Contributed By Weil, Gotshal & Manges LLP
In Germany, the most important stock exchange in terms of reputation and trading volume is the Frankfurt Stock Exchange (“FWB”®) operated by Deutsche Börse AG (“Deutsche Börse”).
There are additional stock exchanges in Berlin, Dusseldorf, Hamburg, Bremen, Hanover, Munich and Stuttgart.
On the FWB, shares can be listed on the regulated market in either the General Standard or the Prime Standard with additional post-admission obligations. In the “Open Market” (Freiverkehr), which is a multi-trading facility within the meaning of the European Market Abuse Regulation (EU) No 596/2014 (“MAR”), there is no formal admission process but only inclusion of the shares.
The Prime Standard sets higher admission requirements, and therefore higher reporting and transparency requirements, than the General Standard and is thus intended for large and international companies.
Deutsche Börse, as the operator of FWB, has several sector and stock indices. The most important index is the DAX®, which includes the 30 largest listed companies in terms of market capitalisation based on free float (Streubesitz) and trading volume. The next 50 largest companies in terms of market capitalisation based on free float and trading volume are included in the MDAX®, while the TecDAX® comprises 30 of the largest companies with a focus on technology in terms of market capitalisation based on free float and trading volume.
In Germany the listing process is governed by the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) (“BaFin”) and the relevant stock exchange on which the shares are to be listed, eg FWB.
The German Listing Act (“BörsG”) regulates the listing of securities in the organised exchange securities trading on German exchanges. For the admission of securities to stock exchange trading, the German Listing Act refers to various laws and regulations, eg:
For a primary listing of shares on the regulated market, issuer-related as well as asset-related requirements must be fulfilled:
The formation and constitution of the issuer must be in accordance with local laws. In Germany, there are three legal forms of companies whose shares can be listed on a stock exchange, namely, a stock corporation (Aktiengesellschaft) (“AG”), a partnership limited by shares (Kommanditgesellschaft auf Aktien) (“KGaA”), or a Societas Europea (Europäische Gesellschaft) (“SE”) incorporated under the laws of Germany. The issuer must have been incorporated or be validly existing for at least three years, but it can be converted into the legal form of an AG, SE or KGaA, and in principle, it must have published financial statements for the last three years prior to application for listing.
The minimum market capitalisation of the shares must be at least EUR1.25 million and at least 10,000 shares must be admitted to trading. Further, the minimum free float must be 25%. The shares must be freely tradeable.
In general, the same rules apply to a secondary listing as to a primary listing. However, there is an exemption from the prospectus requirement for issuers already listed on other EU-regulated markets if the following key conditions are met:
Prior to conducting an initial public offering (“IPO”), the potential issuer may have to implement certain pre-IPO measures in order to prepare the issuer for the IPO and ensure compliance with legal, corporate governance and reporting requirements after the flotation. Such pre-IPO measures may include significant corporate and tax restructurings in connection with the carve-out of business units. Further measures may include the implementation of corporate governance, compliance and financial reporting in line with capital market requirements.
In many cases, a change of the legal form of the issuer, eg from a formal limited liability company (Gesellschaft mit beschränkter Haftung) into an AG, SE or KGaA, is required. Foreign issuers must be organised as comparable corporations under the law of the country in which the issuer has its registered office, eg a Luxembourg société anonyme.
In carve-out situations, the relationships with the shareholder must be terminated. For a transitional period, the former shareholder may provide certain services or grant shareholder loans, but the capital market will perceive it positively if the issuer group is operated independently from the shareholder. Equity may need to be increased prior to the offering and debt reduced to levels that are acceptable for investors.
In addition, the articles of association of the issuer need to be amended to include authorisations for the issue of authorised and contingent capital for the underlying of convertible bonds and a potential management stock option plan. A shareholders' resolution should provide the management board (Vorstand) and the supervisory board (Aufsichtsrat) of the issuer with the authorisation to issue convertible bonds or similar equity-linked instruments as well as to repurchase shares.
