Germany is the largest economy by GDP in Europe and is the fourth largest globally by nominal GDP (and, according to the International Monetary Fund, is forecast to be the third largest in 2023) As a result, capital markets lawyers from outside of Germany may have many reasons to find themselves involved in capital markets deals in Germany. This may include advising:
- On IPOs and other equity transactions of German companies where part of the offering will also be sold outside of Germany, or the shares will be listed on a foreign stock exchange. For example, a public offer in Germany is often combined with a private placement in foreign jurisdictions, including the US market under Rule 144A.
- On the IPO of non-German companies that wish to list on a German stock exchange.
- On debt offerings of German companies where part of the offering will also be sold outside of Germany.
- Issuers of securities publicly offered in Germany that often have part of their business in other jurisdictions. If these business operations are substantial, their legal framework is typically disclosed in the securities prospectus prepared for the offering. Foreign counsel will be involved in the transaction, in particular in due diligence and to support drafting of the relevant disclosure.
- On European de-SPAC transactions of German targets, which often involve merging entities or businesses into a Luxembourg or Dutch public company. Foreign lawyers may be involved if the de-SPAC involves a non-German SPAC.
- On Nordic bonds where a German issuer is raising funds on the Nordic markets.
What is considered the best advice to give foreign lawyers can vary by the type of transaction or the industry sector of the deal. This Note outlines top tips that may apply to general equity and debt transactions in Germany. In addition to general top tips, it covers other points for a foreign lawyer to be aware of in relation to regulatory review and approvals, transaction communications and disclosure requirements, and the legal and regulatory issues that may impact capital markets deals in Germany. The Note is based mainly on insights shared by German counsel, Prof. Dr. Michael Schlitt, partner of Hogan Lovells International LLP.
Germany has a range of different stock exchanges. The Frankfurt Stock Exchange is the country's main market and has both a regulated and an unregulated market. The Frankfurt Stock Exchange's regulated market is divided into the Prime Standard and the General Standard, while the unregulated market consists of the Scale. Alongside the Frankfurt Stock Exchange, there are six regional stock exchanges in major cities across Germany.
Supervision of the German capital markets comes from the Federal Financial Supervisory Authority (BaFin). The legislative framework for the German capital market is made up of German and EU legislation (including the Market Abuse Regulation ((EU) 596/2014) and EU Prospectus Regulation ((EU) 2017/1129), among others) and the rules of the different stock exchanges.
Although Germany is the fourth largest economy globally, the Frankfurt Stock Exchange sits just outside the ten largest stock exchanges worldwide by market capitalisation of listed companies, and it has the eighth highest share of global equity markets (smaller than its European neighbours such as the UK and France). This slight disparity may be due to, among other things, the hesitancy of German retail investors to invest in stocks (see Germany, The World Factbook (15 November 2023): Economy and Financial markets in Germany - statistics & facts (31 August 2023)).
Top Ten General Tips
Involve German Counsel Early On
German capital markets lawyers are typically lead counsel given the nature of the German capital markets, with German companies or foreign companies wanting to list their securities on the German stock exchanges. However, regardless of whether German counsel will be leading or have a more supporting role, given some of the particularities of the doing deals in Germany discussed in this note, it is advisable to instruct German counsel early on in a transaction. For example, experienced German counsel will know to consider the practical guidance of BaFin and the European Supervisory Authority (ESMA).
Multiple Voting Rights Now Permitted
The legal situation on multiple voting rights changed on 1 January 2024 due to Germany's Financing for the Future Act (Zukunftsfinanzierungsgesetz) (ZuFinG). This new act aims to reform some of Germany's stock corporation and capital markets laws, and to strengthen and improve the conditions for start-ups, growth companies and SMEs in Germany. These reforms include the insertion of section 135a into the Stock Corporation Act (Aktiengesetz) (AktG), which permits multiple voting rights being attached to one share. A resolution by the annual general meeting to grant or issue shares with multiple voting rights requires the approval of all shareholders concerned. The multiple-voting rights will, however, cease to exist once shares are transferred after a listing or, at the latest, ten years post-listing.
Company Must Allow Time to Convert to IFRS pre-IPO
Most issuers convert their accounting standard from local GAAP to IFRS before an IPO. The time that is required for this process should not be underestimated, as this conversion can take months. The IPO timings may be delayed if the company has not allowed enough time for the conversion process.
