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Legal and regulatory framework
Laws and regulations
What are the relevant statutes and regulations governing securities offerings? Which regulatory authority is primarily responsible for the administration of those rules?
Securities (debt and equity) offerings and trading in Germany are governed by a number of statutes, rules and regulations, in particular:
- Act on the Strengthening of Investor Protection and Improved Functioning of the Capital Markets;
- Act on the Strengthening of German Financial Supervision;
- Bond Act (SchVG);
- Regulation (EC) No. 809/2004 of 29 April 2004 implementing Directive 2003/71/EC as regards information contained in prospectuses, as well as the format, incorporation by reference and publication of such prospectuses and dissemination of advertisements;
- Regulation (EC) No. 211/2007 of 27 February 2007 amending Regulation (EC) No. 809/2004 implementing Directive 2003/71/EC as regards financial information in prospectuses where the issuer has a complex financial history or has made a significant financial commitment, amended by the Commission Delegated Regulation (EU) No. 486/2012 as regards disclosure requirements;
- Regulation (EU) No. 1092/2010 of 24 November 2010 on European Union macro-prudential oversight of the financial system and establishing a European Systemic Risk Board;
- Regulation (EU) No.1093/2010 of 24 November 2010 establishing a European Supervisory Authority (European Banking Authority), amending Decision No. 716/2009/EC and repealing Commission Decision 2009/78/EC;
- Regulation (EU) No. 1095/2010 of 24 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority), amending Decision No. 716/2009/EC and repealing Commission Decision 2009/77/EC;
- Commission Delegated Regulation (EU) No. 862/2012 of 4 June 2012 amending Regulation (EC) No. 809/2004 as regards information on the consent to use of the prospectus, information on underlying indexes and the requirement for a report prepared by independent accountants or auditors;
- Commission Delegated Regulation (EU) No. 486/2012 of30 March 2012 amending Regulation (EC) No. 809/2004 as regards the format and the content of the prospectus, the base prospectus, the summary and the final terms and as regards the disclosure requirements;
- Commission Delegated Regulation (EU) No. 382/2014 of 7 March 2014 supplementing Directive 2003/71/EC with regard to regulatory technical standards for publication of supplements to the prospectus;
- Delegated Regulation (EU) No. 1392/2014 of 15 April 2014 supplementing Directive 2003/71/EC with regard to regulatory standards for publication of supplements to the prospectus;
- Regulation (EU) No. 596/2014 of 16 April 2014 on market abuse;
- Regulation (EU) No. 600/2014 of 15 May 2014 on markets in financial instruments and amending Regulation (EU) 648/2012;
- Regulation (EU) No. 909/2014 of 23 July 2014 on securities settlement and the Central Securities Depositories;
- Regulation (EU) No. 1286/2014 of 26 November 2014 on key information documents for packaged retail and insurance-based investment products (PRIIPs);
- Commission Delegated Regulation (EU) 2015/761 of 17 December 2014 supplementing Directive 2004/109/EC with regard to certain regulatory technical standards on major holdings (Regulation 2015/761/EU);
- Commission Delegated Regulation (EU) of 30 November 2015 supplementing Directive 2003/71/EC with regard to regulatory technical standards for approval and publication of the prospectus and dissemination of advertisements and amending Commission Regulation (EC) No. 809/2004;
- Commission Implementation Regulation (EU) 2016/347 of10 March 2016 laying down implementing technical standards with regard to the precise format of insider lists and for updating insider lists in accordance with Regulation (EU) No 596/2014;
- Regulation (EU) 2017/1129 of 14 June on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/EC;
- First Act Amending Financial Market Regulations of 30 June 2016 (1. FiMaNoG);
- German Securities Trading Reporting and Insider List Regulation (WpAIV);
- Exchange Rules of the Frankfurt Stock Exchange;
- Financial Stability Act (FinStabG);
- General Terms and Conditions (Open Market) of Deutsche Börse AG for the Regulated Unofficial Market on the FWB Frankfurt Stock Exchange;
- German Banking Act (KWG);
- Investment in Assets Act (VermAnlG);
- Investment Services Rules of Conduct and Organisation regulation;
- Ordinance for the Ascertainment of the Prohibition of Manipulation Practices (MaKonV);
- Ordinance concerning the Admission of Securities to Official Listing on a Stock Exchange (BörsZulV);
- Ordinance of Securities Trading Reporting and Insider List (WpAIV);
- Safe Custody Act (DepotG);
- Securities Prospectus Act (WpPG);
- Securities Trading Act (WpHG);
- Stock Corporation Act (AktG);
- Stock Exchange Act (BörsG);
- Trading Regulations for the Regulated Unofficial Market on the Frankfurt Stock Exchange;
- Act Adapting Legislation in the Financial Market Area (KAGB-Anpassungsgesetz); and
- Second Act on the Amendment of Financial Markets of 3 January 2018 (2. Finanzmarktnovellierungsgesetz, 2. FiMaNoG).
In addition, various EU Directives have been implemented in the aforementioned German rules and regulations, including:
- Directive 2001/34/EC of 28 May 2001 on the admission of securities to official stock exchange listing and on information to be published on those securities;
- Directive 2004/39/EC of 21 April 2004 on markets in financial instruments (amending Council Directives 85/611/EEC and 93/6 EEC and Directive 2000/12/EC and repealing Council Directive 93/22/EEC (MiFID));
- Directive 2004/109/EC of 15 December 2004 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC;
- Directive 2010/73/EU of 24 November 2010 amending Directive 2003/71/EC of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading;
- Directive 2011/61/EC of 8 June 2011 on Alternative Investment Fund Managers, and amending Directives 2003/41/EC and 2009/65/EC (AIFMD);
- Directive 2014/95/EU of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups;
- Directive 2014/49 EU on Deposit Guarantee Schemes;
- Directive 2014/57/EU of 16 April 2014 on criminal sanctions for market abuse (CSMAD); and
- Directive 2014/64/EU of 15 May 2014.
The European Securities and Markets Authority (ESMA) in Paris (see Commission Regulation (EC) No. 1095/2010) will ensure the functioning of the internal market by ensuring a high, effective and consistent level of regulation and supervision. ESMA’s tasks include promoting supervisory convergence and providing advice to the EU institutions in the areas of securities and markets regulation and supervision, as well as related corporate governance and financial reporting issues.
In Europe, the European banking supervision has started and, since 4 November 2014, the Single Supervisory Mechanism (SSM) has been implemented. The SSM is comprised of the European Central Bank (ECB) and certain national competent authorities (NCA) of euro-area countries and other participating countries (participating member states). The three main aims of the SSM are: to ensure the safety and soundness of the European banking system; to increase financial integration and stability; and to ensure consistent supervision. In the SSM Framework Regulation, the types of supervised banks referred to are credit institutions, financial holding companies, mixed financial holding companies and branches of credit institutions established in non-participating member states.
The ECB is responsible for the direct and indirect supervision of around 4,700 credit institutions (supervised entities) within participating member states. In doing so, the main role of the ECB is the supervision of the ‘significant’ entities (119 in 2018) while the NCAs supervise the ‘less significant’ entities (although the ECB is also entitled to supervise these entities to ensure the consistent application of high-quality supervision standards). The Federal Financial Services Supervisory Authority (BaFin) is assisting the ECB with the supervision of the ‘significant’ entities. The SSM conducts a regular review to determine whether a supervised entity fulfils specific conditions and qualifies as being ‘significant’. Notwithstanding the fulfilment of these conditions, the SSM may declare a supervised entity as significant to ensure the consistent application of high-quality supervision standards. In addition, the ECB is also involved in the supervision of cross-border entities and conglomerates.
BaFin exercises the supervision of all institutions in cooperation with the Deutsche Bundesbank. The Deutsche Bundesbank, without having NCA status, is involved in the ongoing monitoring of the institutions under German national law. The banking supervision activities involve evaluating notifications and reports submitted by the institutions, conducting supervisory discussions with bank management and performing on-site inspections, particularly in the areas of risk management and approval of internal models. BaFin is responsible for sovereign decisions in the form of supervisory measures, which it implements, inter alia, on the basis of the Deutsche Bundesbank’s work. Additionally, BaFin has responsibility for supervising financial services institutions and payment services providers, and for consumer protection. The SSM Regulation does not affect its responsibilities for the latter areas. This division of duties between BaFin and the Deutsche Bundesbank should continue with regard to the SSM as well - directly in relation to less significant banks and via Joint Supervisory Teams in the case of significant institutions.
Other responsibilities of BaFin regarding securities supervision are:
- combating insider dealing;
- tracking down market manipulations;
- enforcing transparency rules, such as obligations relating to ad hoc announcements;
- making voting rights announcements;
- making notifications on directors’ dealings and financial reporting; and
- reviewing securities prospectuses.
In addition, the exchange supervisory authorities of the federal German states are responsible for the supervision of the respective stock exchanges established in such states and work together with BaFin in this regard.
Finally, the management of the respective domestic stock exchange is responsible for admission for the trading of securities at such a stock exchange.
What regulatory or stock exchange filings must be made in connection with a public offering of securities? What information must be included in such filings or made available to potential investors?