Further amendments to the issuer’s articles of association include cancellation of any rights of first refusal in favour of another shareholder, and provisions applicable to the stock corporation’s corporate bodies, ie management board, supervisory board and the shareholders’ meeting (Hauptversammlung).
In addition, the by-laws of the management board and the supervisory board should be amended to be in line with the legal requirements for listed companies and the recommendations of the German Corporate Governance Code (Deutscher Corporate Governance Kodex) (“GCGC”).
Issuers incorporated under foreign law must also comply with their local law requirements. Within the EEA, EEA issuers may opt for approval of the prospectus by the local financial supervisory authority and “passporting” to Germany. For example, if a Luxembourg issuer conducts a public offering in Luxembourg and Germany, it can use the prospectus also for listing of its shares on the FWB.
In general, the IPO can be structured as a public offering to retail and institutional investors (qualified institutional buyers) and as a placement to institutional investors only. Additionally, it must be decided if the offering/placement should include primary shares, secondary shares or a mix of both. In most cases, the IPO is structured as a public offering with an offering of primary and secondary shares.
A public offering requires that shares of the issuer also be offered to retail investors because offerings to qualified institutional buyers only do not qualify as a public offering. However, there are no rules in Germany that require an offering to be public, eg IPO of Schaeffler AG.
Subsequent primary offerings serve corporate finance purposes, are conducted in connection with the acquisition of a business or allow the distribution of a stock dividend, while subsequent secondary offerings allow the shareholders to monetise their investment.
Subsequent primary offerings can be structured by either using the authorised capital (the amount is usually between 20% to 50% of the stated capital when the authorisation resolution has been adopted by the shareholders’ meeting) or adoption of a shareholders' resolution to increase the issuer’s stated capital.
Capital increases can be conducted via contributions in cash or in kind. Capital increases against contributions in kind are used to acquire businesses in exchange for shares in the issuer. Either the seller contributes the shares or assets directly to the company, the issuer is the surviving entity in the context of a merger or the shares are contributed after a public takeover offer in which shares of the issuer were offered as (or as part of the) consideration.
Subsequent primary offerings against cash contributions are often structured as an accelerated bookbuilding offering (“ABO”) and utilise the issuer’s authorised capital. The authorised capital usually includes the possibility to exclude the subscription rights of shareholders when the offering does not exceed 10% of the stated capital and the placement of the shares is executed at a price close to the current share price (discounts of up to 3% to 5% below the relevant share price are generally accepted). This allows the issuer the placement of a significant stake with one or several (anchor) investors in a short timeframe. In this context, the opportunity of placing up to 20% of the shares of an issuer within 12 months without publishing a prospectus allows the issuer to react quickly upon positive share-price developments. Subsequent primary offerings against contributions in cash that require a shareholders' resolution due to their volume (because the authorised capital is not sufficient) are comparatively rare due to their complexity. A prospectus would be required as well as a convincing marketing story that describes the issuer’s equity need that cannot be satisfied from using authorised capital or via debt.
Secondary offerings can also be structured as ABOs allowing (private equity) investors to finally exit their investment over a certain period of time and benefit from positive share-price developments.
Key parties in an IPO are the issuer, the issuer’s shareholder(s), the banks which underwrite the offering and place the shares on the market, their legal advisers, the audit firm which prepares the financials for the prospectus, the IPO adviser and a public relations firm.
An IPO adviser informs the issuer on all financial matters of the contemplated transaction. Key tasks usually include verifying the IPO readiness of the company, reviewing the financials, valuation of the company as well as supporting the development of the issuer’s equity story, the overall project management and development of the initial issue concept (eg size of the issue, primary/secondary composition). The IPO adviser may also assist in the selection of the underwriting banks.
The global co-ordinator is the most senior bank and leads the process and prepares, coordinates and executes the IPO. The global co-ordinator performs detailed due diligence and valuation of the company. It is responsible for the development of the offering roadmap, including a detailed day-to-day timetable. Further responsibilities include the preparation of the marketing materials (most importantly the analyst presentations), assistance in the preparation of the prospectus, the marketing and placement of the issue via their sales force and advice on the pricing of the issue. A book-runner is a bank that keeps the order book during the book-building process. The global co-ordinator also acts as book-runner. In large IPOs, there are also banks that underwrite a smaller share of the offering, the “co-lead manager(s)”.