Agreeing Timings with BaFin Is Essential
The issuer's counsel should approach BaFin early on to discuss the transaction and to propose a transaction timeline. At the same time, the issuer will also propose the set of financials to be included in the prospectus (for example, financial statements for the last three (soon to be shortened by the EU Listing Act to two) business years, and whether any interim financial statements are required, in particular taking into account the 135 days rule for the comfort letter, as to when financials go stale). A typical timeline usually involves three to four submissions of the prospectus and comment periods from BaFin. BaFin typically responds within one to two weeks as to whether they agree with the timeline proposal. Once agreed, BaFin is committed to keeping the timeline.
BaFin also expects the issuer to keep to the agreed timeline, subject to extraordinary circumstances. For example, if the issuer engages in an M&A transaction and needs to provide pro forma financial statements, it will discuss the implications on the timeline with BaFin. Or, if market conditions are not conducive to marketing the securities, the issuer will propose a delay to BaFin. It usually takes a couple of days to change the timeline, and BaFin would generally agree to a revised timeline in such circumstances.
Be Aware of Financial Statement Filing Timings with BaFin
A typical IPO transaction will usually involve three filings of the draft prospectus with BaFin, and the second filing must include all the financial statements. This requirement may cause a problem for IPOs scheduled for later in the year (after mid-May for a company whose financial year ends on 31 December), because interim financial statements are usually required to be included in the filing, which may not be ready in time. If the statements are not ready and therefore change after the second filing, BaFin may restart the review, which will delay the IPO timetable.
Unwanted Profit Forecast May Lead to IPO Delay
If an issuer preparing for an IPO has a current profit forecast outstanding, it must include it in the prospectus. The banks and auditors will want to review the forecast, which will take time and could lead to delay.
Potential Impact of M&A Transactions on the IPO Timetable
If an envisaged M&A transaction means that pro forma financial statements are required, the IPO may need to be postponed so that the pro formas can be prepared. The issuer may need to weigh up the advantages and disadvantages of proceeding with the acquisition or postponing the IPO.
Disclosing Business Plans to Investors Can Impact IPO Timetable
Potential investors may approach an issuer and ask to see its business plan. Because the business plan is not included in the prospectus, investors who learn about the business plan will have non-public information, and the prospectus may be considered incomplete if the forecast is still valid. As a result, the issuer may need to postpone the IPO (for example, for a couple of months) until the disclosed business plan becomes stale. This can be a particular problem in dual track IPO/M&A transactions, where potential M&A investors may have received information that cannot, for liability risk reasons, be included in the IPO prospectus.
Prepare Company for Heavy Workload at End of IPO Transaction
Often there is only a small core team at the issuer of the CEO, CFO and others working on the IPO transaction. Counsel should ensure this core team does not underestimate the amount of work that will be required of them at the end of the transaction.
Many Transactions Involve Notarial Formalities
Lawyers from outside Germany may not be aware that various transactions require notarial formalities. These formalities should not affect the transaction timeline as long as they have been factored in appropriately into the process. For more, see Execution of Documents.
Regulatory Review and Approval: Points to Note
International counsel may want to be aware of the following issues in relation to regulatory review and approval in a capital markets transaction in Germany.
Required Regulatory Approvals
The regulatory approval requirements are dependent on the type of transaction and the issuer. For example, for an IPO with a concurrent admission to the regulated market of a stock exchange, the issuer must meet the admission requirements of the stock exchange, which are defined in particular by the listing rules. These regulatory requirements include:
- A German issuer must first be structured as a German stock company (Aktiengesellschaft, AG), a German limited partnership on shares (Kommanditgesellschaft auf Aktien, KGaA) or a European stock company (Societas Europaea, SE). Other possible foreign legal forms are, for example, the Luxembourg S.A. and the Dutch N.V.
- Under the new ZuFinG regime, it is also possible for start-ups and growth companies to use a so-called Reverse Takeover Company (Börsenmantelaktiengesellschaft, BMAG) to get an easier access to the regulated capital market in Germany. The BMAG follows the model of the American Special Purpose Acquisition Company (SPAC). This new legal form of organisation is now regulated in sections 44 – 47b of the German Stock Exchange Act.
- The expected market value of the shares under the new ZuFinG regime must be at least EUR1 million (instead of EUR 1.25 million required under the pre-ZuFinG regime), (although market expectation would typically be much higher). The equity capital must be at least EUR730,000 and the issuer must, in principle, have been in existence for at least three years. In addition, a minimum denomination of 10,000 shares and a minimum distribution of 10-25% of the shares among European investors must be guaranteed, depending on the stock exchange's requirements in the individual case.
- Investors holding more than 3% of the shares are not counted towards the minimum distribution (free float). Moreover, the annual financial statements of the last three years must have been properly disclosed.
Beyond the pure admission requirements, a listed company may need to change its internal organisation to implement compliance systems. The company must adapt its articles of association to meet capital market standards, implement a remuneration system for the management board and supervisory board, change its accounting standards to IFRS, and form an audit committee.
