Contributed By Weil, Gotshal & Manges LLP
German Debt Capital Markets ("DCM") comprise, eg, public and private debt markets and retail and institutional markets. This questionnaire will mainly focus on debt instruments placed on public debt markets in the retail market either through a public offer or by means of listing on an exchange. Schuldscheine, ie a promissory note as a hybrid between loans and bonds,and German law-registered bonds (Namensschuldverschreibungen) cannot be listed and are therefore not the subject of this questionnaire.
German publicly listed DCM instruments include investment-grade corporate bonds, high-yield bonds, hybrid instruments (subordinated debt, Tier 2 capital), equity-linked products (convertibles, exchangeables), derivatives products (certificates, warrants, options), exchange-traded derivatives, covered bonds and asset-backed securities.
DCM instruments may be publicly listed (a) on regulated markets, such as the main exchange in Frankfurt or regional exchanges (eg, in Stuttgart, Düsseldorf or Hamburg); or (b) on the unregulated open market (Freiverkehr) of any German exchange.
Please note that Germany has a vibrant industry for Initial Coin Offerings (“ICOs”) and Blockchain. German regulator, the Federal Financial Supervisory Authority ("BaFin") is quite service-oriented and assists with classifying each individual ICO, whether such ICO is regulated and which regime applies to the ICO. Generally, ICOs require a prospectus.
In Germany, there are three distinct market segments:
Whilst the Deutsche Börse AG, Germany’s largest exchange company, has bond-related indices such as eb.rexx, REX and iBoxx, any debt-related indices are not widely recognised in Germany.
Apart from indices, the Frankfurt Stock Exchange ("FWB") organises market segments for corporate bonds. There is a Prime Standard segment as part of the regulated market for prime corporate bonds. The inclusion criteria are the statutory requirements as set out below.
As part of the grey capital market, the FWB offers a segment for SME bonds called "Scale".
The main regulatory bodies governing the listing process are BaFin and the respective exchange, eg, the FWB.
In Germany, exchanges are public institutions with limited legal capacity (teilrechtsfähige Anstalten des öffentlichen Rechts). Functions such as listing and supervision of debt securities are governed by public law whereas the exchanges are held by private law companies (Börsenträger).
BaFin approves prospectuses for the issuance of debt securities and ensures that the prospectus includes all statutory minimum information and that it is worded understandably and contains no contradictory statements. BaFin does not review the accuracy of the prospectus, the investment product itself or the trustworthiness of the issuer.
The respective exchange, if applicable, approves the listing of a security if the listing conditions are met, and supervises orderly conduct pursuant to the exchange rules after the listing.
In all these scenarios, an issuer needs to apply for BaFin's approval of the prospectus for public offerings. The regulatory proceedings for standalone emissions and the establishment of a debt issuance programme are largely identical. The only significant difference is that the documentation for the issuance of debt under debt issuance programmes does not require an additional regulatory approval.
If an issuer has a prospectus for an offer or listing of securities in a country outside the European Economic Area (the "EEA"), eg, in the USA, it can use such prospectus in Germany. BaFin will require such issuer to add specific information required by the EU Prospectus Regulation or the German Securities Prospectus Act ("WpPG") to be added in a wrapper document.
Securities to be listed on an exchange require the admission or inclusion by the management of the respective exchange based on an application of the issuer together with a credit institution or financial service company
Securities of an issuer are to be admitted pursuant to s 32, para 3 of BörsG, provided an approved prospectus is available and the securities are freely tradable (frei handelbar). Securities are freely tradable if they are (a) transferable and not subject to transfer restrictions, (b) fully paid in or mitigating arrangements are in place and (c) capable of being traded in a fair, orderly and efficient manner.
The Issuer needs to be incorporated and must validly exist. Non-incorporated entities may not be issuers.
Under German law, an incorporation of an issuer requires registration with the German commercial register (Handelsregister) of the respective district court (Amtsgericht).
Moreover, the issuer must validly exist under the laws of Germany and have the corporate power and authority to perform its obligations. Under German law, registration in the commercial register creates good faith in regard of the respective entity's valid existence.
No response provided.
Legally there is no minimum rating per se. However, a rating is an important marketing tool and it is crucial to have a “credit story” to ensure a successful placement. A rating, if available, should be discussed in the prospectus, eg, in the risk section.
Generally, BaFin requires the inclusion of the consolidated annual reports of the last three years and the last standalone annual report.