Legal advisers are involved in the IPO process at all times. Particularly, the issuer’s counsel, together with the shareholder’s counsel, identify and execute the pre-IPO measures. Both the issuer’s counsel and the underwriters’ counsel conduct due diligence on the issuer because the issuer and the underwriters may be held liable if the prospectus contains incorrect or incomplete information that is required for an investor. The issuer’s counsel drafts publicity guidelines and supervises the compliance of all parties. The issuer’s counsel is also responsible for the approval of the prospectus by BaFin and the registration of the capital increase with the commercial register. The underwriters’ counsel is mainly responsible for drafting the underwriting agreement. The underwriters’ counsel will also issue certain legal opinions for the benefit of the bank consortium.
The auditor may assist the company in the transition from local GAAP to IFRS accounting. The auditor performs financial due diligence and provides the financial information that is required to be published in the prospectus (F-pages). The auditor will also issue comfort letters guaranteeing the correctness of certain financial information in the prospectus.
The public relations firm is responsible for the external presentation of the issuer. It develops a communication strategy and prepares the intention to float, press and ad hoc releases. The public relations firm may also assist in setting up a functional investor relations department and website for the issuer.
No response provided.
In principle, an IPO in Germany requires a securities prospectus that informs comprehensively and reliably about the issuer and the offered security allowing a potential investor to make an informed investment decision. Most requirements for a securities prospectus are set forth in the WpPG, the 2003 EU Prospectus Directive and the 2004 EU Prospectus Regulation. The latter two will be replaced from 21 July 2019 by the 2017 EU Prospectus Regulation. The legal regulations are supplemented by the recommendations of the European Securities and Markets Authority (EMSA).
The legally required minimum content is listed in Annex I to the 2017 EU Prospectus Regulation.
As part of the approval procedure, BaFin checks whether the legally required minimum disclosures are included in the prospectus (completeness check), whether the prospectus is comprehensible and whether the content of the disclosures in the prospectus is not inconsistent (coherence check).
The prospectus must contain information about the factual and legal circumstances that are material to the assessment of the offered shares. The information in the prospectus must be accurate and complete.
Additional content may be required for specialist companies.
No response provided.
See 6.1 The Prospectus or Offering Document.
If a prospectus is required, it must be published at least one business day before the launch of the public offering after approval of the prospectus by BaFin. The prospectus is published online on the issuer’s website. Printed copies should be available at the offices of the issuer and/or at a German office of one of the underwriters. The prospectus can be drafted in English if the public offering is conducted in Germany and another EU/EEA country.
Exceptions to the obligation to publish a prospectus result from Section 3 WpPG and, from 21 July 2019 onwards, from Article 1. - 1-d 2017 EU Prospectus Regulation. Since 20 July 2017, up to 20% (previously up to 10%) of the shares of an issuer whose shares are already admitted to trading on the same regulated market can be admitted to trading on this regulated market over a period of 12 months without publishing a prospectus. This exception is frequently used in connection with ABOs.
In the marketing phase, certain restrictions have to be observed preventing investors from being inappropriately influenced in their investment decisions. All information contained in any marketing materials must also be reflected in the prospectus. Advertisements must be clearly recognisable as such and must contain a reference to the published or yet to be published prospectus and where the prospectus can be obtained. All investors to whom the offer is addressed must receive the same information. Further, the offering, as well as the publications and marketing measures affecting it, should not violate any foreign capital market rules. Based on a separate acceptance letter, research guidelines provide binding rules for the preparation and distribution of corporate analyses by the underwriters. The provisions in the research guidelines are also intended to ensure that the preparation and distribution of research reports are consistent with applicable capital market regulations. US law requires that additional disclosure guidelines must also be observed in Germany. According to US law, the public relations work of the issuer two weeks prior to an IPO and 40 days after settlement is regularly subject to certain restrictions in “publicity guidelines”. According to those guidelines, the content and distribution of all publications must be coordinated between the (joint) global co-ordinator and the issuer in a clearing committee set up for this purpose.
