Debt Capital Markets in Germany

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Market snapshot

Market climate

What types of debt securities offerings are typical, and how active is the market?

The German debt capital market is very diverse. One can distinguish the various market segments in classic investment-grade corporate bonds, high-yield bonds, equity-like debt instruments, in particular issued by credit institutions and insurance companies (subordinated debt, Tier 2 capital), equity-linked products (convertibles, exchange­ables, profit participation notes), commercial paper, retail structured derivatives products (certificates, warrants, options), exchange-traded derivatives, covered bonds, asset-backed securities and special private placement markets (such as certificates of indebtedness and registered bonds). These various debt products are often listed, either on the regulated markets (Luxembourg, Frankfurt or at some of the regional stock exchanges such as Düsseldorf, Stuttgart or Hamburg) or the unregulated open market of the Frankfurt Stock Exchange. Schuldscheine and German law-registered bonds (specific German law private placement instruments) are not capable of being listed.

On the investor side, there are distinct retail markets (such as the certificates and options market) and at the other end of the spectrum distinct institutional markets (such as private placement markets). Other markets such as the equity-linked bond market are also pure institutional markets, as the products are predominately issued in denominations above the €100,000 mark. Many corporate bond issuers are frequent issuers and have established a debt issuance platform allowing fast and consistent drawdowns during the year.

Regulatory framework

Describe the general regime for debt securities offerings.

Various laws and regulations are relevant to the issuance, placement, listing, sale, trading and buy-back of debt securities in Germany. The following list mentions the most important laws and rules.

German Securities Prospectus Act

This is the key legislation in respect of offering debt securities in Germany. It implements the EU Prospectus Directive 2003/71/EC, which was amended by Directive 2010/73/EC in 2010. It provides for the obligation to produce a prospectus for public offers or listings, any applicable exemptions, the main content of a prospectus as well as the procedure and the responsible authority - the German financial regulator, BaFin.

EU Securities Prospectus Regulation (EC) No. 809/2004

This EU regulation, which applies directly in Germany, implements parts of the EU Prospectus Directive as regards information contained in prospectuses as well as the format, incorporation by reference and publication of such prospectuses. It lays down principles to be observed when drawing up prospectuses. In addition, the European Securities and Markets Authority (ESMA) has delivered regulatory technical standards for publication of supplements to the prospectus as well as for the approval and publication of the prospectus. Furthermore, ESMA has published various guidelines and FAQs in respect of the format and the content of prospectuses. Although the prospectuses need to be approved by the relevant local regulator (in Germany, BaFin), ESMA provides relevant guidance in interpretation of various provisions of the prospectus regulation (for which ESMA is the respective European authority).

New EU prospectus regime

The European Parliament, the Council of the European Union and the Commission have agreed on the text of the new Prospectus Regulation (Regulation (EU) 2017/1129 of 14 June 2017 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). This new regulation will replace the existing Prospectus Directive and introduce new rules on prospectus contents as well as providing broader exemptions for small offerings, where no prospectus is required. The main changes from the current prospectus regime include:

• capital raisings up to €1 million will not need a prospectus at all;
• offerings below €8 million will not require an EU prospectus and will be subject to local rules;
• a new frequent issuer regime, which will halve approval times from 10 days to five;
• a shorter prospectus for secondary issuances;
• shorter prospectus summaries using language that is easier for investors to understand; and
• a paper prospectus will only be required if a potential investor explicitly requests one.

These new rules have been in force since 20 July 2017 and will be phased in until 21 July 2021.

German Investment Act

This act was introduced in 2012 and regulates investment products that are not captured by the Securities Prospectus Act and the relevant European legislation. It aims at previously unregulated products (which may take the form of debt securities). For example, German registered bonds as well as participation rights (which are not in the form of securities) fall within the scope of this act. The Investment Act sets out if and what kind of prospectus needs to be produced. It also provides for safe harbours. The obligations are very similar to the ones in the Securities Prospectus Act.