German debt securities are usually Euro-denominated. However, any issuer, be it domestic or foreign, may issue debt securities in any given foreign currency.
Pursuant to the WpPG, debt issuance programmes ("DIP") may be used for continuously issuing non-equity securities of a similar class and rights (ähnlicher Art und Gattung) as well as option certificates of any kind. Under a DIP, it is usual to issue bonds, certificates, option certificates and other structured products.
DIPs require a base prospectus approved by BaFin. Such a base prospectus should cover all required information except the final terms. The final terms are drawn up once an issue is drawn from the DIP and do not require a further BaFin approval. Within the validity period of twelve months, the issuer may draw as many issues as it chooses.
Apart from that, there are no eligibility requirements.
A timely and forward-looking preparation and planning of an emission plays a key role in the listing process. One of the first steps is a careful choice of advisors and one or several investment banks as underwriter(s). "Own emissions" without the involvement of a bank are rather rare in Germany. Usually a letter of engagement and an underwriting agreement are negotiated with the investment bank, outlining, among others, the key facts of the planned emission, the conditions under which the underwriter undertakes to accept the placement risk as well as (rather standardised) representations and warranties.
The emission process starts with drafting a clear timetable and a kick-off meeting of all involved parties in week one.
Thereafter, further preparatory work is conducted and finalised, such as legal and financial due diligence, structuring of the emission, clarifying balance sheet and tax issues, preparation of the investors presentation, marketing material and legal documentation, including a prospectus.
In the final phase, the emission is finally launched, and relevant telephone conferences regarding pricing, final bring-down of due diligence and settlement take place.
In the case of a public placement, a prospectus needs to be drafted and approved. Getting such a prospectus approved by the regulator usually takes between six and eight weeks.
Separately, it must be ensured that the requirements for a listing, in particular with respect to market capitalisation, liquidity and transparency are met. The rules of the relevant local exchange where the security instrument is to be listed may provide for additional requirements for admission to certain parts of the regulated market. Further, the listing application must be filed together with a factsheet and any additional documents the respective local exchange may require.
Procedures do not differ for companies incorporated in a foreign country.
Additional steps are not required for a debut issue. However, setting up the required structures within the issuer, compliance processes etc, may need extra time for a debut issuer.
Straight-forward German debt issuances usually use the fiscal agency structure.
German offerings are usually structured with a view to the targeted group of investors which would be attracted by the issuance, ie, retail or wholesale investors, thereby considering the following technical key drivers:
There are no significant differences regarding the listing process for different types of debt securities. It goes without saying, though, that different corporate law requirements may apply on convertible securities as opposed to eg, corporate bonds.
Steps for setting up a programme are basically the same as for a standalone listing, except with respect to the legal documentation to be provided. Emission programmes are framework agreements for the issuance of debt security of various terms and conditions by way of private placement or public offering. For such issuances, a base prospectus is drawn up, which will be complemented by so called "final terms" for each emission under the prospectus specifying the missing information relating to the individual issuance. Only the base prospectus needs to be formally approved by the regulator. Only the final terms are filed without any additional approval required.
Key advisers are financial and legal advisers. The financial advisor advises on bond terms, market appetite and sourcing of and communication with potential investors. The legal advisers execute legal due diligence and prepare the legal documentation such as a letter of engagement, an underwriting agreement or a prospectus.
See 5.1 Advisers Appointed in Connection with the Issuance.
In a debut issuance and listing, the work that needs to be done before the issuance to get the issuer fit for capital markets is more extensive. Therefore, legal and financial advisors are more involved in analysing the current situation at the issuer and setting up processes within the organisation. In particular, it is required to retrieve and consolidate all required information and streamline internal processes in terms of corporate governance and compliance with market abuse regulation.
The requirements for the issuance and listing made by a foreign company are substantially the same, except for a wrapper document which needs to be added in case of use of a non-EEA prospectus, adding all required information under EU Prospectus Regulation which is not included in the non-EEA prospectus. Therefore, the roles of advisors are substantially the same provided that their roles now include explanation of German legal culture and market standards also.
A drawdown under an existing DIP does not regularly involve external advisors, as all economic and legal structuring has been completed before setting up the base prospectus for the DIP. Prior to a drawdown under a DIP, it is crucial that all significant changes regarding the issuer have been supplemented to the base prospectus.