The underwriters prepare research reports. A research report is regarded as the most important source of information for institutional investors and, for reasons of reputation and quality assurance, a high standard of due diligence must be applied in the preparation of the research report.
Further, there is a disclosure obligation with regard to possible conflicts of interest and “Chinese walls” must be established to ensure that the financial analyst is independent when preparing the research report.
After the IPO has been included in the financial analyses, the statutory provisions also stipulate that an overview of the recommendations contained in their financial analyses must be provided on a quarterly basis in relation to the investment banking services provided to the issuer in the last 12 months.
In addition, the research guidelines regularly provide for the obligation to send a copy of the prospectus to recipients of company analyses (or at least to those who receive an allotment). The independent analyst’s own findings, forecasts and future expectations developed from the information provided are not directly covered by the requirement for consistency, but should be clearly identified as such (outsider’s review).
With regard to forecasts, the internal rules of the investment banks regularly contain self-restrictions for the relevant forecast period. The inclusion of investment recommendations, target prices or earnings per share is generally prohibited. However, descriptions of the methods used to value comparable companies in the context of a valuation discussion are permitted to a limited extent. Despite these limitations, compared with conventional financial analyses, issuers are sometimes only provided with a draft of the research report without the valuation discussions and summaries (redacted research) as part of the review process.
In Germany, there is usually a bookbuilding process for equity offerings.
At least in larger IPOs, the underwriting is usually structured as a hard underwriting, ie, a firm commitment of the underwriting banks.
One of the (joint) global co-ordinators or persons acting on its behalf acts as stabilisation manager in the context of an IPO and may, acting in accordance with legal requirements of MAR and Commission Delegated Regulation (EU) 2016/1052 of 8 March 2016 (“Commission Delegated Regulation”) (in conjunction with the regulatory technical standards issued as applicable), take stabilisation measures to support the market price of the shares of an issuer and thereby counteract any selling pressure. The “stabilisation manager” acts as the central point responsible as set forth in Article 6(5) of Commission Delegated Regulation and assumes responsibility for the public disclosure requirements and for handling any request from any competent authorities referred to in such regulation. Stabilisation measures can be taken from the date of the commencement of trading of the shares of the issuer on the regulated market of the FWB and must be terminated no later than 30 calendar days after that date.
A block trade is the sale of a larger stake of shares (usually less than 10%) of a listed entity structured as a public placement with institutional investors by one or more investment banks by way of an ABO.
Given that no securities prospectus or offer documents are required, the transfer may take place solely on the basis of a term sheet between the seller and the investors.
Primary block trades usually require the approval of the seller’s management and supervisory board or a shareholders’ meeting. In addition, there are follow-up obligations for the participants, such as notification obligations of the seller and the bank under the WpHG, as well as ad hoc notification obligations for the seller and, if applicable, also for the target company.
In principle, there are no legal restrictions concerning the use of foreign law or jurisdiction in relation to equity issuances.
In principle, English or New York law can be used to govern an underwriting agreement. However, today it is common market practice that the underwriting agreement and the pricing agreement for German equity issues are governed by German law and that the place of jurisdiction is Frankfurt am Main, Germany, or the seat of the issuer.
There have been no cases where the choice of law or jurisdiction has not been recognised.
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).
Judgments by a court which are enforceable in the court of an EU Member State are enforceable in Germany without any additional declaration (Article 39 of Regulation (EU) 1215/2012 of the European Parliament and the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters).
Enforcement of a judgment of a non-EU court in Germany requires recognition by a German court, with such recognition requiring that:
The enforceability of any of the transaction documents related to an equity issue would not be affected by a shareholder being domiciled in a foreign jurisdiction, but it may require additional administrative and procedural efforts.
In principle, there are no regulatory restrictions concerning foreign entities entering into equity transactions or offering their equity securities in Germany as long as they also comply with their domestic law. Compared to a German entity, however, additional resources are required to analyse how the foreign entity can meet necessary requirements, and implementation of measures may also require additional work compared to a German entity.
