The act for the implementation of a package of measures for the stabilisation of the financial market (Financial Market Stabilisation Act – FMStG) came into force on 18 October 2008 after it was published in the Federal Gazette on 17 October 2008 (BGBl I, No. 46, page 1982). The FMStG had been passed on 17 October 2008 by the Federal Parliament and approved by the Federal Council.
The FMStG has essentially three parts: Article 1 establishes the Financial Market Stabilisation Fund (the Fund); article 2 contains provisions designed to facilitate the measures to be taken by the Fund; articles 3 through 6 amend – for a transitional period lasting until the end of 2010 – certain provisions of the German Banking Act, the German Insurance Supervision Act and the German Insolvency Code.
The Financial Market Stabilisation Fund Act
Article 1 of the FMStG contains the Financial Market Stabilisation Fund Act (FMStFG), which establishes the Fund and contains fundamental provisions on its operation. The FMStFG is complemented by a regulation (FMStFV) enacted by the Federal Government on 20 October 2008.
The Fund is a special estate of the Federal Republic of Germany for which the Federal Republic is fully liable. The Fund will be administered by a public-law institution established by the FMStG, the Financial Market Stabilisation Authority (FMSA). The FMSA will be supported by the German central bank, Deutsche Bundesbank, but is legally separate from the Bundesbank. Significant decisions of the Fund are to be taken by a steering committee comprised of members from various German ministries, a member chosen by the federal states and an advisory member from the Bundesbank.
Potential beneficiaries of the Fund’s stabilisation measures are financial sector companies incorporated in Germany (credit institutions, investment firms, investment companies, insurance companies, pension funds, operators of stock or derivatives exchanges and certain financial holding companies). This also includes German subsidiaries of foreign financial sector companies. Special purpose vehicles to which risks from financial sector companies have been transferred can also benefit from these stabilisation measures.
Types of stabilisation measures
There are three types of stabilisation measures under the FMStFG: guarantees, recapitalisations and assumptions of risk. The FMStFV provides that guarantees will be the preferred type of stabilisation measure, while recapitalisations and assumptions of risk are only to be granted in cases where guarantees would not be sufficient. Guarantees can be issued, up to a maximum of €400bn in total, to secure debt instruments issued by, and other liabilities of, financial sector companies, provided that such instruments or liabilities have a maturity not exceeding 36 months. The remuneration for the guarantees shall be in line with market conditions. In principle, the Fund shall issue guarantees only to companies that are adequately capitalised. The FMStFV indicates that there shall be a maximum amount (which is not specified) of guarantees that can be granted to any single beneficiary (including its affiliates), depending on the capitalisation of the beneficiary. As a rule, the Fund shall issue on-demand-guarantees that cover principal, interest and costs of the underlying obligations. Guarantees can also be issued for liabilities in currencies other than euros.
In the case of a recapitalisation, the Fund can invest in any type of equity or hybrid instrument issued by the relevant financial sector company, with a preference for tier 1 or similar instruments with preferential dividend rights or interest components. The instruments should earn a return in line with market conditions. For any single beneficiary (including its affiliates), there is a quantitative limit of €10bn, which may only be exceeded with the consent of the steering committee.
The Fund may also assume risk positions that were acquired by the relevant financial sector company before 13 October 2008. The Fund will assume risk positions at book value, or at a lower value against delivery of German government bonds. The Fund shall ensure that the assumption of risk yields an adequate return. The transfer of risk positions shall be combined with the creation of put and call rights that ensure an adequate participation by the relevant company in the underlying risk. However, such put and call rights shall be structured in such a way as to allow derecognition on the beneficiary’s balance sheet. In general, the Fund shall only assume risks from companies that are adequately capitalised. There is a quantitative limit of €5bn on risk positions acquired from any single beneficiary (including its affiliates), which limit may only be exceeded with the consent of the steering committee. The total amount available for both recapitalisations and assumptions of risk under the FMStG is €80bn.
Conditions for stabilisation measures
The Fund shall take stabilisation measures only vis-àvis companies that have a sound and prudent business policy. To ensure that this criterion is met, the Fund may impose conditions on beneficiaries, subject to the principle of proportionality.