A prospectus is required in cases where securities are offered to the public or admitted to trading on an EU-regulated market.
An offer to the public is any communication to persons in any form and by any means, presenting sufficient information on the terms of the offer and the securities to be offered so as to enable an investor to decide to purchase or subscribe to these securities.
Any offering prospectus must be produced in compliance with the German Securities Prospectus Act (until 20 July 2019) or the 2017 EU Prospectus Regulation (applicable from 21 July 2019) and be approved by BaFin or another EU regulator (passporting).
By means of passporting, a prospectus approved by a regulator within the EEA may be passported to any other EEA country by way of notification through the financial supervisory authority of the respective EEA country. Following such notification, the issuer may issue securities under the prospectus in the notified EEA countries without an additional approval process in that EEA country.
A prospectus shall cover the following key contents:
The information may vary depending on (a) the nature of the issuer, (b) the type of securities, (c) the circumstances of the issuer, and (d) where relevant, whether or not the non-equity securities have a denomination per unit of at least EUR100,000 or are accessible for trading to qualified investors only.
The main categories of information are as follows: (a) highly-regulated summary with key information (unless qualified investors only or denomination per unit of at least EUR100,000), (b) information about the issuer, (c) risk factors, and (d) financial information.
The following persons are jointly and severally liable for the content of the prospectus: (a) the issuer, (b) the financial institutions involved, (c) the persons named in the prospectus as being responsible for content, and (d) the initiator indirectly profiting from the issuance (Prospektveranlasser), eg, a group parent.
However, please note that it is market standard for the financial institutions to be indemnified by the issuer under an indemnity clause in the Underwriting Agreement.
There are no differing content requirements for offering documents depending on which exchange securities are listed on, the EU Prospectus Regulation requires a prospectus for any offer of securities to the public, ie, at any relevant exchange.
Wholesale issuances are usually structured to fall under the exemptions to the prospectus requirements.
Prior to a public offering of securities, BaFin needs to approve the publication of the prospectus. Marketing activities for a debt instrument may only start once BaFin has approved the prospectus based on the submission of the following documents:
Once BaFin approval has been granted, the prospectus needs to be published either in a print newspaper in Germany available to investors or on the website of the issuer.
Exemptions include: (a) qualified investors classified as professional clients or eligible counterparties pursuant to the EU Directive 2014/65/EU on markets in financial instruments ("MiFID II"); (b) issuances with a denomination of above EUR100,000; (c) investors have to subscribe at least EUR100,000, or (d) offers to fewer than 150 persons per EU Member State.
Private placements are usually structured to fall within the above exemptions.
MAR generally forbids bilateral disclosure of inside information. Rather, pre-announcement marketing efforts need to be closely aligned with the market sounding exemption.
Market sounding comprises the communication of information by an issuer or a third party acting on behalf of the issuer (known as a "Disclosing Market Participant") prior to the announcement of an issuance, in order to gauge the interest of potential investors and the conditions of a possible transaction such as potential size or pricing.
For a legitimate market sounding, the Disclosing Market Participant shall:
7.1.1 reflect whether market sounding involves the disclosure of inside information and shall make a written record of its conclusion and the reasons thereof;
7.1.2 obtain consent from persons receiving the market sounding (the "MS Person") to receive inside information;
7.1.3 inform the MS Person that he is prohibited from trading in securities of the issuer relating to that information and that he shall keep the information confidential; and
7.1.4 make and maintain a record of all information given to the MS Person and the identity of those to whom the information has been disclosed and the date and time of each disclosure.
While an (accelerated) bookbuilding can be used for debt offerings, a public subscription (öffentliche Zeichnung) is more common. In a public subscription, investors are asked to submit their orders for the securities at a fixed, pre-determined price within a certain offer period.
Underwriters will only commit their underwriting at the end of the bookbuilding phase, thus covering the period from pricing to closing. Best efforts clauses are rather untypical for German issuances.
One of the key points to be stipulated by a subscription agreement is the extent to which the investment bank assumes the risk associated with the placement (so called “firm commitment underwriting”), leaves it with the issuer (so called “best-efforts underwriting”) or seeks a middle ground. Further, in case of a public offering, underwriters are also liable for the content of the prospectus, hence, an indemnity provision may be stipulated.
The dealer agreement stipulates the conditions relating to the role of the bank, the structure of placement and terms of the subscription as well as the bank's contractual relationship with the issuer.
