if certain requirements are met. The time limits depend on the specific type of transaction. In the case of a regular IPO, the period for permissible stabilisation measures is 30 calendar days, starting on the day on which trading in the securities commences.

Usually, existing shares provided by a share loan from the existing shareholders are allotted at the time of allotment of the offer shares (over-allotment option), if there is sufficient demand. If stabilisation is required, shares are bought in the market and re-delivered to the providers of the share loan. If no stabilisation is required, the Greenshoe option is exercised and the offer price, instead of shares, is re-delivered under the share loan. The Greenshoe option can only be exercised during the stabilisation period. Alternatively, the issuer may provide new shares from a further capital increase for purposes of the over-allotment option. The specific conditions and terms must be set out in the prospectus and a separate publication in any case, complemented by additional publications during and at the end of the stabilisation period, to establish a sufficient degree of transparency. 

Tax: Equity Issues

22. What are the main tax issues when issuing and listing publicly traded equity securities?

The tax issues when issuing and listing debt publicly traded equity securities are highly fact-specific and there is no general tax advice for issuers.

Continuing Obligations

23. What are the main areas of continuing obligations applicable to listed companies and the legislation that applies?

Post admission, various obligations arise that affect the issuer, its management and major shareholders, including in relation to:

  • Making ad hoc announcements.
  • Holding an analyst meeting, at least once a year.
  • Maintaining updated financial calendar with the most important corporate action events for each financial year.
  • Keeping internal insider lists.
  • Specific accounting and reporting obligations.
  • Directors' dealings notifications.
  • The publication of voting rights notifications of shareholders.
24. Do the continuing obligations apply to listed foreign companies and to issuers of depositary receipts?

The German post-listing obligations apply to foreign companies and to issuers of depositary receipts in the same way as to national issuers of shares. For the post-listing obligations see Question 23.

25. What are the penalties for breaching the continuing obligations?

Violations of the post-listing obligations can result in: 

  • Criminal sanctions.
  • Administrative measures.
  • Civil liabilities.
  • Sanctions under competition law.

Fines of up to EUR2.5 million can be imposed on legal entities and up to EUR1 million on natural persons. BaFin can also prohibit natural persons from trading securities on their own account for a period of up to two years.

Market Abuse and Insider Dealing

26. What are the restrictions on market abuse and insider dealing?

Restrictions on Market Abuse/Insider Dealing

Restrictions on market abuse and insider dealing are contained in the Market Abuse Regulation, which is directly applicable in Germany. The Market Abuse Regulation prohibits the following actions:

  • Engaging or attempting to engage in insider dealing, as well as recommending or inducing another person to engage in insider dealing.
  • Unlawfully disclosing insider information.
  • Engaging or attempting to engage in market manipulation, which means entering into a transaction, placing an order to trade or any other behaviour that gives, or is likely to give, false or misleading signals as to the supply of, demand for or price of a security or securities, or is likely to secure the price of one or several securities at an abnormal or artificial level.

Penalties for Market Abuse/Insider Dealing

See Question 25.

De-Listing

27. When can a company be de-listed?

De-Listing

A stock exchange listing can be withdrawn either through a:

  • Regular de-listing. In this case, the admission is withdrawn by the stock exchange at the request of the issuer. A regular de-listing requires the issuer to make an offer to the shareholders to purchase their shares, unless a listing on another domestic stock exchange continues to exist. In the case of a mandatory offer, the offer price is determined on the basis of the average stock market price over the last six months.
  • Forced de-listing. Admission may also be revoked by the stock exchange when it is foreseeable that orderly exchange trading cannot be guaranteed in the long term and the management of the exchange has already discontinued the trading on the regulated market. A forced de-listing may also be pursued if post-admission obligations are not fulfilled even after expiry of an appropriate grace period.
  • Cold de-listing. In this case, the company is restructured with the consequence that the requirements for a stock exchange listing no longer apply. This may be the case, for example, in the event of a merger, a squeeze-out or a change of legal form.

Overall, de-listings are rare given the cost-intensive requirement to make an offer to all shareholders for the purchase of their shares.

Suspensions

Trading on the stock exchange can be suspended for a short period of time if orderly trading is temporarily endangered or the suspension appears necessary for the protection of the public. Suspension temporarily terminates trading on the exchange and therefore the quotation. The decision is made by the management board of the exchange.