On 20 July 2017, after its publication in the Official Journal on 30 June 2017, the new Prospectus Regulation entered into force. The Prospectus Regulation will begin applying on a rolling basis, with full application from 21 July 2019 and will replace the previous EU Directive 2003/71/EC. As with any other EU Regulation, its provisions will be legally binding in all EU member states without transposition into national law as from the day of entry into force. Except for some specific provisions that applied from 20 July 2017 and from 21 July 2018, the bulk of its provisions will apply from 21 July 2019, after which the existing Prospectus Directive 2003/71/EC regime will cease to have effect.
Until the final application of the Prospectus Regulation, the WpPG requires every public offering of securities (debt and equity) in Germany to be based on a prospectus, if no exemption for this requirement as stated in the WpPG applies. According to the WpPG, the content of the prospectus should, inter alia, contain the following:
- a summary, regarding the issuer and securities, the key features of the offering, and a warning notice, that is concise and in non-technical wording, is comprehensible to the general public, and the length of which reflects the complexity of the issue but does not exceed 7 per cent of the prospectus or 15 pages overall;
- presentation of the risk factors;
- information about the issuer (eg, name, seat, business overview and executive bodies);
- financial information, including annual financial statements (containing the auditor’s report) and quarterly, semi-annual or annual financial reports (if applicable or available);
- an explanation of the financial results;
- an explicit working capital statement; and
- information on the securities to be offered and the terms and conditions of the offer.
Further, where an issuer has a complex financial history, the entire business aspects of the issuer may not be covered by the historical financial information relating to the issuer, but will be covered instead by financial information drawn up by another entity. In those cases, the corporate structure or the financial situation of the issuer has to be disclosed in more detail if such fundamental changes in the corporate or financial structure during the relevant financial period have occurred. Commission Regulation (EC) No. 211/2007 amended Directive 2003/71/EC regarding the financial information that must be included in a prospectus where the issuer has such a ‘complex financial history’ or has made a significant financial commitment.
The prospectus must be published at least one working day before the start of the offering to enable investors to evaluate the securities offered. Such a publication may be made in any nationwide newspaper, in a printed format, by newspaper notice stating where the printed prospectus is available, or electronically on the website of the issuer and the underwriter or the stock exchange. The public offering of securities without a prospectus is an offence subject to administrative fines (see question 20). In the case of debt securities and other non-equity securities including warrants, which are issued under an offering programme, a ‘base’ prospectus may be used. Such a prospectus will be valid for 12 months after its publication for public offerings or admissions to trading, provided appropriate supplements are prepared and approved thereafter.
Further, Commission Delegated Regulation (EU) No. 382/2014 supplemented Directive 2003/71/EC and sets forth a non-exhaustive list of when an issuer is required to publish a supplement to a prospectus. According to the delegated regulation, an issuer of equity securities or underlying shares in the case of depository receipts must publish a supplement to its prospectus:
- if new annual audited financial statements are finalised after the approval of the prospectus;
- if the issuer publishes an amendment to a profit forecast or estimate previously included in the prospectus;
- in the event of a change of control; and
- in the event of a new public takeover bid.
Additionally, an issuer must publish a prospectus supplement when:
- there is a change in the working capital statement;
- the issuer is seeking admission to regulated markets or intends to make a public offer in member states other than those previously listed in the prospectus;
- the issuer makes a new significant financial commitment that is likely to produce significant gross change; and
- the issuer increases the aggregate nominal amount of the offering.
When the Prospectus Regulation entered into force on 20 July 2017, the amendments to two exemptions, which release the issuer from the obligation to publish a prospectus under certain circumstances, became effective immediately. One exception to the prospectus obligation applies pursuant to article 1, clause 5, sub clause 1(a) of the Prospectus Regulation for securities that are fungible with securities already admitted to trading on the same regulated market, provided that they account for less than 20 per cent of the number of securities already admitted to trading on the same regulated market over a period of 12 months. A second exception applies pursuant to article 1, clause 5, sub clause 1(b) of the Prospectus Regulation for shares resulting from the conversion or exchange of other securities or from the exercise of rights attached to other securities, provided that they are shares of the same class as the shares already admitted to trading on the same regulated market and, if so, over a period of 12 months account for less than 20 per cent of the number of shares of the same class already admitted to trading on the same regulated market. With regard to the 20 per cent restriction, the subclause makes two exceptions: one for convertible and one for exchangeable bonds issued before 20 July 2017. As a result, a new prospectus will not be required for the admission to trading of shares resulting from conversion or exchange of securities if the resulting shares represent, over a period of 12 months, less than 20 per cent of the same class already admitted to trading on the same regulated market. The exemptions as mentioned under the Prospectus Regulations are also applicable under section 4, clause 2 of the WpHG.
In addition, there are further exemptions stated in section 4, clause 2 of the WpPG, in particular for:
- shares issued in exchange for shares of the same class admitted to trading on the same organised market without the issue of such new shares being accompanied by a capital increase;
- securities offered on the occasion of an acquisition by means of an exchange offer, provided that a document is available whose information is equivalent to that of the prospectus;
- securities offered or allocable or to be allocated on the occasion of a merger or split, provided that a document is available whose information is equivalent to that of the prospectus; and
- shares to be offered or allocated or to be issued to holders of the same class in the same organised market following a capital increase from corporate funds and dividends in the form of shares of the same class as the shares for which such dividends are distributed, if any document containing information about the number and type of shares and explaining the reasons and details of the offer is available.
On 21 July 2018, article 1, clause 3 and article 3, clause 2 of the Prospectus Regulation became effective. This provision exempts public offerings of securities with a total consideration in the EU of less than €1 million from a prospectus requirement with this threshold value being calculated over a period of 12 months. Article 1, clause 3, subclause 2 of the Prospectus Regulation allows the member states to stipulate other disclosure requirements on a national level for public offerings with a total consideration of less than €1 million to the extent that such requirements do not constitute a disproportionate or unnecessary burden.
Article 3, clause 2 of the Prospectus Regulation, furthermore, allows member states to exempt public offers from the obligation to publish a prospectus up to a total consideration of up to €8 million over a period of 12 months.
Hence, the Prospectus Regulation offers member states two options: below the threshold, they can lay down other proportionate disclosure requirements at the national level and not require a prospectus. It also gives member states the option of fully exempting offers of securities to the public not exceeding €8 million from the obligation to publish a prospectus. Notification is, of course, not possible in either case. In Germany, in particular, an amendment to the WpPG took advantage of both options to the extent that issuers offering securities to the public with a total consideration of between €100,000 and less than €8 million must draw up, file and publish a securities information sheet instead of a prospectus, as stated in section 3, clause 2 sentence 1 No. 6, section 3a and section 3c of the WpPG. Public offers of securities up to a total consideration of less than €100,000 are prospectus and WIB-exempt as mentioned in section 3, clause 2 No. 6 of the WpPG. By raising the prospectus obligation threshold to €8 million, as stated in section 3, clause 2 sentence 1 No. 6 and section 3a of the WpPG, legislators have ensured considerable liberalisation in order to promote Germany’s capital market.
The WIB is intended to serve investors as a source of information for their investment decisions. It may not be published until BaFin has granted approval. The approval procedure largely corresponds to that of the capital investments information sheet stipulated in the VermAnlG. The WIB may comprise no more than three pages and must clearly state the key information on securities, offerors, issuers and any guarantors in an easily comprehensible manner. Section 3a (3) sentence 2 of the WpPG contains a longer, albeit non-exhaustive, list of requirements. The WIB must also contain a warning to the effect that acquisition of the security involves considerable risks and can result in the total loss of the capital invested. It must also include a note stating that no prospectus approved by BaFin has been filed, as well as other information. The WIB is to be kept up to date and corrected, if necessary, for the duration of the public offer. The updated version is also to be filed with BaFin and published, although no new BaFin approval is required. Offerors should not be burdened with recurring approval costs.
Furthermore, according to section 3c of the WpPG, an offer of securities whose total consideration in the EEA is €1 million or more, which is to be calculated over a period of 12 months, shall be exempted from the obligation to publish a prospectus under section 3, clause 2 sentence 1, point 6, only if the securities are brokered solely by way of investment advice or investment intermediation through an investment services company that is legally required to consider whether the total amount of securities acquired by an unqualified investor may not exceed €1,000, or €10,000, provided that the respective non-qualified investor has freely available assets in the form of bank deposits and financial instruments of at least €100,000, subject to self-disclosure by him or her; or twice the amount of the average monthly net income of the non-qualified investor according to a self-assessment to be given by him or her, up to a maximum of €10,000. Article 3, clause 2 of the Prospectus Regulation, furthermore, allows member states to exempt public offers from the obligation to publish a prospectus up to a total consideration of up to €8 million over a period of 12 months. This exemption can be found in section 3, clause 2, No. 6 of the WpPG.
Further, a prospectus is not required for offers of securities to the public, which are limited to qualified investors. In addition, when an offer of securities is addressed to a restricted circle of (not qualified) investors (150 persons), no prospectus is required. Finally, when an offer is addressed simultaneously to qualified investors and to non-qualified investors that commit to invest at least €100,000 each, the offer is exempted from the obligation to publish a prospectus. As previously stated, these exempted offers will also not benefit from the passporting regime under the Prospectus Regulation. In addition, these exemptions only apply to public offers of securities. If the securities are also to be admitted to trading on a regulated market or a multilateral trading facility (MTF), an admission prospectus will still be required unless any of the exemptions applicable to such admissions apply.