Stabilisation and market manipulation are covered in the MAR.
Stabilisation is the purchase of securities or of associated instruments, which is undertaken by a credit institution in the context of a significant distribution of such securities exclusively for supporting the market price of those securities due to selling pressure in such securities. In regard of the stabilisation of a primary or secondary offer, such stabilisation may take place for 30 days from the date of commencement of trading and needs to be publicly announced prior to the period. During the stabilisation period, all stabilisation transactions need to be disclosed no later than the end of the seventh daily market session.
Market manipulation is prohibited, eg, giving false or misleading signals as to supply, demand or price of financial instruments or securing the price of a financial instrument.
Generally, the choice of foreign law to govern an agreement will be recognised by courts in Germany in accordance with Article 3 Regulation (EC) No 593/2008 of the European Parliament and of the Council of June 17 2008 on the law applicable to contractual obligations (Rome I Regulation), and
There have been some cases in the past where the choice of foreign governing law or jurisdiction were not recognised by German courts because the choice of law or jurisdiction did not comply with applicable requirements of German conflict of law provisions. These cases did, however, not relate to debt capital market products.
Yes, subject to certain conditions and depending on the country of origin, foreign judgments are enforceable in Germany.
Foreign arbitration awards are enforceable in Germany in accordance with the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) (New York Convention).
Judgments by a court which are enforceable in the courts of EU Member State are enforceable in Germany without any additional declaration (Art. 39 of Regulation (EU) 1215/2012 of the European Parliament and the Council of December 12, 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (Brussels Ia)).
Enforcement of a judgment of a Non-EU court in Germany requires recognition by a German court, which itself requires that
Certain pledges require notarisation and registration in the competent register: for example, a German land charge (Grundschuld) requires registration in the competent local land register, a pledge over a ship requires registration in the (International) Shipping Register ((Internationales) Seeschiffsregister) and a pledge over an aircraft requires registration in the Register of Liens on Aircrafts (Register für Pfandrechte an Luftfahrzeugen).
A pledge over shares in a German limited liability company (Gesellschaft mit beschränkter Haftung) (GmbH) needs to be read aloud by a German notary and the pledged company needs to be notified of the pledge.
Valid creation of any pledge requires notification of the relevant banks where the pledged accounts are held.
The domicile of a bondholder in a foreign jurisdiction has no impact on the enforceability of any transaction document, as the enforceability only becomes relevant for those jurisdictions where enforceable assets of the debtor are located, irrespective of the domicile of the bondholder.
No specific restrictions apply to foreign entities entering into a bond transaction in Germany.
Foreign bonds with a prospectus approved by another EU regulator may be offered by means of passporting (see item 6.1 above).
Bonds issued by third-country entities to be offered in Germany have to comply with the requirements of Chapter VI of the 2017 EU Prospectus Regulation. Once the EU home Member State has approved the prospectus, it entails all rights and obligations provided for under the 2017 EU Prospectus Regulation and the third-country issuer shall be subject to all of the provisions of the 2017 EU Prospectus Regulation under the supervision of the competent authority of the home Member State.
Generally, BaFin has to approve a prospectus within ten working days from submission. Such period is extended to 20 working days in a case where the issuer has not previously offered securities to the public and does not have any securities admitted on an organised market in the EEA.
If BaFin has comments on a submitted prospectus, it has another ten or 20 working days from submitting the amended prospectus. This may take multiple rounds of submissions until BaFin is fully satisfied and approves the prospectus.
This being said, BaFin generally does not use the full time granted under the statutory deadlines. In order to obtain an expedient approval, it is crucial to include missing information (eg, interim financial information) as soon as possible. Also, it is advisable to contact BaFin ahead of filing a draft prospectus for agreeing on a timetable and discussing any potential issues regarding the information to be included in the prospectus.
In respect of draw-downs under a DIP, the basic prospectus for the DIP is valid for 12 months following BaFin's approval. Thus, subject to necessary supplements to update outdated information, the issuer may draw-down funds under such a DIP without further BaFin approval.
Wholesale offerings are usually structured to be exempted from the prospectus requirements. Hence, the timeline is driven by economic factors, ie, a potential road show and bookbuilding process.
Mostly, debt securities are in bearer form, documented in a global certificate. Such global certificates are held in a collective giro deposit, primarily with Clearstream Banking AG, and booked electronically to the respective security holder's account (Girosammel-Depotgutschrift).
