Since a 2013 decision by the German Federal Court of Justice, the number of delistings at German stock exchanges has increased significantly. The decision simplified the requirements that need to be fulfilled by a company when revoking its admission to the stock exchange-regulated market. This simplification has, however, had far wider implications than anticipated.
In an October 2013 decision, the German Federal Court of Justice changed the rules for the revocation of admission to the regulated market stock exchange (delisting) and the rules for companies wishing to leave the regulated market but retain admission to the unregulated market (known as downlisting). Contrary to the Court’s 2002 decision in Macroton, the power to approve a delisting or downlisting now resides solely with the Board of Management and, if applicable, the Supervisory Board. It is no longer necessary for the Board to obtain an endorsing resolution by general meeting and major shareholders are no longer required to grant any cash compensations, which are verifiable by mediation proceedings.
The protection of shareholders in a delisting is now provided by the German Stock Exchange Act in conjunction with the German Stock Exchange Regulations. The Act provides that stock exchange delistings and downlistings must not conflict with shareholder protections. These protections are laid out in the various German Stock Exchange Regulations of each stock exchange, and range from reasonably straightforward to rather burdensome.
For example, under the Frankfurt Stock Exchange Regulations, a delisting from the General Standard becomes effective six months after it has been announced, during which period the shareholders continue to be able to sell their shares on the regulated market. The Düsseldorf Stock Exchange Regulations, on the other hand, are based on the principles set forth in Macroton, and state there must be a resolution by a general meeting in favour of the delisting, and the majority shareholder must offer to purchase minority shares.
UNEXPECTED CONSEQUENCES OF THE NEW RULES
Numerous delistings and downlistings have occurred since the October 2013 decision of the Federal Court of Justice and the introduction of the new rules. The unexpected consequences of a delisting or downlisting are extremely interesting. It’s become clear that, as a result of the delisting or downlisting, many shareholders sell their shares and, as a result, the share price of the company falls. Institutional investors may be compelled to sell if they have to invest in the regulated market, other shareholders sell because they would rather invest in fungible shares.
The fall in the price is mostly due to the fact that, under the new rules, there is no longer an underlying cash compensation offer by majority shareholders.
The fall in the price of shares of delisted or downlisted companies was not expected by the German Constitutional Court when it made the decision that underlies the 2013 German Federal Court of Justice decision. The Constitutional Court assumed that delisting or downlisting at the request of the issuer would not generally of itself affect the fundamental rights of ownership of individual shareholders and therefore would not trigger a mass sale. Shareholder associations and market commentators have therefore criticised the new rules and are demanding that the legislature restores the old legal position.
The fact that so many shareholders are selling their shares in delisted or downlisted companies has a generated a further unforseen consequence of the 2013 decision - tactial delistings and downlistings.
TACTICAL DELISTINGS AND DOWNLISTINGS
A major shareholder might benefit from the price drop caused by shareholders selling en masse as a result of a delisting or downlisting by buying up shares cheaply and exceeding the relevant majority thresholds for structural measures, up to a squeeze-out.
A delisting or downlisting can also be applied tactically to avoid the compulsory provisions of the German Securities Acquisition and Takeover Act (especially mandatory offers) in the event of a public takeover of shares admitted to the regulated market by an investor, by executing the delisting before the public takeover. The preconditions of the structuring of such an avoiding approach include that the underlying Board of Management decision is resolved to the benefit of the company, and that no binding agreements that trigger the provisions of the German Securities Acquisition and Takeover Act exist with potential buyers prior to the delisting or downlisting coming into effect. Once the delisting or downlisting has taken effect, a major shareholder is then free to sell his shareholding to a buyer, without the buyer having to submit an offer to all the shareholders at the same price.
For private investors who want to remain invested in fungible shares, and institutional investors that have to invest in regulated shares, a delisting can also be utilised as an additional incentive in order to increase the acceptance rate of a takeover bid. Because, according to the German Securities Acquisition and Takeover Act, a takeover bid is based, amongst other things, on the average, weighted three month market price of the share prior to the bid, the fall in the price might make a takeover bid more likely or appealing.
External investors may also profit from the falling price of shares in a delisted or downlisted company by buying shares cheaply and speculating on company restructuring measures and potential mediation proceedings following the delisting, which can result in a higher share price later.
It is also conceivable that, as a result of a delisting or downlisting, an interested investor may profit from the falling price and collect shares, or ensure getting them by irrevocable undertakings to tender the shares, and makes a takeover bid that is no longer subject to the rules of the German Securities Acquisition and Takeover Act.
It is likely that the legislature will comply with the demands of the shareholder associations, which means that the window for taking advantage of the consequences of the 2013 Federal Court of Justice decision will close again in the foreseeable future. Companies that may be interested in making the most of the situation, should therefore make their move sooner rather than later.