The list below shows a typical IPO timetable that may vary based on the particularities of the IPO at hand. For example, the IPO may be conducted on an accelerated basis due to time constraints.
(Note: days in brackets mean days prior to listing – ie, the kick-off meeting commences 140 days prior to the listing.)
D(140) Kick-off meeting.
D(139) If applicable, restructuring of the issuer.
Start of due diligence/prospectus preparation.
D(60) First submission of the prospectus to BaFin.
D(55) Analyst presentation.
D(54) Pilot fishing/early look investor meetings.
D(35) Second submission of the prospectus to BaFin.
Press announcement (intention to float).
D(28) Distribution of research reports.
Dispatch of syndicate briefing memorandum to underwriters.
D(27) Start research black-out and start investor education.
D(21) (Extraordinary) shareholders’ meeting (Hauptversammlung) (including resolution on authorised capital).
D(16) Third prospectus submission to BaFin (final version without price range).
D(14) Finish investor education/'feedback presentation' for issuers.
D(13) Determination and announcement of price range (ad hoc announcement/press release).
D(12) Signing of takeover/consortium agreement or launch agreement.
Application for admission to the FWB.
Prospectus approval by BaFin passporting.
Issue of legal opinions/disclosure letters/comfort letters.
Publication of the prospectus on the issuer’s website.
D(11) IPO press conferences.
Start of management roadshow.
Beginning of bookbuilding.
D(2) Resolutions of the management board and supervisory board on the utilisation of authorised capital or extraordinary general meeting (resolution on ordinary capital increase).
Registration of the implementation of the capital increase for entry in the commercial register.
D(1) Submission of legal opinions/disclosure letters/bring-down comfort letter (if applicable, signing of takeover agreement/consortium agreement).
Entry of the implementation of the capital increase in the commercial register.
End roadshow/bookbuilding – pricing and allocation.
Signing of price fixing contract.
Ad hoc announcement on the issue price.
Stock exchange listing of the shares by FWB.
D+2 Issue legal opinions/disclosure letters/bring-down comfort letter settlement.
D+30 End of stabilisation period/exercise of greenshoe.
D+42 End of research black-out period (40 days after settlement).
For equity securities issuances of issuers with tax residency in Germany, no special German tax rules exist, but general rules apply. For non-German equity security-holders, taxation of the dividend income and the question of withholding tax (see 12.2 Withholding Tax) are the key issues.
Generally, dividends in Germany are subject to 25% WHT plus an additional 5.5% solidarity surcharge resulting in a total WHT rate of 26.375%. This WHT is levied on dividends regardless of the state of residence (domestic or non-domestic) of the recipient.
If the dividend recipient is either a resident taxpayer (corporation or individual) or a non-resident corporation holding the shares via a German permanent establishment (“PE”), the amount of WHT levied can be credited against the overall corporate income tax (“CIT”) burden. For non-German tax residents, the WHT is definite.
A special WHT relief procedure (upon application with the Federal Central Tax Office (“FCTO”) is in place for non-domestic corporations to reduce their WHT rate down to 15.825%. This rate can be reduced even further under an applicable double taxation treaty (“DTT”) (in such cases often a minimum (direct) shareholding requirement has to be fulfilled).
A complete WHT relief can be obtained under the Parent-Subsidiary Directive, which provides for a tax exemption if the dividend recipient is (i) resident of another EU member state, (ii) holds at least 10% of the shares in the distributing corporation for a minimum period of 12 months, and (iii) the dividend payment is not tax-deductible for the distributing German corporation.
A foreign corporation can file a request for refund of the (withheld) WHT or for the issuance of an exemption certificate (in which case the WHT is not withheld) if one or more of the above-mentioned cases (reduced WHT rate, DTT or exemption under the Parent-Subsidiary Directive) applies. Such refund or exemption certificates will only be granted if certain (mostly extensive) substance requirements are met by the dividend recipient or its (direct or indirect) shareholder. In a few cases, no WHT will be withheld, eg if:
There is no stamp tax or duty in Germany. However, the introduction of a financial transaction tax to tax the transfers of listed or unlisted shares is currently being discussed in Germany (and in nine other EU Member States).