Depending on the structure of the issuer, it may be considered a fund, and the specific regulations on funds and the offering of funds apply.
Review of Disclosure Documents by Regulator or Stock Exchange
The public offering of shares on a regulated market in Germany typically requires the publication of a securities prospectus approved by the competent authority. For foreign issuers, depending on the home member state, foreign supervisory authorities or the German BaFin, may be the competent authority. This must be checked carefully and the relevant competent authority ascertained early on in the process.
Additionally, the application for admission to the Frankfurt Stock Exchange may require the approval of the stock exchange management board. The application for approval to be submitted for this purpose must be filed together with other documents, 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.
There are several other transactions, such as bond issuance programmes or public takeovers in the case of share for share transactions, where the European prospectus regime is also applicable.
Further disclosure requirements may arise from the PRIIPs Regulation ((EU) 1286/2014), and the Assets Investment Act (Vermögensanlagegesetz) (VermAnlG) as well as, in the case of funds, the Capital Investment Act (Kapitalanlagegesetzbuch) (KAGB).
Qualifying for Certain Exemptions or Waivers
There are different exemptions from the prospectus requirements that, depending on the circumstances, may be relevant to an issuer..
When no Prospectus Is Required
There is no obligation to prepare a prospectus if the offering meets any of the following requirements:
- It has a total consideration of less than EUR8 million (although under the proposed EU Listing Act (which is expected to come into force during the course 2024) this figure will be increased to EUR12 million over a period of 12 months) and the securities are being marketed via asset managers.
- It is addressed solely to qualified investors.
- It is addressed to fewer than 150 natural or legal persons per member state other than qualified investors.
- It has a minimum denomination or minimum order size of EUR100,000.
In addition there is no obligation to prepare a prospectus for secondary issues, if the newly admitted securities represent, over a period of 12 months, less than 20% of the number of securities already admitted to trading on the same regulated market. The new regime of the EU Listing Act, which is expected to come into force in 2024, extends this exemption to companies that have had securities traded on an SME for at least the 18 months before the offer or the admission to trading of the securities. Additionally, the threshold of the exemptions is likely to increase once the EU Listing Act comes into force.
Simplified Prospectus Requirements for Secondary Issues
There are currently simplified prospectus requirements for secondary issues of securities (Article 14(1), EU Prospectus Regulation). Provided that the newly admitted shares are fungible with old shares that already have been admitted to trading on a regulated market or an SME growth market for a continuous period of at least 18 months, the EU Prospectus Regulation stipulates some simplifications. For example:
- The issuer is only obliged to present its financial information from the last 12 months prior to the approval of the prospectus.
- The issuer benefits from accommodations in the drafting and presentation of certain information in the prospectus.
When combined with the simplified requirements applicable to capital increases under the AktG, the accommodations for secondary issues under the European prospectus regime play an important role in the financing of listed companies, especially SMEs.
Replacing the Simplified Prospectus for Secondary Issues with a new EU Follow-On Prospectus
The proposed EU Listing Act introduces a new EU follow-on prospectus, which will replace the simplified prospectus for secondary issues (Articles 7(12b), 14b, 20(6b), 21(5b) and Annexes IV and V, EU Prospectus Regulation). The new regime for the EU follow-on prospectus follows a standardised format and sequence, and is subject to a page limit. The EU follow-on prospectus applies for all secondary issues, provided they do not fall under one of the exemptions.
Reduced Disclosure Requirements for EU Growth Prospectus
Reduced disclosure obligations currently apply to EU growth prospectuses.
According to the EU growth prospectus regime, issuers that meet the following requirements, among others, have the option of drawing up an EU growth prospectus if they have not previously issued securities that have been admitted to trading on a regulated market (Article 15(1), EU Prospectus Regulation):
- SMEs.
- Issuers, other than SMEs, whose securities are or will be traded on an SME growth market and whose average market capitalisation is less than EUR500 million.
- Offerings of SME securities.
Replacing the EU Growth Prospectus with a new EU Growth Issuance Document
The new regime under the proposed EU Listing Act introduces a new EU growth issuance document, which should replace the EU growth prospectus (Articles 7(12b), 15a, 21(5c) and Annexes VII and VIII, EU Prospectus Regulation). This EU growth issuance document follows a standardised format and sequence, and is subject to a page limit. Under the new EU Listing Act regime, the publication of an EU growth issuance document is mandatory, except where an exemption from the obligation to publish a prospectus applies.