Debt securities of CRR institutions (applies from 21 July 2019)
Effective as of 21 July 2019 the Prospectus Regulation will provide for a new exemption for the offer or admission of non-equity securities issued in a continuous or repeated manner by a credit institution, where the total aggregated consideration in the EU is less than €75 million calculated over a period of 12 months, provided that those securities are not subordinated, convertible or exchangeable; do not give a right to subscribe for or acquire other types of securities; and are not linked to a derivative instrument.
Universal registration document (applies from 21 July 2019)
Further, for issuers whose securities are admitted to trading on a regulated market or a multilateral trading facility (MTF), there will be a new form of registration. Once an issuer has a universal registration document approved by a competent authority for two consecutive years in place, it will be possible for this to be used as a constituent part of any future equity or debt prospectus and is therefore intended to simplify the process of issuing further securities. If an issuer has a universal registration document, subsequent universal registration documents can be filed or amended without prior approval (but subject to ex post review), and a prospectus using such universal registration documents benefit from a faster approval process (within five working days as opposed to the typical 10 business days). Moreover, the universal registration documents can be used in lieu of annual financial reports (if published within four months after the end of the year) or half-yearly financial reports (if published within three months after the end of the first six months of the year) required under the Transparency Directive. This allows frequent issuers to use a single annual disclosure document and save the cost and time of having to make duplicative public disclosures to the market.
Growth market (applies from 21 July 2018)
In addition, a new simplified disclosure regime will replace the current regime for pre-emptive offers. A simplified prospectus will be available for secondary offers where the issuer has had securities admitted to trading on a regulated market or a small and medium-sized enterprise (SME) growth market continuously for at least the last 18 months. Issuers other than SMEs that either: (i) have an average market capitalisation of less than €500 million over three calendar years with securities traded on an SME growth market; or (ii) are offering securities with a total EU consideration of less than €20 million over a 12-month period and do not have securities traded on an MTF, will be able to use a standardised EU growth prospectus in order to gain easier and more cost-efficient access to capital markets financing. Simplified contents requirements will apply to that prospectus, including information on the issuer’s organisational structure; the company’s strategy and objectives related to its development and future performance; the company’s management and business operations; financial statements and key performance indicators; and shareholders’ information.
Prospectus summary (applies from 21 July 2019)
The Prospectus Regulation brings in changes to the content and presentation of the summary contained in a prospectus. The summary must not exceed seven A4 sides of paper and must not include summaries of more than 15 risk factors (see below). Issuers now have more discretion over the information that they include, within a new presentation style that comprises four main sections: an introduction containing certain warnings; key information on the issuer including its key financial information; key information on the securities and any guarantors; and key information on the offer to the public or the admission to trading. The prohibition to incorporate information by reference into the summary applies in order to avoid the summary becoming a mere collection of hyperlinks and cross-references. No summary will be required for prospectuses relating to the admission to trading on a regulated market of non-equity securities that are accessible only by qualified investors or with a per unit denomination of at least €100,000.
Risk factors (applies from 21 July 2019)
Furthermore, the required content and format of risk factors changed under Article 16 of the Prospectus Regulation. The Prospectus Regulation requires risk factors to be categorised by their nature and presented in order of their ‘materiality’, which is assessed based on the probability of their occurrence and the expected magnitude of their negative impact. Among others, risk factors must include those resulting from the level of subordination of a security, the impact on the expected size or timing of payments to holders of the securities in the event of bankruptcy and, if there is a guarantee, the risk factors pertaining to the guarantor’s ability to fulfil its commitment under the guarantee. Because there is a tendency to include every risk, including generic risk factors (mostly serving as disclaimers), only those risk factors that are material and specific to the issuer are to be mentioned in the prospectus.
Incorporation by reference (applies from 21 July 2019)
Pursuant to Article 19 of the Prospectus Regulation, the information an issuer is able to incorporate by reference has been broadened, to include, inter alia, reports on the determination or the value of an asset or a company, management reports, corporate governance statements and remuneration reports. If included by reference, information needs to be available via hyperlink. Such documents may, from 20 July 2017, be published and made accessible online on the same electronic platform as the prospectus that refers to them.
Review of filings
What are the steps of the registration and filing process? May an offering commence while regulatory review is in progress? How long does it typically take for the review process to be completed?
For issuers incorporated and seated in Germany, the prospectus will be approved by BaFin. Alternatively, for issuers incorporated in other EU member states or in states of the European Economic Area (EEA), the prospectus must be approved by the issuers’ home state authority and, thereafter, the home member state authority will notify BaFin of the approval accordingly. For issuers who are incorporated outside the EU and the EEA, the competent regulatory authority is the authority of the EU or EEA state where the securities are offered to the public for the first time, or where the admission for trading on a regulated market is filed for the first time, under the conditions of later choice of the issuer if the home member state has not been determined by its vote or the securities will no longer be traded on a regulated market of the home member state, but will be traded on a different regulated market of another EEA state (section 2, No. 13(c) of the WpPG).
Under German law, the filing of a prospectus relating to a public offering is governed by the WpPG. BaFin reviews the content of the prospectus to ensure its compliance with the applicable regulations (see question 2). In addition to the filing with BaFin, if the securities are to be admitted to trading on a stock exchange, an application must be filed with the relevant stock exchange. There are various stock exchanges in Germany (Berliner Börse, Börse Düsseldorf, Deutsche Börse Group, Hamburg Stock Exchange, Börse München, Börse Stuttgart) on which securities are traded, but Germany’s main stock exchange is the Frankfurt Stock Exchange operated by Deutsche Börse AG. The equity capital market trading segment at the Frankfurt Stock Exchange is divided into the regulated market (Prime Standard and General Standard segments) and the regulated unofficial market (the Open Market segment). Most securities trading takes place on the Frankfurt Stock Exchange through the electronic trading system Xetra. The trading on the Frankfurt Stock Exchange is supported by a named specialist for each listed security.
In general, the issuer has to file the application for admission to the exchange together with a bank, a financial service institution or a designated listing partner that is approved for trading on the Frankfurt Stock Exchange. The following documents must generally be submitted:
- listing application (signed by the issuer and the bank, financial institution or a listing partner);
- prospectus that has been approved by BaFin and published (a preliminary prospectus is sufficient for filing an application);
- certified articles of association;
- certified excerpt from the commercial register;
- report on the company’s formation (if it has not yet existed for three financial years);
- evidence of a resolution in relation to the initial public offering (IPO), namely, minutes of the annual general meeting and resolution of the executive board and the supervisory board;
- proof of sufficient working capital for at least 12 months; and
- proof of a free float of at least 25 per cent, whereby exceptions exist for shares in large volumes.
The Open Market segment regulated by the Frankfurt Stock Exchange provides an alternative to the EU-regulated segment, the organised market, as a point of access to the capital market. On 1 March 2017 Deutsche Börse launched this exchange segment designed for SMEs, in order to enhance their access to investors and growth capital. The Open Market (divided into the Scale, Quotation Board and Basic Board segments) represents a second domestic market segment regulated by private law after the public law regulated market. However, in contrast to the regulated market, the Open Market is not a recognised market and, as such, is only governed by German law as opposed to EU regulations. For example, the General Terms and Conditions of Deutsche Börse AG govern the inclusion of securities on the Open Market for the Regulated Unofficial Market on the Frankfurter Wertpapierbörse, last modified on 2 January 2019. In addition to German shares, mainly international shares, bonds of German and international issuers, and certificates representing shares are traded on the Open Market.
In principle, a registered trading member of the Frankfurt Stock Exchange files the application for inclusion of securities in the exchange trading in the Quotation Board or Scale with the simultaneous inclusion in the Basic Board. The inclusion of securities in the Scale with the simultaneous inclusion in the Basic Board takes place upon application of the issuer of the securities in connection with a capital market partner (eg, bank institution, a financial services institution or a company that operates according to section 53(1), clause 1 of the KWG, or according to section 53b(1), clause 1 of the KWG). The organising body of the Open Market, Deutsche Börse AG, makes the decision about inclusion. Issuers must fulfil several formal inclusion requirements. The inclusion of securities in the Quotation Board requires that such securities are admitted to trading on a similar domestic or foreign exchange market recognised by the Frankfurt Stock Exchange. Further, Deutsche Börse AG is entitled to terminate the inclusion without notice if the included shares, certificates representing shares or represented shares cease to be admitted for trading at a domestic or international exchange-like trading market recognised by Deutsche Börse AG or if an orderly trading or settlement is jeopardised or if the public is at any risk of financial losses. Further, the issuer and Deutsche Börse AG may terminate the inclusion of securities in the Scale segment with a term of three month. The right of DBAG and of the issuer to terminate the inclusion of securities in Scale for good cause and without notice is also stated in the terms and conditions.
Ultimately, the Scale segment is the platform for a cost-effective admission to exchange listing and trading. An issuer applying for the Scale segment must provide detailed information in the form of a prospectus that is valid and approved or certified according to the regulations of the WpPG, or an inclusion document, which allows for a better assessment of the issuer. The issuer must also inform Deutsche Börse AG immediately and in writing about essential circumstances concerning the included securities and itself.