For debt issuances of issuers with tax residency in Germany, no special German tax rules exist, but general rules (eg, interest barrier rules) do apply. For non-German debt security holders, taxation of the interest income is, apart from the question of withholding tax (see item 12.2 below), the key issue.
Debt interest received by a non-German tax resident (having no permanent establishment in Germany to which the debt securities are allocated to) is subject to German income taxation only if the debt securities:
Repayments of principal are not subject to WHT in Germany.
Furthermore, Germany does not levy WHT to anybody on interest payments, unless one of the cases (2) or (3) of item 12.1 apply, in which case WHT of 25% (plus 5.5% solidarity surcharge thereon) is levied. For a non-German tax resident creditor an applicable double taxation treaty may provide for a lower or even no WHT rate. Given the fulfillment of further requirements, such WHT might have a final tax compensating effect with regards to the tax liability of the taxpayer, otherwise the non-German tax resident creditor may apply for a tax refund claim with the German Central Tax Office.
To reduce or eliminate German WHT for a non-German tax resident, tax structures without the above-mentioned collateral (German real property rights in rem or by ships) or registration in a public debt register or global certificates should be avoided.
No. There is no stamp tax or duty in Germany.
German issuers of securities are obligated to publish annual and half year reports both on a standalone and consolidated basis.
An annual financial report ("AFR”) shall be published within four months after the end of a business year. Such AFR comprises an annual report and a management report. Moreover, German issuers of securities also publish a half-year financial report ("HYR") within three months following the end of the respective half-year. The HYR comprises an abbreviated report and an interim management report.
Investors holding convertible bonds or similar securities granting the investor the right to acquire shares in an issuer (regardless of the physical or cash settlement) shall disclose such financial instruments to both the issuer and the BaFin within four trading days, provided their investment crosses any of the various thresholds in the underlying share between 5 % and 75 %.
Information regarding the issuer should be disclosed in the issuer section of a prospectus, if any.
Should information on the issuer change between approval of the prospectus and public offer or listing of securities, the prospectus should be amended accordingly. Otherwise, the prospectus liability for incorrect or misleading information can apply.
Moreover, the issuer should inform the public as soon as possible of inside information which directly concerns such issuer (ad hoc disclosure).
In terms of continuing obligations, there are no specific corporate governance requirements.
However, please note that prior to issuing convertible or profit sharing bonds, the issuer needs to obtain a resolution from the general meeting ("GM") with a quorum of 75 % of the share capital mandating such issuance as well as excluding the existing shareholders' subscription rights. Such resolution is valid for five years and needs to be registered with the German commercial register. A convertible bond additionally requires a GM resolution on the issuance of contingent capital.
Transactions of managers and by persons closely related to them in debt instruments of the respective issuer or derivatives or other financial instruments linked thereto need to be notified, within 3 business days following such transaction, to the issuer and financial supervisory authority. The issuer should ensure that the information is made public no later than 3 business days after the transaction. There is a de minimis-threshold of an aggregated transaction volume for the year of EUR5,000.
Also, managers are generally prohibited from transactions during a closed period of 30 calendar days before the announcement of an HYR or AFR.
Issuers of debt instruments listed on an organised market with a denomination of EUR100,000 or above are exempt from the reporting requirement of item 13.1(a) above. Also, there is no need to update the issuer information if the issuer is exempt from the prospectus requirement.
Apart from that, there are no differences between retail and wholesale offers of debt securities.
This depends on the domicile of the foreign issuer. Provided he is non-EU and his securities are listed on a German exchange, these obligations apply.
13.4.1 Reporting Obligations
For contraventions against reporting obligations there is a financial fine of up to EUR10 million or 5 % of consolidated revenues, or twice the economic benefit drawn from the infraction. The company and potentially its directors may be liable as well as the advisory board.
13.4.2 Disclosure Requirements
Should the information on the issuer not be updated in the prospectus, the issuer is liable to reimburse the investor the issue price of the respective security. The company and potentially its directors may be held liable as well as the advisory board.
The omission of an ad hoc disclosurepursuant to MAR is punished with a fine of up to EUR1 million. The company and potentially its directors may be liable as well as the advisory board.
13.4.3 Managers' Transactions
Infractions against obligations regarding managers' transactions may be punished with a fine of up to EUR500,000 against the manager and EUR1 million against the respective issuer. The company and potentially its directors may be liable as well as the advisory board.