However, ultimately, meeting investor expectation and making it possible to market the securities to investors are decisive. The current simplified EU growth prospectus regime, or the EU growth issuance document which will apply under the proposed EU Listing Act, may therefore need to be supplemented by additional information. Overall, the use of the EU growth prospectus or the EU growth issuance document is limited, given the often diverging and more exhaustive disclosure required by investors.
Regulator and Investor Focus on Certain Deal Aspects
European and German regulation of deals varies significantly depending on the structure of the deal and the issuer.
According to European law, a prospectus, as the disclosure document, must contain all information that is material for the investor; that is, it must be complete and correct. So, regulation aims to provide sufficient information to make rational decisions, but also to prevent information overload by only presenting material information. That is why, for example, all substantial information must be summarised in the first section of the prospectus.
Typically, the following are the key aspects in securities prospectuses that investors will focus on:
- Identification of risk factors that are material and specific to the issuer and the securities.
- Financial information for the last three business years.
- Pro-forma information.
- Management discussion and analysis.
Generally, an IPO is the capital markets transaction with the most requirements, and requires the largest amount of drafting by legal counsel. In particular, an IPO prospectus is much more detailed than in a debt offering. The respective requirements for a prospectus are governed from the perspective of a potential investor. Where, for example, in the case of bond issues, the offering itself and the terms and conditions are in the spotlight, in equity security offerings the issuer must provide more comprehensive financial disclosures as well as information on the competitive situation, dilution and the business in general.
Level of Communications with Regulator
Legal counsel to the issuer is in close communication with the competent German Financial Supervisory Authority, BaFin, during the drafting of the prospectus as the offer and disclosure document. A detailed timetable is agreed with BaFin in advance of the transaction. During the typical three submission rounds of the prospectus, the issuer receives individual feedback on the status of the prospectus. There is usually no direct contact with the European Securities and Market Authority (ESMA). However, ESMA publishes its legal opinion on certain transaction issues in (non-binding) guidelines and Q&As in order to help establish a level playing field. These are treated as binding law.
In most cases, the same contact person at BaFin is available as a central point of contact throughout the prospectus review process. The communication and review process with BaFin may seem more bureaucratic by comparison with some other jurisdictions.
Filings with Entities Other than the Regulator or Stock Exchange
In the phase of preparing a private company to go public via an IPO, the company usually undergoes significant changes under German company law, such as changes in its form and its articles of association. These changes must be submitted to the commercial register and be published.
Subsequent disclosure obligations (such as voting rights and director's dealings) following a listing must be reported to and published in the Federal Gazette (Bundesanzeiger), among others.
Communications and Transaction Documents: Points to Note
International counsel should be aware of the following issues in relation to communications, disclosure, and transaction documents.
Financial Statement Requirements
To be admitted to the stock exchange, the issuer must disclose its audited annual financial statements for the last three business years. The statements must be in accordance with IFRS or similar foreign standards in the case of non-EU issuers.
Some exemptions to the financial information required to be disclosed are available, for example in secondary offerings.
After the IPO, semi-annual and annual reports (and, if the listing is in the Prime Standard segment, quarterly information) must be published by the company.
Prospectus Summary to be in German
Generally, prospectuses are drafted and published in English (even for a domestic offering). The summary of the prospectus must be published in German as well as English as it contains the very basis of the offering.
Liability for Disclosure in Offer Documents
Responsibility for the content of the prospectus must be expressly assumed by the issuer, the applicant for admission (that is, the one or more banks involved) and the guarantor, if any. The persons responsible for the prospectus are generally liable for incorrect or incomplete material information in the prospectus under the Securities Prospectus Act (Wertpapierprospektgesetz) (WpPG). 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. A due diligence defence may be raised by the banks, and they invariably receive an indemnity from the issuer in the underwriting agreement.
The persons responsible for the prospectus are additionally liable under both criminal and civil law for an incorrect prospectus. In addition, the management board members of the issuer may be held personally responsible for damages towards the company. This liability is not governed by EU law but by national laws.
Communications Restrictions
There are several communication restrictions concerning the marketing of publicly offered equity or debt security transactions. The marketing must firstly 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. 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.
Whether for a public offering or a private placement, pre-deal marketing is also subject to special rules regarding the handling of insider information. There are special rules for exploratory market talks with qualified investors (market sounding), depending on the stage of the transaction and the size of the group of investors addressed.
Post-IPO, the company must publish any newly arising price-sensitive information (so-called insider information) by way of an ad hoc announcement or, under certain conditions, it can decide to exempt itself from immediate publication.