On 26 November 2015, the Act on the Implementation of the Revised EU Transparency Directive came into force in Germany. This Act is especially relevant for companies listed on the regulated market of a German Stock Exchange because it provided for modified rules regarding the delisting from a regulated market. The Act modified section 39 of the BörsG in relation to the decision made by board members to apply for the company to be delisted from a regulated market (eg, General and Prime Standard on the Frankfurt Stock Exchange).
According to section 39 of the BörsG, an application to delist the shares from the regulated market is subject to a compensation offer to be made to all shareholders in accordance with the analogous applicable rules of section 31 of the Securities Acquisition and Takeover Act (WpÜG). The offer must be aimed at the acquisition of all shares in the company and may not be subject to any conditions. The purchase price has to be offered in euros and the offer price has to correspond to the weighted average domestic stock exchange price over the period of the last six months. Generally, a valuation of the company is not required unless the shares are traded and priced on less than one-third of the official trading days during the previous six-month period or if the fixed prices on trading days show a price difference of more than 5 per cent on the following trading days. Furthermore, if the stock exchange price has been materially manipulated or inside information, relating to the company or its shares, has not been properly published, the offer price has to include the difference in terms of the market manipulation. Ultimately, the delisted shareholders may apply for judicial review of the offered purchase price and claim the difference between that purchase price and the company’s actual value. Any envisaged delisting is, therefore, potentially associated with considerable costs resulting from the obligation to make an acceptable purchase offer to the shareholders.
The main German listing and admission for trading market for debt securities is also the Frankfurt Stock Exchange. The sub-segment Prime Standard of the regulated market, which provides additional obligations for issuers, applies to equity securities being admitted to trade. Therefore, debt securities are only governed by the General Standard rules implemented by law.
What publicity restrictions apply to a public offering of securities? Are there any restrictions on the ability of the underwriters to issue research reports?
As mentioned in question 2, every public offering of securities requires the publication of a prospectus if no exemptions apply. The basic terms ‘public offering’ and ‘securities’ are defined in section 2 No. 4 and 1 of the WpPG. Essential to the concept of a security by the standards of the WpPG is fungibility, namely, the marketability of the securities in the capital market. Registered bonds, promissory notes and fixed-term deposits are therefore excluded, as are non-transferable share options. Share certificates of a company with limited liability (GmbH), limited partnership or partnership organised under the German Civil Code (BGB) are treated likewise. Falling within the definition of a security in accordance with the WpPG are all tradable securities, in particular, shares, certificates in place of shares (ie, ADRs), participation certificates and warrants and bonds from industrial undertakings or corporations are also covered. In this respect, it is irrelevant whether the securities are in certified form or not.
The term public offering is defined in section 2, No. 4 of the WpPG as a notice to the public in whatever form and by whatever means, which contains sufficient information about the conditions of the offering and the securities to be offered to place an investor in a position to be able to decide whether to purchase or subscribe to these securities.
Accordingly, advertising measures in advance of going public, or ‘roadshows’ fall short of an offer within the meaning of the WpPG as the actual opportunity to purchase or subscribe is lacking. The (public) invitation to make an application to conclude the subscription contract, for instance, is sufficient. This issue is important in particular for Open Market initial public offerings, such as the Scale segment of the Frankfurt Stock Exchange. Neither the application for inclusion in the Open Market nor the actual inclusion establishes a definite opportunity to purchase; consequently, a public offering is not made. The threshold of the public offering is crossed only in the event of additional promotional activities being undertaken. The term ‘promotional activity’ should be given a broad interpretation in this sense. All sources of information relate to the public, in contrast to individuals, if they are accessible to an undefined group of people. This naturally includes the internet, but also company journals used to make announcements or electronic systems such as Bloomberg or Reuters. The use of external investment intermediaries (tied agents) also regularly meets the ‘public’ criterion.
Exceptions to the duty to provide a prospectus apply in the case of certain types of offers and in relation to certain securities (see question 7).
If a prospectus is drawn up, it is not allowed to be published and distributed before being approved by BaFin (see question 3). BaFin will decide whether to approve the content of the prospectus and must make its decision within 10 working days after having received a complete prospectus, in respect of the prospectus’ conformity with section 13 of the WpPG. This period is extended to 20 working days if the public offering concerns securities that are not yet licensed to be traded on an organised market in an EEA member state. If the prospectus is incomplete, or if it requires supplementary information, the periods stated apply only from the time when this supplementary information is received. In the case of an IPO, the timing for supplementary information is crucial and should be discussed with BaFin in advance. The approved prospectus is made available by BaFin on its website for 12 months. The issuer must publish the prospectus without delay, at the latest one working day before the start of the public offering. Each important new circumstance or significant inaccuracy that could affect the assessment of the securities must be stated in an addendum to the prospectus. The addendum also must be approved by BaFin, and it must be published in the same way as the original prospectus.
Research reports are not regarded as prospectuses under WpPG or by the definition of the prospectus liability provisions under stock exchange law. There is no special legal basis of liability in respect of defective or incomplete reports. Nonetheless, liability on a purely civil basis is not excluded, in particular in the case of ‘scalping’. In the case of larger public offerings, rules of conduct for marketing and capital markets communication are, therefore, customary in the market in order to minimise liability risks.
Are there any special rules that differentiate between primary and secondary offerings? What are the liability issues for the seller of securities in a secondary offering?
In principle, secondary offerings of securities through a public offering are subject to the same requirements as primary offerings. In that case, the WpPG is applicable. Secondary equity offerings are regularly used to diversify shareholdings among the general public in order to create a (larger) free float. In respect of prospectus requirements, it should be proved whether the preconditions for a public offering exist and, if so, whether an exemption rule comes into play. Such an exemption from the duty to provide a prospectus may be considered in the case of subsequent tranches of a share offering if, over a period of 12 months, the new shares amount to less than 10 per cent of the shares of the same type that have already been admitted to trading in the same market pursuant to section 4, clause 2 of the WpPG.
According to the AktG, any offer by an issuer for subscription of new shares is subject to the subscription rights of the existing shareholders in proportion to their existing shareholding. Under the rules of the AktG, it is possible to exclude pre-emptive rights in whole or in part, but only if such exclusion is made in the same resolution as the one that decides on the capital increase. In addition, such an exclusion of pre-emptive rights must be approved by at least 75 per cent of the share capital represented at the general meeting (unless an even larger majority is required in the articles of association).
Further, the selling shareholder is liable only for defects in the existence of the right embodied in the share, such as for the existence of the company, as well as the existence, content and scope of features of the ownership rights (participation in profits, voting rights, freedom from investment arrears and any ancillary obligation).
If a major shareholder sells shares to an underwriting syndicate, it is customary for additional assurances to be given extending beyond the principles of legal liability. The greater the ‘proximity’ of the selling shareholder to the issuer (an original shareholder or member of the company’s executive body), the more likely the assisting banks are to demand a non-liability-dependent guarantee. This relates, in particular, to the assurance that the selling shareholder does not know of any facts that are not in the public domain that could be relevant to the valuation of the business, the shares, or both.
However, the selling shareholder is not liable for the value or the negotiability of the shares, for the level of the dividend, for defects in the business or for any over-indebtedness of the company.
What is the typical settlement process for sales of securities in a public offering?
The introduction of the securities, for example, the commencement of the listing, may take place (at the earliest) one working day after the prospectus has been published or, if none has been published, one working day after admittance to trading. This trading application can be made one working day prior to admittance to trading. The authority to settle the details of the listing’s acceptance was transferred by the act implementing MiFID to the respective stock exchange regulations.
The following settlement is the process whereby securities are delivered, usually against payment, to fulfil contractual obligations such as those arising under securities trades. As part of performing the delivery obligations entailed by the trade, settlement involves the delivery of securities and the corresponding payment. The clearing and settlement process in Germany is characterised by an integrated structure. Generally, every placed trading order follows the clearing and settlement chain provided by Deutsche Börse AG, which means, for example, that after trading on Xetra, clearing will be operated by Eurex Clearing AG and settlement delivery will be executed in the Clearstream Banking AG system, both of which are subsidiaries of Deutsche Börse AG. Clearstream ensures accurate settlement in global and international securities, and domestic securities traded across borders. Transactions for selected stock exchanges and instruments are also automatically routed to Clearstream.
Are there specific rules for the private placing of securities? What procedures must be implemented to effect a valid private placing?
As a basic description, an offer to the public is an offer directed at the general public, which means an offer that targets an unlimited number of potential investors. In contrast, a private placement of securities (debt and equity) requires, for example, a personal relationship between the issuer and the actual investor prior to the offer. Hence, Germany has broad exemptions from disclosure requirements for sales to sophisticated investors or to market professionals. An offer is not deemed to be an offer to the public (and therefore no prospectus is required) if it is made only to certain categories of investors. The key exemptions (some of which may be combined) in this regard are in accordance with section 3, clause 2 of the WpPG and include offers:
- solely addressed to qualified investors (defined as professional investors in line with the definition under MiFID);
- addressed to fewer than 150 individuals or legal entities (other than qualified investors) per EU or EEA state;
- addressed to investors who acquire securities for at least €100,000 per investor with respect to each separate offering of securities;
- where the minimum denomination per unit amounts to at least €100,000; or
- where the total consideration for all offered securities in the EEA is less than €8 million over a period of 12 months.