In general, the sale of shares in a German corporation will trigger capital gains tax in the form of income tax (individuals) or CIT (corporations) if the shareholder holds (directly or indirectly) 1% or more of the sold shares within the last five years prior to the sale. For individuals, 40% and, for corporations, 95% of such capital gains arising from the sale of shares are tax-exempt (the remaining 5% non-deductible expenses leading to an effective tax rate of 0.8%). However, the German Supreme Tax Court recently ruled the treatment of the 5% of capital gains as non-deductible expenses for non-domestic seller corporations without a German permanent establishment to be inapplicable, with the consequence that capital gains would be effectively tax-free.
However, to the extent that capital gains are subject to German taxation, most DTTs between Germany and other countries establish a taxation right for the country of residence of the selling shareholder (unless the sold shares have been held through a German permanent establishment).
Companies listed on EU-regulated markets are subject to a comprehensive set of post-admission obligations predominantly aiming at investor protection. The European approach to ensure investor protection in a capital market context is driven by transparency principles and protections against market abuse (in particular, anti-fraud and insider trading).
In this context, issuers must comply with ongoing reporting obligations introduced on a European level by MAR.
In terms of ad hoc disclosure requirements, inside information must generally be disclosed without delay, subject to a permitted delay of disclosure if certain requirements are met (in particular, the issuer’s interest in delaying disclosure must overweigh the market’s interest in immediate disclosure and confidentiality must be ensured). If an issuer decides to delay disclosure of inside information, it is required to have certain statutorily defined decision-making and record-keeping procedures in place in order to monitor the continued availability of the exemption from the requirement to publish the inside information without delay. Upon the (later) publication of the inside information, the issuer must notify the reason for the delay of disclosure of inside information and explain in detail how it complies with the record-keeping obligations under MAR.
Members of executive bodies and other executives (Führungskräfte) are subject to statutory disclosure obligations (directors’ dealings). A report is made to the issuer and to BaFin. The issuer is obliged to publish the reported information, inform BaFin and submit the report to the company register for storage. In addition, there are also obligations to provide information and, for limited periods of time, a ban on trading. With regard to the transactions, it is assumed that the transactions involve shares or debt securities of the issuer or related financial instruments. Disclosures of related party transactions are required in the consolidated financial statements of the issuer.
Further, the issuer has to publish an annual financial report within four months after the end of each financial year and a half-yearly financial report within three months before the end of the reporting period. Pursuant to provisions of the German Stock Corporation Act, the management board and the supervisory board of listed companies have to state annually whether the company complies with the provisions of the German Corporate Governance Code and explain the reasons if it deviates from the recommendations of the Code (comply or explain).
In the Prime Standard, issuers must also hold an analysts' conference (in addition to the annual press conference) at least once a year. A financial calendar containing the issuer’s most important corporate action events must be published, updated and transmitted.
MAR and consequently also the obligations mentioned therein apply Europe-wide. Non-EU issuers must also comply with national regulations in addition to their home country requirements. Foreign issuers have the option of prolonging publication deadlines through BaFin. Foreign accounting principles are partially recognised.
The legal consequences for the cases in which the issuer or the responsible individuals do not comply with their disclosure obligations listed above are in principle criminal offences (Straftatbestände) and administrative offences (Ordnungswidrigkeitstatbestände). Apart from the exception of Section 97 WpHG, there is no claim for damages (Schadensersatzansprüche) against the issuer.
Issuers who (i) do not publish or (ii) unlawfully delay the publication of ad hoc notifications or (iii) publish wrong inside information may be liable for damages to third parties resulting from such omission, delay or wrong publication. The management board and the supervisory board may be held liable if they are responsible for the breach of the publication rules.
The same applies to non-compliance with notification and publication obligations of transactions by management members, as well as notification and publication obligations of voting shares.