Equity Offerings: Private

28. What are the main exemptions from the requirements for publication or delivery of a prospectus (or other main offering document) for private offerings of equity (both listed and non-listed)?

The prospectus requirement does not apply in a private offering (under the 20% exemption, only addressing qualified investors). For the general exemptions from the prospectus requirement, see Question 11.

The exemptions from the prospectus requirement also apply to foreign issuers if their securities are admitted to a regular market in Germany (or the EU/EEA). The registered office of the issuer is not relevant in this context.

However, where applicable, there is an obligation to make an offer when control is acquired over a public company (through acquisition of 30% of the voting rights in the target company). The bidder must make an offer to the remaining shareholders to acquire the shares, so that those shareholders have the opportunity to terminate their investment. The offer must include an appropriate consideration. This is determined primarily on the basis of the stock market price of the shares and the payments made by the bidder for the acquisition of the shares in the last six months.

This obligation also applies to foreign bidders who must make an offer for target companies domiciled in the EU or the EEA.

29. What is the process (if any) for a company completing a private offering of equity securities?

The prospectus requirement does not apply in a private offering (under the 20% exemption, only addressing qualified investors). As a result, a shortened due diligence can be carried out and the marketing effort is considerably minimised, with lower transaction risk and faster receipt of the transaction proceeds. However, issuers must publish an ad hoc announcement, as the private offering may affect the price of the listed shares.

30. Are there any private stock trading platforms where unlisted securities can be bought and sold?

All the German stock exchanges offer an unregulated stock trading platform, regulated primarily by the relevant stock exchange without being a regulated market under EU law. These involve a direct exchange of securities between two trading participants, whereby the transaction must be confirmed by the respective counterparty in order to initiate the settlement. Clearing and settlement takes place through the exchange's established post-trade systems. There are no special features with regard to foreign trading participants.

In addition, there are a number of private trading platforms outside of stock exchanges, which are considered to be multilateral trading facilities under EU law. 

Reform

Are there any proposals for reform of equity capital markets/exchanges? Are these proposals likely to come into force and, if so, when?

The EU aims to create a Capital Markets Union in the long term. Although no immediate reform of the capital market is currently intended, far-reaching changes can be expected at the European level as part of the EU Green Deal and the Action Plan for Sustainable Finance. The following changes are expected by (larger) national as well as foreign companies and issuers:

  • Changes in the organisation of UCITS and AIFs.
  • Changes in the capital requirements of banks and credit institutions.
  • Proposals for amendment and European harmonisation of the reporting guidelines on corporate social responsibility.
  • Enhanced disclosure requirements for certain capital market products.

TABLES

Stock Exchanges and Regulatory Authorities by Jurisdiction

 

Jurisdiction

Exchange(s)

Regulatory Authority

Germany

 

 

Frankfurt Stock Exchange (www.boerse-frankfurt.de)

Financial Market Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) (BaFin) (www.bafin.de)

 

 

Prospectus Content Requirements

 

Jurisdiction

Mandatory requirement?

Desirable (but not mandatory)?

Not required or used.

Germany

 

 

The latest three years of audited annual financial statements.

 

 

Identity of directors/executive officers, including their principal activities outside the issuer and any conflicts of interest.

 

 

Principal activities of the issuer and principal markets.

 

 

Information on material contracts.

 

 

Information on related party transactions.

 

 

Analysis of, or information on, executive compensation.

 

 

Details of the independent accounting firm and any other experts who have provided their opinion on the prospectus.

 

 

Details of any significant change in the issuer's financial or trading position since its most recently published financial statements.

 

 

Details of any significant change to the issuer's prospects since its most recent audited financial statement.

 

 

Details of any significant legal or arbitral proceedings (including both pending and threatened over the preceding 12 months).

 

 

Summary of the prospectus.

 

 

Details of the principal and selling shareholders.

 

 

Description of the securities being distributed.

 

 

Risk factors facing the issuer or relating to the securities being issued.

 

 

Information regarding the audit committee and corporate governance practices.

 

 

Information on the issuer's capital.

 

 

Future plans and prospects of the issuer and the use of the offering proceeds.

 

 

Information on any tax issues.

 

 

 

 

 

Authored by Michael Schlitt und Susanne Ries.

The authors thank Laura Esmaty and Sophie Wollenweber for their assistance in drafting this article.

Contacts
Michael Schlitt
Partner
Frankfurt
Susanne Ries
Of Counsel
Frankfurt

 

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