Pursuant to section 1, clause 2 No. 4 of the WpPG, there is no prospectus requirement where non-equity securities issued by CRR credit institutions for a total consideration of less than €75 million of securities offered in the European Economic Area for a period of 12 months, provided such securities are (i) not subordinate, convertible or exchangeable; or (ii) not entitled to subscribe or acquire other securities and are not linked to a derivative.
Further, under section 4, clause 2 of the WpPG, an issuer is not required to publish a prospectus for securities admitted on a regulated market if the securities being issued are exempt, in particular but not limited to:
- shares representing, over a 12-month period, less than 10 per cent of the number of shares of the same class already admitted to trading on the same regulated market;
- shares being offered in exchange for shares of the same class already admitted in the same regulated market, provided that a document is available containing information that is equivalent to that of a prospectus; and
- shares issued after the exercise of conversion or subscription rights from other securities, provided that they are shares of the same class as the shares already admitted to trading on the same regulated market.
What information must be made available to potential investors in connection with a private placing of securities?
In the case of a private placement of securities, there are no specific statutory requirements for any information to be provided to potential investors. However, if the issuer is providing potential investors with information, such private placement documents might be expected to contain, in an understandable manner, all information necessary to enable investors to make an informed assessment of the issuer’s assets and liabilities, financial situation, profits, losses and future prospects and the rights attached to the securities. Further, it should include warning notices, essential information about the securities, and statements by the responsible persons. In relation to minimum requirements, Commission Regulation (EC) No. 809/2004 as amended and section 5 of the WpPG can, therefore, be used in an analogous manner. Further, if an issuer does not make use of an exemption under section 3, clause 2, 3 or section 4 of the WpPG and prepares an informational document, such document will be regarded as a prospectus and the WpPG and other rules will apply.
Transfer of placed securities
Do restrictions apply to the transferability of securities acquired in a private placing? And are any mechanisms used to enhance the liquidity of securities sold in a private placing?
There are no statutory provisions that apply especially to the transferability of securities (debt and equity) acquired by investors through a private placement. If the exceptions stated in the WpPG (as outlined in question 7) apply and the securities are admitted to trading on the stock exchange, the related securities can be traded on the stock exchange in accordance with the applicable laws and regulations of that stock exchange. Where such securities are not admitted to trading, it should be noted that in the issuer company’s articles of association the transferability of securities may also be defined, and such articles may restrict the transferability of such securities. Further, there are no mechanisms in place to enhance the liquidity of securities in a private placement.
What specific domestic rules apply to offerings of securities outside your jurisdiction made by an issuer domiciled in your jurisdiction?
In a fully globalised securities market, issuers in public primary markets should be able to offer securities (debt and equity) to investors worldwide using one set of optimal distribution procedures and disclosure documents, and subject to one set of liability standards and enforcement remedies. Such a standardised issuance governed by internationally accepted rules would reduce the costs of issuing securities that are in international demand, a benefit that would be shared by both issuers and investors.
However, such international rules are not yet implemented worldwide, but do exist in Europe. To date, EU and EEA member states have implemented a passport regime under the Prospectus Directive and Prospectus Regulation (see question 3). Accordingly, the WpPG requires an issuer of a pan-European offering of securities to apply for notification (in most cases from its home member state authority) to be forwarded to the respective host member state authority. This means that a German issuer who wants to publicly offer securities not only in Germany as its home member state, but also in one or more other EU or EEA member states must file a prospectus with BaFin for approval. As soon as BaFin approves the prospectus and any supplements thereof, the approval entitles the issuer to validly, publicly offer the securities in one or more EU or EEA member states without needing further approval of the prospectus by other supervisory authorities. A further requirement is the prior notification of the respective supervisory authority in the particular EU or EEA member state. The same applies vice versa, namely, if a prospectus has been approved by a supervisory authority in another EU or EEA member state, BaFin needs to be notified and certain further language requirements must be met.
If an offer of securities is made outside Germany, the respective issuer must comply with the securities laws of those jurisdictions.
Offerings of other securities
What special considerations apply to offerings of exchangeable or convertible securities, warrants or depositary shares or rights offerings?
Convertible bonds can be converted during their term at the option of the bondholders or of the issuer into the issuer shares. In contrast, exchangeable convertible bonds differ from ‘ordinary’ convertible bonds in that they are issued by a company (issuer) and can be exchanged for the securities of another company (entity). Typically, an exchangeable convertible is a bond that pays periodic coupons and is callable at prevailing market prices, whereby ordinary convertible bonds can be exchanged for a set number of the entity’s shares at bond maturity or when the bond is called before maturity, if bondholders wish to do so. Moreover, participation bonds are issued by companies, which provide investors with the right to participate in dividends to the shareholders.
Under German corporate law, the issue of convertible bonds, participation bonds and participation rights requires a resolution of the shareholder’s meeting adopted by at least 75 per cent of the share capital represented at the meeting, unless there is a different majority provided in the articles of association. Further, in the case of a domestic stock corporation, other certain statutory rules have to be observed.
Further, the issuance of exchangeable or convertible bonds, warrants or rights offerings falls within the scope of the WpPG, so that the issuer has to observe the respective statutory requirements of the WpPG. Pursuant to the rules in the WpPG any issuer wishing to make a public offering or an admission to trading of such securities must, subject to certain exemptions, submit a prospectus to BaFin for approval (see question 2).
Types of arrangement
What types of underwriting arrangements are commonly used?
In the German market, commonly used international standards, in particular the International Capital Market Association (ICMA) standards, are applicable in debt and equity offerings. Parties to the underwriting agreement are the issuer, the selling shareholders (if any), and the banks or financial institutions as underwriters. Typically, the underwriting agreement is signed by the lead managers on behalf of the other members of the underwriting syndicate and the issuer. The main terms of the underwriting agreements relate to the details of the underwriting, the offering of the securities, admission to listing and the respective obligations of the parties.
In a firm commitment underwriting agreement, underwriters agree that they will purchase securities being offered for resale to the public. The underwriters must pay for and hold the securities for their own account if they are not successful in finding public investors. This form of underwriting is mainly used by well-known underwriters and provides a greater assurance that the issue will be placed with the desired investors, like insurance companies or pension funds.
The other common type of underwriting agreement is where the underwriters agree to use their best efforts to sell the issue as the issuer’s agent. In such a case, to the extent that investors cannot be found, the issue will not be sold. Further, a best efforts agreement may provide that no securities will be sold unless buyers can be found for all securities.
What does the underwriting agreement typically provide with respect to indemnity, force majeure clauses, success fees and overallotment options?
Underwriting agreements in respect of German debt and equity securities offerings contain indemnity clauses, with the purpose of indemnifying and protecting the underwriters against any loss or damage resulting from untrue statements of material fact or material omissions in the issuance prospectus, or resulting from any inaccuracy in representations and warranties contained in such an underwriting agreement and the company or officers’ certificates. Such indemnity clauses apply only between the underwriters themselves and will not apply to the investors. The clauses also often include affiliates and parent companies of the underwriters and exclude damages and liabilities arising from information provided by the underwriters.
Further, force majeure clauses in equity underwriting agreements generally cover any event that could affect national or international financial markets overall, such as any change in general economic or political conditions of the issuer or currency exchange fluctuations, any suspension or material limitation in trading in securities on the main stock exchanges and any other related event that could have an adverse effect on the success of the offering. Additionally, in some underwriting agreements that relate to equity offerings, success fee clauses are implemented, which are paid at the issuer’s discretion. Further, debt underwriting agreements mainly follow the ICMA’s rules and recommendations relating to force majeure and other issues.
In Germany, many equity securities offerings have initial underwriting agreements providing for an overallotment option in connection with the activities that underwriters may perform during the 30-day stabilisation period following the listing of the shares. This overallotment option is typically granted by the company on existing shares (greenshoe shares) sold by one or more existing shareholders, instead of newly issued shares.
What additional regulations apply to underwriting arrangements?
There are no specific further requirements for underwriting agreements. However, in the case of transactions based on an underwriting agreement, it is important for foreign banks or financial institutions to observe the licensing requirements pursuant to section 32, clause 1 of the KWG. The decisive factor is whether the initiative was taken by the foreign entity or by the German issuer. If the foreign entity specifically targets the German domestic market with its range of services, the underwriting of securities at the foreign entity’s own risk would constitute underwriting activities, which requires a licence in accordance with section 1, clause 1, and sentence 2, No. 10 of the KWG. Alternatively, the ‘issuing syndicate’ will constitute principal brokering activities, which also requires a licence in accordance with section 1, clause 1, sentence 2, No. 4 of the KWG. In addition, best efforts underwriting as an ‘agency syndicate’ would constitute contract-brokering activities requiring a licence in accordance with section 1, clause 1a, and sentence 2, No. 2 of the KWG.
Ongoing reporting obligations
Applicability of the obligation
In which instances does an issuer of securities become subject to ongoing reporting obligations?
Any issuer, whose securities (debt or equity) are listed on a domestic stock exchange, is subject to several ongoing reporting obligations (seequestion 16). Such obligations are mainly stated in the WpHG and relate to issuers whose securities are admitted to trading on a domestic stock exchange on an EU regulated or unregulated market. Under the exchange rules of the Frankfurt Stock Exchange, an issuer with shares admitted to the Prime Standard segment of the regulated market segment must fulfil additional reporting obligations in addition to the obligations that apply to the General Standard segment. Issuers admitted for trading on the exchanged regulated market segments have specific reporting obligations under the Market Abuse Regulation (MAR).