In the case of a recapitalisation, the Fund may require, inter alia, that the beneficiary company:
- reviews its business policy and 1 the sustainability thereof. The company may be required to restrict or abandon certain high-risk business areas;
- pays special attention to the lending needs of small and medium enterprises;
- reviews its remuneration system. The remuneration system must be transparent, based on long-term and sustainable goals and must not induce excessive risk taking;
- ensures that the remuneration for board members is not excessive. A total remuneration of more than €500,000 per annum is, as a rule, considered excessive. No bonus payments will be permitted, except to compensate an individual for a low fixed salary; and
- ensures that no dividends (or other profit distributions, including share buy-backs, that are not legally owed) are paid to shareholders other than the Fund.
These conditions, with the exception of 2 above, also apply in the event of an assumption of risk. For guarantees, the conditions are substantially less strict: only the condition with regard to the business policy under 1 above is applicable.
The Fund may also impose conditions to prevent the distortion of competition. The Fund’s rights (including information rights) shall, in principle, be ensured through contractual provisions. In the case of a recapitalisation, the management board of the beneficiary company may be required to sign a declaration of commitment to the conditions.
The Acceleration Act
Article 2 of the FMStG contains the act on the acceleration and simplification of the acquisition of shares and risk positions of financial sector companies by the fund (Acceleration Act). The Acceleration Act provides for waivers from certain general provisions of German law (in particular corporate and capital markets law).
In relation to the declaration of commitment by the management board that may be required by the Fund, the Acceleration Act provides that the management board may enforce such declaration of commitment vis-à-vis the company and its shareholders. To facilitate capital increases (for the benefit of the Fund), the Acceleration Act establishes an authorised capital of up to 50 per cent of the company’s share capital. Such authorised capital may be used by the management board, subject to the approval of the supervisory board, without a shareholders’ resolution. Subscription rights of existing shareholders are excluded; only the Fund is eligible to acquire shares from such a capital increase. The newly issued shares may have preferential rights. Whereas under general stock corporation law, nonvoting shares can only be issued as cumulative preference shares, the Acceleration Act allows non-voting noncumulative preference shares to be issued to the Fund to create tier 1 capital. The preferential rights of shares issued to the Fund terminate in the event of a transfer to a third party. Also, in the event of a transfer to a third party, the Fund may convert non-voting shares into voting shares.
The management board may also call a shareholders’ meeting to decide on a capital increase for the benefit of the Fund. In that case, the company benefits from certain simplifications of the formal requirements for such shareholders’ meeting and an exclusion of the shareholders’ rights to challenge the shareholders’ resolution. The subscription rights of the existing shareholders may also be excluded.
The Acceleration Act also provides for procedural simplifications for the issuance of profit participation rights to the Fund and for silent partnerships with the Fund. In particular, no shareholders’ meeting is necessary for such instruments.
The Fund shall offer subscription rights to its shareholders in the event of a sale of shares, silent participations or other rights.
Capital markets law
There are a number of simplifications and/or waivers for the Fund in the event of the acquisition of shares of listed companies. In particular, the Fund is released from the obligation to make a mandatory takeover offer in the event that it holds 30 per cent or more of the voting rights of the relevant company. Where the relevant class of shares is listed on a German stock exchange, the issuer is released from its obligation to apply for an admission to trading in respect of shares issued to the Fund.
The transfer of assets to the Fund is privileged. Certain provisions of German civil law, insolvency law and data protection law are disapplied to ensure that the Fund acquires a legal position with regard to such assets that cannot be challenged.
No German merger control
Finally, the Acceleration Act waives the application of the main parts of the German Law Against Restraints On Competition, in particular the provisions on merger control. The EU provisions on merger control remain applicable.
Articles 3 and 4 of the FMStG limit the liability of special representatives that may be appointed by the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) to replace the management of a credit institution or an insurance company. Article 5 amends the definition of overindebtedness as grounds for insolvency under the German Insolvency Code. Before this revision, the management of a company was required to file for insolvency if the company was over-indebted, ie, if its liabilities exceeded its assets. This standard has been amended to no longer require an insolvency filing by a company that, while technically over-indebted, is nonetheless expected to be able to successfully restructure and carry on its business. It should be noted that the scope of application of article 5 is not limited to financial sector companies.
Article 6, in combination with the provisions on the entry into force in article 7, effectively limits the application of articles 3 through 5 of the FMStG until the end of 2010. As of 1 January 2011, the limitation of liability for special representatives introduced by the FMStG will expire and the old provisions on overindebtedness will again be in effect.