Generally, an issuer must publish immediately inside information that has been selectively disclosed to a limited number of people. However, for example, in the case of an acquisition or capital increase, the issuer would not want to disclose early. In these instances, the issuer can decide that it has a material interest in delaying disclosure and can publish and file the information with the regulator after the fact. It remains to be seen whether and in which way the EU Listing Act will alter these requirements.
Due Diligence Reports and Legal Opinions
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 auditor reviews the financial information contained in the prospectus so that it can issue a comfort letter to the underwriters and the issuer. The legal advisors issue legal opinions on certain aspects of the transaction (for example, the underwriting agreement and the pricing and volume agreement).
In the case of private placements, where no prospectus is required, a shortened due diligence process, mainly by way of management calls, is typical.
Execution of Documents
In principle, all transactions involving changes to the articles of association, capital measures or changes of legal form, among other actions, require the services of a notary public in various forms.
For example, to register the amendments to the articles of association, the management board must attach a notary's certificate to the application to the commercial register. The certificate testifies that the amended provisions of the articles of association correspond to the resolution on the amendment of the articles of association, and that the unamended provisions correspond to the last complete wording of the articles of association submitted to the commercial register.
The resolution to convert the legal form of the issuer, as well as the previous capital increase which typically occurs, require notarial certification to be valid. After the successful conversion, typically further capital measures and authorisations of the management board are required, which must be approved by the annual general meeting. These shareholders' resolutions must be certified by a notary public accordingly.
Legal or Regulatory Issues Impacting Capital Markets Transactions: Points to Note
International counsel should be aware that the following legal or regulatory issues could impact capital markets transactions in Germany.
Due Diligence: Privacy Concerns
Under the EU General Data Protection Regulation ((EU) 2016/679), the disclosure of certain private data (such as names, addresses and telephone numbers) is prohibited without the consent of the data subject. This may imply that the issuer must verify that it has the appropriate consents before disclosing the information required in the due diligence process and, if necessary, redact information before making a document available in the data room.
Restrictions on Foreign Investment
Foreign investments are generally possible in all areas within the framework of the applicable law.
However, to avoid security threats, the Federal Ministry for Economic Affairs and Climate Action may review the acquisition of domestic companies by foreign buyers on a case-by-case basis.
To examine whether the specific acquisition is likely to impair public order or security, or essential security interests of the Federal Republic of Germany, so-called cross-sectoral or, in the case of the acquisition of certain defence or IT security companies, sector-specific investment reviews are carried out. Foreign trade, that is trade in goods, services, and capital with foreign countries as well as trade in foreign assets and gold, is therefore subject to certain restrictions resulting from EU law and from the Foreign Trade and Payments Act (Außenwirtschaftsgesetz) (AWG) and the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung) (AWV).
Required Corporate Approvals
Certain corporate measures that must be taken to get "IPO-ready" require a resolution of the annual general meeting, such as:
- A capital increase out of retained earnings ahead of the IPO.
- Amendments to the articles of association.
- A change of legal form.
Under German law, the decision of the company's management to go public does not require a resolution of the annual general meeting.
However, a typical IPO does not only involve the admission of existing shares but also the creation of new shares through a capital increase. Capital measures in turn require the approval of the general meeting. This also applies to the issuance of option and convertible bonds.
Before the company goes public, it typically converts from the legal form of a GmbH (limited liability company) to an AG (joint stock company), KGaA (company limited by shares), or SE (Societas Europea). This step requires the approval of the shareholders.
Benefits if the Issuer is Incorporated in Germany
In general, the issuer is not required to be incorporated in Germany to be admitted to a German stock exchange or to engage in other equity or debt transactions. EU incorporated issuers are not treated any differently to a German company. If the issuer is incorporated in a country outside the EU (a so-called third country), certain disadvantages may arise; for example, it may be difficult to provide evidence of the equivalence of the financial statements required for the preparation of the prospectus.
Speed of Deals
The speed of capital markets deals largely depends on the type of transaction. In general, the amount of time needed for the same type of transaction is likely to be similar to other EU jurisdictions.
Likelihood of Post-Deal Litigation
Post-deal litigation is much less likely in Germany than, for example, in the US.
However, there remains a risk of litigation or liability, in particular in the following situations:
- If the issuer is required to publish a prospectus, there is generally a risk of liability for the inaccuracy or incompleteness of the prospectus.
- In the case of transactions requiring the approval of the annual general meeting, there is the threat that the resolution may be challenged.
- Issues of subscription rights, in particular, are subject to specific risks, especially regarding the calculation and allocation or exclusion of subscription rights.
- Following an IPO, the company must comply with certain follow-up obligations such as the duty to publish price-sensitive information Failure to comply with these obligations can lead to heavy fines.
This practical note was originally published by Practical Law Capital Markets