Information to be disclosed
What information is a reporting company required to make available to the public?
BaFin has issued the fifth edition of its Issuers’ Guidelines, which is now available in the form of thematically ordered individual modules (Module A, published on 12 November 2018, and Module B on 17 December 2018), which are designed to provide guidance to issuers whose securities have been admitted to trading at a domestic exchange on the interpretation and execution of the various laws applicable to financial market participants, in particular the MAR and WpHG, and to outline BaFin’s administrative practice in monitoring the financial market. The two new modules have already been published and, in the future, the Issuers’ Guidelines will be updated when additional modules are added. Module A relates to the supervision of company accounts and publication of financial reports and replaces chapter X through XIV of the fourth edition. Module B relates to information on ‘Significant Voting Rights andNecessary Information for the Exercise of Rights from Securities’ and replaces chapter VIII and IX of the fourth edition. For the not yet revised parts of the Issuer’s Guidelines, the validity of the fourth edition remains until the other parts are revised.
Ad hoc notifications
The MAR imposes a statutory requirement on all issuers of financial instruments to publicly disclose inside information so that other market participants are not put at a disadvantage to company insiders. At the European level, article 17 of the MAR is supplemented by various Level 2 and Level 3 measures, while at the national level in Germany it continues to be supplemented by the WpHG, which has been modified and amended with respect to the MAR and the relevant implementing provisions by the 1. FiMaNoG. Moreover, the current version of the WpAIV will continue to apply for the time being, but the MAR and its delegated and implementing regulations supersede German law where their provisions contain corresponding or diverging provisions.
The ad hoc publicity requirement applies to all issuers who have applied for or received admission to trading on a regulated market or an MTF (including the Open Market segments of German stock exchanges) in a member state for their financial instruments. Thus, pure MTF issuers are also subject to ad hoc publicity requirements if they have been included in trading with the consent of the issuer, either because they have requested this, or a third party has requested it, or have consented to its inclusion. From 3 January 2018, the obligation to publish will also apply to issuers who have been admitted to an organised trading system (OTF) for their financial instruments, as well as participants in the market for emission allowances. If a company does not report any insider information that is subject to ad hoc publicity, too late, incorrectly or incompletely, the supervisory authority becomes active. Article 17, clause 1 of the MAR requires that issuers disclose to the public immediately, ad hoc, any facts about their company that have the potential to influence the price of the financial instrument and relate directly to the issuer. For the publication of insider information, the issuer is required by law to use a widely used electronically operated information system and a bundle of media for Europe-wide distribution. In addition, the companies must forward these publications to the business register, which then saves them. If the company has a website, the inside information must be posted on there, publicly, for at least five years. BaFin is obliged to intervene if a company fails to disclose inside information covered by the MAR ad hoc disclosure requirement altogether, or if the information it provides is late, false or incomplete. BaFin also checks whether issuers who claim the statutory exemption have properly claimed the exemption. BaFin also checks whether issuers or participants in the market for emission certificates who have made use of the statutory exemption option have duly exempted themselves from the ad hoc obligation.
Any manager (or persons closely associated with them) of issuers whose financial instruments are traded on a regulated market, on an MTF or, with effect from 3 January 2018, on an OTF (article 3(1), No. 8 of the MAR in conjunction with article 4(1), No. 23 of Directive 2014/65/EU) are subject to a notification obligation. Pursuant to article 3, clause 1, No. 25 of the MAR, a manager is a person within an issuer, an emission allowance market participant, or another entity referred to in article 19, clause 10 of the MAR, who is (i) a member of the administrative, management or supervisory body of such entity; or (ii) a senior executive who is not a member of the bodies referred to in point (i), who has regular access to inside information relating directly or indirectly to such entity and the power to make managerial decisions affecting the future developments and business prospects of such entity.
Article 19 of the MAR requires managers’ transactions to be notified and published. It requires members of the management or supervisory bodies of an issuer in particular, as well as any other persons with regular access to inside information who take important managerial decisions to notify both the issuer and the competent authority (BaFin) of transactions conducted on their own account relating to shares or debt instruments of the issuer, which are traded on the financial markets or financial instruments linked thereto (eg, derivatives) within three business days. The notification requirement also applies to spouses, registered civil partners, dependent children and other relatives living with them in the same household for at least one year. The same goes for legal persons, trusts (such as foundations) or partnerships closely associated with persons discharging managerial responsibilities. There is no notification requirement if the total volume of all transactions for the calendar year is less than €5,000. Further, the issuer is responsible for ensuring that transactions subject to the notification requirement are transmitted to media suitable for the dissemination of the information throughout the European Union immediately (ie, no later than three days after the transaction). In addition, the issuer is required to forward the published information to the company register, which stores it.
However, a notification obligation only exists if the issuer has requested, or been approved for, admission to trading of its securities on an MTF or OTF. The issuer must have been actively involved in the listing of its financial instruments on an MTF. With regard to the necessary request for or approval of trading on an MTF, the following circumstances are possible: issuers have requested admission to or inclusion in trading on an MTF; issuers have commissioned a third party to request admission to or inclusion in trading; or issuers have approved admission to trading of their securities by a third party. In addition to article 19 of the MAR, articles 7 to 9 of Delegated Regulation (EU) 2016/522 deal with exemptions from the prohibition on trading contained within article 19(12) of the MAR. Article 10 of this Delegated Regulation contains a non-exhaustive list of transaction types subject to a notification requirement. Implementing Regulation (EU) 2016/523 contains a template that is to be used for the notification and public disclosure of such transactions.
Reporting obligations with respect to voting rights (see also new Module B of BaFin’s Issuer’s Guidelines)
The notification obligations pursuant to sections 33, 38 and 39 of the WpHG relate to voting rights in accordance with section 33, clause 1 sentence 1 of the WpHG to issuers for which the Federal Republic of Germany is the country of origin, pursuant to section 2, clause 13 of the WpHG. Thereby, section 33 of the WpHG regulates the reporting obligation for voting rights derived from shares and section 39 regulates the reporting obligation for all reportable instruments contains a reporting obligation for the sum of the shares and instruments held according to section 33 and section 38 of the WpHG.
Pursuant to section 33, clause 1 of the WpHG, anyone whose share of a domestic listed company’s voting rights equals, exceeds or falls below 3, 5, 10, 15, 20, 25, 30, 50 or 75 per cent as a result of a purchase or sale, or by any other means, is obliged to inform within four days, pursuant to section 34 of the WpHG, the listed company and BaFin that he or she has achieved, exceeded or fallen below the aforementioned thresholds. Ultimately, any change in voting rights must be reported to the listed company and BaFin without undue delay, namely, within four trading days at the latest (section 33 of the WpHG). The term ‘everyone’ is defined in section 33 clause 1 sentence 1 WpHG and includes all natural persons and legal persons, regardless of their age and legal form. Citizenship and residence with natural persons are as irrelevant as the seat of legal persons. Further, pursuant to section 40 of the WpHG, an issuer with securities admitted to trading on a domestic stock exchange must immediately publish certain voting rights-related information, pursuant to section 33, clause 1, sentence 1, paragraph 2 and section 38, clause 1, sentence 1 and section 39, clause 1, sentence 1 or equivalent provisions of other EU and EEA member states, received from third parties and inform BaFin and the company registers no later than three trading days after receipt of such information.
Further, section 41 of the WpHG provides that any domestic issuer has to publish information about, and inform BaFin of, the total number of voting rights of the above-mentioned thresholds at the end of each calendar month in the case of an increase or decrease of such voting rights. In addition, pursuant to section 42a of the WpHG, anyone who has issued a notification in accordance with section 33, section 38 or section 39 of the WpHG shall, upon request of BaFin or of the domestic issuer, prove the existence of the notified participation.
General reporting obligations
Under the detailed regulations of sections 48 to 51 of the WpHG, any issuer whose home member state is Germany and whose securities are admitted to trading on a domestic stock exchange, as well as any issuer from other member states of the EU or EEA whose securities are admitted to trading on a domestic organised market and whose home member state does not provide for similar regulations of the domestic stock exchange, has to publish in electronic format information to allow investors to exercise their rights in connection with such securities. In the case of shares, the reporting obligations, pursuant to section 49 of the WpHG, relate, inter alia, to:
- the convening of the shareholders’ meeting;
- the distribution and payment of dividends;
- the issuance of new shares or rights;
- any agreement or exercise with respect to the securities; and
- modifications to its articles of association.
Further, any issuer of debt securities admitted to trading can invite its creditors to participate in a creditor meeting in any EU or EEA member state if the creditors have received all related information and the denomination of the bonds is at least €100,000 or outstanding bonds with a denomination of €50,000.
Specific financial reporting obligations (see also new Module A of BaFin’s Issuer’s Guidelines)
Under sections 114 et seq of the WpHG, an issuer of securities (debt and equity) with a registered seat in Germany whose securities are admitted to trading on a domestic stock exchange has to prepare annual financial statements and semi-annual financial reports that set out the development of business activities during the reporting period.
The WpHG states details on the content of the reports, the means of publishing such reports and respective publication deadlines. As a matter of principle, issuers must meet the following financial reporting requirements:
- publish an announcement on the internet stating the date and the exact address of the website on which the accounting documents are being made publicly available (according to BaFin, the documents must be posted directly on the indicated website or at least must be accessible by just one link);
- notify BaFin of the publication of the announcement and pass the announcement to the company register; and
- publish the complete accounting documents on the website and submit the documents to the company register in order to be stored there.
Publication of annual financial statements on the website must be made publicly available, at the latest, four months after the end of the financial year, whereas semi-annual financial statements must be published within three months after the end of the half year. BaFin recommends publishing the announcement approximately one week prior to the publication of the statements. The WpHG also provides details on deadlines and contents (eg, for annual and semi-annual reports, a ‘true and fair view’ statement made according to the best knowledge of the legal representatives of the issuer) and imposes on issuers the obligation to publish a notice as to the online availability of the financial statements, which must also remain available to the public at the corporate register for at least five years.
The language of the publication is governed by section 114, clause 3 of the WpHG and section 22 of the WpAIV. The publication takes place in accordance with section 3a of the WpAV, to which section 18 of the WpAV refers, over the media bundle. The publication shall be forwarded to the media for publication, including those that can be expected to disseminate the information throughout the European Union and in the EEA. According to the Legislative Declaration (BT printed paper 16/2498 of 4 September 2006), the media must include at least one electronically operated information distribution system, news providers, news agencies, the most important print media at national and European levels, as well as corresponding internet pages for the financial market.
Reporting obligations under the German Corporate Governance Code
German stock corporations listed on the regulated market must publish an annual declaration on whether they comply with the recommendations of the German Corporate Governance Code and explain any non-compliance with such recommendations.
Reporting obligations under the Rules of the Frankfurt Stock Exchange
Pursuant to the Stock Exchange Rules of the Frankfurt Stock Exchange, the reporting obligations of the General Standard segment set forth the minimum reporting requirements. In the case of a listing in the Prime Standard segment, listed companies must, in addition to the General Standard segment reporting obligations, comply with international reporting standards. Such additional obligations include, in particular but not limited to:
- consolidated financial statements and quarterly reports in German and English;
- internet publication of a financial calendar in German and English;
- ad hoc disclosures, also in English; and
- the performance of an analyst conference each year.
The Open Market is a regulated exchange market and not an organised market in the meaning of the WpHG (section 2 clause 5 of the WpHG). Unlike the regulated market, which is subject to public law, the Open Market is subject to private law. The General Terms and Conditions of Deutsche Börse AG for the Regulated Open Market on Frankfurter Wertpapierbörse regulate the conditions for admission to and the follow-up duties for securities in the Open Market segment.
What are the main rules prohibiting manipulative practices in securities offerings and secondary market transactions?
The main rules prohibiting manipulative practices in securities offerings and secondary market transactions are those related to insider dealing and market manipulation.
Insider dealing and market manipulation
As mentioned above, at the European level the MAR is supplemented by various delegated and implementing regulations. At the national level in Germany, it continues to be supplemented by the WpHG, which has been amended, in light of the MAR and its relevant implementing provisions, by the 1. and 2. FiMaNoG. The current version of the WpAIV continues to apply, but the MAR and its delegated and implementing regulations take precedence where they contain corresponding or diverging provisions. Specifically, the chances based on the 2. FiMaNoG take precedence over national provisions on insider dealing (section 26 WpHG) and market manipulation (15 MAR).
The MAR defines ‘inside information’ as ‘information of a precise nature, which has not been made public, relating directly or indirectly to one or more issuers or to one or more financial instruments, and which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments’. MAR provides that inside information may only be disclosed to another person if such disclosure is made in the normal course of exercising an employment relationship, profession or duty. All other instances where inside information is disclosed will generally be presumed to constitute an unlawful disclosure of inside information.
Disclosures made in the course of a ‘market sounding’ to gauge potential investors’ interest in a possible transaction and the conditions relating to it, however, are not unlawful as long as certain requirements are met. The disclosure of inside information by a person intending to make a takeover bid or a merger is generally permitted as well. The market sounding exception did not exist under the Market Abuse Directive (MAD) and has been added to the MAR to allow issuers to gauge the opinion of potential investors, to enhance shareholder dialogue, and to ensure that deals run smoothly. Critically, it helps to gauge whether the views of issuers, existing shareholders and potential investors are aligned, without risking violation of the prohibition on unlawful disclosure of inside information.
Apparently, the MAR prohibits insider dealing, which is when a person possesses inside information and uses (or attempts to use) it to trade financial instruments to which the information relates. Recommending that another person engage in, or inducing another person to engage in, insider dealing is also prohibited. The person recommending or inducing insider dealing, as well as the person using such recommendation, if the other person knows or ought to know that it was based on inside information, are considered to be engaging in prohibited insider dealing. The fact that a person possesses inside information will not automatically lead to such an assumption. For a legal person, this is the case if adequate and effective internal procedures were in place that ensured that any natural person who acted on behalf of the legal person, or may have had an influence on the decision, was not in possession of the information, and the legal person did not induce or influence the natural person acting on its behalf.
Further situations in which the mere possession of inside information does not create a presumption of insider dealing include: where the transaction in question is carried out in accordance with a contractual, legal or regulatory obligation that has become due and not to circumvent the prohibition against insider dealing, and that arose before the person possessed inside information; and where the inside information was obtained in the execution of, and used solely for the purpose of proceeding with, a public takeover or merger with a company, provided that at the time of the merger’s approval or the acceptance of the offer by the company’s shareholders, any inside information has been made public or has otherwise ceased to constitute inside information.
Pursuant to section 26, clause 2 of the WpHG, a domestic issuer, an MTF issuer or an OTF issuer is required under article 17, clauses 1, 7 and 8 of the MAR, before publication of the insider information, to inform BaFin and the management the trading venues on which its financial instruments are admitted to trading or included in trading, and immediately after the publication to submit the insider information to the business register in the sense of section 8b of the HGB for storage. This rule relates to the article 17 of the MAR, which requires issuers to inform the public as soon as possible of inside information in a manner that enables fast access and complete, correct and timely assessment of the information by the public.
According to article 17, clause 1 of the MAR, an issuer has to inform the public as soon as possible of inside information that directly concerns that issuer. However, article 17, clause 4 of the MAR states that an issuer may, on its own responsibility, delay disclosure of inside information to the public, provided that all of the conditions therein contained are met. Where an issuer has delayed the disclosure of inside information, according to article 17, clause 4 of the MAR, immediately after the information is disclosed to the public the issuer needs to inform BaFin that disclosure of inside information was delayed, and provide written explanation on how the conditions set out in article 17, clause 4 of the MAR were met. Where the issuer has delayed the disclosure of inside information in accordance with article 17, clause 4 of the MAR and the information subsequently loses the element of price sensitivity, that information ceases to be inside information and thus is considered outside the scope of article 17, clause 1 of the MAR. Therefore, the issuer is not obliged to publicly disclose that information or to inform the BaFin in accordance with the last paragraph of article 17, clause 4 of the MAR that disclosure of the information was delayed. However, given that the information had been inside information for a certain period of time, the issuer has to comply with all relevant obligations relating to the drawing up and updating of insider lists and the maintenance of the information relating to the delay of disclosure, stemming from MAR and its delegated and implementing Regulations.
Pursuant to article 18 of the MAR, issuers, or any person acting on their behalf, are required to draw up an insider list of all persons who have access to inside information and who are working for them under a contract of employment, or otherwise performing tasks through which they have access to inside information (eg, lawyers, accountants). This list is to be updated promptly if necessary and submitted to BaFin. The issuer, or person acting on its behalf to maintain the list, is required to take all reasonable steps to ensure that all persons included on the insider list acknowledge in writing the legal and regulatory duties entailed and are aware of the sanctions that apply for insider dealing and unlawful disclosure. The insider list must include:
- the identity of any person having access to inside information;
- the reason for including the person on the insider list;
- the date and time at which the person obtained access to inside information; and
- the date on which the insider list was drawn up.
The issuer is not responsible for the fulfilment of the insider list requirements of the persons acting on its behalf or account mentioned in article 18, clause 1 of the MAR and first subparagraph of article 18, clause 2 of the MAR (eg, advisers and consultants) who are personally responsible for the obligation to draw up, update and provide to BaFin upon request their own insider list. The issuer will remain responsible for complying with the insider list requirements in relation to its own insider list, the drawing up and updating of which has been delegated to the same person as part of a separate agreement.
The concept of market manipulation and the prohibition of market manipulation are now governed by the rules of the MAR. Under article 15 of the MAR, market manipulation and attempts to do so are prohibited. Article 12 of the MAR defines what acts the term ‘market manipulation’ includes. In principle, it is prohibited to give false or misleading signals as to the supply, demand or price of a financial instrument by entering into a deal, placing a trade order or any other act. For this, the appendix to the MAR contains a non-exhaustive list of indicators for manipulative action. For example, the fact that transactions have not led to a change in the beneficial ownership of a financial instrument may be a sign of a market manipulation in the form of a home-based business or wash sales. ‘Agreed orders’ are also prohibited (eg, orders based on a prior agreement between the buyer and seller and not made transparent to the outside prior to their execution). It is also prohibited to disseminate information that gives false or misleading signals about the supply or price of a financial instrument or that can bring about an artificial price level.
In addition, the MAR explicitly prohibits the manipulation of reference values. The ban on market manipulation covers, in particular, all financial instruments traded on a regulated, multilateral or organised trading system. This includes, in addition to securities (such as equities and bonds), money market instruments or derivative transactions and commodity spot contracts, where these may depend on or have an impact on the price or value of a financial instrument. The prohibition expressly applies to goods traded on a domestic market and foreign currency. In order to detect cases of market manipulation, BaFin analyses transaction and order data, conducts information searches and monitors the market. It evaluates institutions’ suspicious transaction reports and investigates the information it receives from the stock exchange, law enforcement and investor market surveillance offices. Another source is evidence from operators of markets and investment firms operating a trading centre. These are required by the MAR regulations to prevent and detect market abuse. Similarly, market participants who conduct business in relation to financial instruments are required to maintain systems for detecting and reporting violations.
The administrative fines regime has been revised in accordance with the relevant provisions of the 2. FiMaNoG. The criminal and fine provisions for market manipulation are regulated in the WpHG. Anyone intentionally or recklessly engaging in market manipulation acts contrary to the rules (section 120, clause 15 of the WpHG). Unlawful market manipulation will be prosecuted by the BaFin and sanctioned with a fine. The amount of the fine depends on the nature of the market manipulation committed and may be, for individuals up to €5 million and for legal persons up to €15 million or 15 per cent of total turnover. In addition, the administrative offence may be punished by a fine of up to three times the benefit derived from the infringement. Intentional manipulations that have affected the stock market or market price are offences punishable by imprisonment of up to five years or a fine (section 119, clause 1, No. 1 of the WpHG). If the offender acts professionally or in a gang, or in the exercise of a professional activity (eg, for an investment services enterprise), market manipulation is punishable as a crime with imprisonment of one to 10 years. The attempt to manipulate the market is also punishable (section 119, clause 5 of the WpHG).
Decisions on measures and sanctions, which were issued because of a violation of the ban on market manipulation, are published by BaFin on its website (naming and shaming, regulated in section 125 of the WpHG).
Permitted stabilisation measures
What measures are permitted in your jurisdiction to support the price of securities in connection with an offering?
Price stabilisation measures in connection with an offering of securities will generally be undertaken by the lead underwriter in accordance with the overallotment of securities. The respective underwriter, however, has to make sure that it does not contravene any applicable security regulations.
In particular, article 5, clause 1 of the MAR states that the prohibition of insider dealing and market manipulation does not apply to trading in one’s own shares through buy-back programmes if the programme fulfils the requirements set out in article 5, clause 1 of the MAR. The existing framework for conducting issuer buy-back programmes and stabilisation operations without breaching the prohibitions on insider dealing, unlawful disclosure of inside information, or market manipulation is contained in article 5 of the MAR. There are exemptions from these prohibitions for both buy-back programmes and stabilisation. In relation to buy-back programmes for shares, the exemption applies where:
- the full details of the programme are disclosed prior to the start of trading;
- trades are reported as being part of the buy-back programme to the competent authority of the trading venue and subsequently disclosed to the public;
- adequate limits with regard to price and volume are complied with; and
- the trading with one’s own shares in buy-back programmes are specifically for the objective of reducing the capital of an issuer, meeting obligations arising from debt financial instruments that are exchangeable into equity instruments, or meeting obligations arising from share option programmes, or other allocations of shares, with respect to employees or members of the administrative, management, or supervisory bodies of the issuer or an associate.
On 8 March 2016, the EU Commission adopted a Delegated Regulation supplementing the MAR with regard to regulatory technical standards relating to the conditions applicable to buy-back programmes and stabilisation measures. Further, the EU Commission published an Implementing Regulation (EU) 2016/1055 of 22 June 2016 that lays down implementing technical standards on the technical means for appropriate disclosure of inside information and for delaying the public disclosure of inside information. Both Regulations entered into force on 1 July 2016 and applied on the same date as the MAR, on 3 July 2016.
Liabilities and enforcement
Bases of liability
What are the most common bases of liability for a securities transaction?
Liability for a securities transaction arises particularly in connection with the information contained in the prospectus. In this regard, sections 21 and 22 of the WpPG (with respect to securities admitted to trading on a stock exchange) and section 20 of the VermAnlG (with respect to investment units that are not regarded as security not admitted to trading on a domestic stock exchange but publicly distributed) provide for a liability of persons who have assumed responsibility for the prospectus (persons who are mentioned in the prospectus) or who have a mandate for the issuing of the prospectus. Usually, this includes the issuer, the underwriters, in particular the global coordinators, and, under certain circumstances, the selling shareholders (in a most recent judgment the Federal Court of Justice confirmed a prospectus liability of the controlling enterprise in the underlying case of a public offering of bonds).
The liability under the WpPG concerns incorrectness or incompleteness of relevant information with respect to the securities in favour of investors who have purchased such securities on the basis of the prospectus within six months after the first admission to trading or public offer of the securities. Details that have to be included in the prospectus are contained in the WpPG, respectively. In particular, pursuant to section 5, clause 4 of the WpPG, the prospectus must contain information with respect to persons who assume liability for the content of such prospectus. Further, such information has to be contained in the summary of the prospectus, which is a mandatory requirement for the preparation of a prospectus filing. Purchasers of such securities may make a claim for restitution of the purchase price as long as such price does not exceed the initial offer price and for the cost accrued in connection with the purchase. Statutory liability for the prospectus is joint and several.
There are a number of statutory defences to a prospectus liability claim, in particular if the respondent is able to demonstrate that he or she was not aware of an error or omission and that this unawareness was not caused by lack of knowledge or gross negligence.
Further, the aforementioned liability for the prospectus incorrectness or incompleteness is joint and several. Under the underwriting agreement, the issuer usually takes on responsibility for the content of the prospectus and agrees to indemnify every other party from claims arising from its content, except to the extent other parties were solely responsible for a particular part of the prospectus. In accordance with section 23 of the WpPG, overall, liabilities under sections 21, 23 or 24 of the WpPG cannot be excluded.
Civil law liability
In addition, certain circumstances may lead to further civil law claims resulting from a contractual relationship (eg, culpa in contrahendo doctrine) or tort pursuant to the mandatory rules of the BGB as mentioned in section 25, clause 2 of the WpPG.
What are the main mechanisms for seeking remedies and sanctions for improper securities activities?
Under German law there are no special or exclusive remedies and sanctions for improper securities activities. In line with general German legal principles, remedies and sanctions can be established in civil litigations, administrative procedures and criminal prosecution. Further, the assumption of liability in the prospectus is mandatory for natural persons or entities responsible for its content in accordance with section 5, clause 4 of the WpPG. In the case of any improper security activities, BaFin may initiate administrative proceedings against the respective parties.
Update and trends
Are there current proposals to change the regulatory or statutory framework governing securities transactions?
21 Are there current proposals to change the regulatory or statutory framework governing securities transactions?
The following regulation and proposal are noteworthy:
- Commission Implementing Regulation (EU) 2018/1624 of 23 October 2018 laying down implementing technical standards with regard to procedures and standard forms and templates for the provision of information for the purposes of resolution plans for credit institutions and investment firms pursuant to Directive 2014/59/EU of the European Parliament and of the Council, and repealing Commission Implementing Regulation (EU) 2016/1066 (https://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1548084527842&uri=CELEX:32018R1624).
- Amended proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) No. 1093/2010 establishing a European Supervisory Authority (European Banking Authority); Regulation (EU) No. 1094/2010 establishing a European Supervisory Authority (European Insurance and Occupational Pensions Authority); Regulation (EU) No. 1095/2010 establishing a European Supervisory Authority (European Securities and Markets Authority); Regulation (EU) No. 345/2013 on European venture capital funds; Regulation (EU) No. 346/2013 on European social entrepreneurship funds; Regulation (EU) No. 600/2014 on markets in financial instruments; Regulation (EU) 2015/760 on European long-term investment funds; Regulation (EU) 2016/1011 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds; Regulation (EU) 2017/1129 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market; and (EU) Directive 2015/849 on the prevention of the use of the financial system for the purposes of money-laundering or terrorist financing (Brussels, 12 September 2018 - https://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1548085328302&uri=CELEX:52018PC0646).
On 31 January 2019, ESMA issued a clarification (Q&As) regarding the Prospectus Directive (PD), the Transparency Directive (TD) and of certain provisions in these Directives in the event the UK withdraws from the European Union on 29 March 2019 with no withdrawal agreement in place (no-deal Brexit).
The Q&As provide the following clarifications in the event of a no-deal Brexit:
- When issuers of equity securities and non-equity securities below €1,000 who currently have the UK as their PD home member state choose a new home member state, they should choose between the EU27 member states and EEA EFTA states in which they have activities after 29 March 2019 (either offers or admissions made after the withdrawal or admissions made before the withdrawal which continue after the withdrawal).
- Issuers admitted to trading on a regulated market within EU27 or EEA EFTA states who currently have the UK as their TD home member state should choose and disclose their new home member state without delay following 29 March 2019.
- As the UK will be a third country, prospectuses and supplements approved by the UK FCA before 29 March 2019 cannot be used in EU27 or EEA EFTA states after a no-deal Brexit.
The purpose of the Q&As is to promote common supervisory approaches and practices in the application of the PD and TD in the event of a no-deal Brexit.