German Listing Act

This piece of legislation regulates stock exchanges in Germany, participation and trading thereon. Although the stock exchanges are mainly run by private companies (such as Deutsche Börse AG in Frankfurt), the exchanges are public law institutions governed by the Listing Act and its implementing secondary regulations.

German Custody Act

The Custody Act regulates the custodial arrangements when holding bearer securities, in particular if securities are held in collective safe custody. In the debt capital market in Germany Clearstream Frankfurt is the main clearing house falling under this regime complying with the respective rules and requirements.

German Securities Trading Act

This act applies to financial instruments, which includes most debt capital markets products. This legislation has implemented, inter alia, Directive 2014/65/EU of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (MiFID II). The directive is complemented by Regulation (EU) No 600/2014 of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012. The new legislation has applied from the beginning of 2018 across Europe. The Securities Trading Act deals with insider trading, market abuse (in addition to the EU legislation on market abuse, see below), disclosure of voting rights, organisation, transparency and prudent behaviour in relation to advising, selling and dealing in financial instruments (including derivative transactions), supervision of BaFin and sanctions. In particular, the Securities Trading Act sets out the continuing obligations for issuers of debt capital markets in Germany. Furthermore, MiFID II requires securities services firms to comply with a detailed product governance regime.

German Banking Act

This act regulates certain activities requiring a licence. In the context of derivatives transactions, financial services institutions are required to hold a licence for the following activities, to the extent these activities are commercially organised on a large scale:

• the brokering of business involving the purchase and sale of financial instruments, which includes derivative transactions (investment brokering);
• providing customers or their representatives with personal recommendations in respect of transactions relating to certain financial instruments where the recommendation is based on an evaluation of the investor’s personal circumstances or is presented as being suitable for the investor, and is not provided exclusively via information distribution channels or for the general public (investment advice);
• the placing of financial instruments without a firm commitment basis (placement business);
• the purchase and sale of financial instruments on behalf of others (contract brokering);
• the management of individual portfolios of financial instruments for others on a discretionary basis (portfolio management); and
• the purchase and sale of financial instruments for own account as a service for others or the purchase and sale of financial instruments for own account as a direct or indirect participant in a domestic organised market or multilateral trading facility (proprietary trading).

The Market Abuse Regulation (MAR)

Regulation No. 596/2014 on market abuse came into effect on 3 July 2016. It aims to increase market integrity and investor protection, enhancing the attractiveness of securities markets for capital raising. Although the Market Abuse Directive (MAD) had already been adopted in 2013, the European Commission felt it was necessary to frame the legislative revision of MAD in an European regulation (rather than a directive, as before) as its direct applicability would reduce regulatory complexity and offer greater legal certainty for firms. MAR strengthens the previous German market abuse framework by extending its scope to new markets, new platforms and new behaviours. It contains prohibitions of insider dealing, unlawful disclosure of insider information and market manipulation, and provisions to prevent and detect these.

German Civil Code and German Commercial Code

These acts set out certain general principles of contract law, which also affect documentation and interpretation of debt capital markets instruments governed by German law.

International Capital Markets Association (ICMA) rules

Although these rules are not legally binding, the ICMA has established rules of conduct and market standards in the area of debt capital markets, which market participants should be aware of. These rules mainly provide recommendations, guidance and standard language and documentation, generally relating to offers of syndicated international bonds in the primary market, to programmes under which such offers may be made and to euro-commercial paper programmes and trades made under them.

German Derivative Association (DDV) rules

The DDV is the industry representative body for the 15 leading issuers of derivatives in Germany. DDV’s aim is to improve the general political and regulatory conditions for structured products in Germany and at European level, and to encourage increasing numbers of private investors to choose certificates and warrants. It provides standardised terminology, a fairness code and product categorisation establishing a set of industry standards.

Filing and documentary requirements

General filing requirements

Give details of any filing requirements for public offerings of debt securities. Outline any requirements for debt securities that are not applicable to offerings of other securities.

The Securities Prospectus Act requires that, where securities are offered to the public but are not admitted to trading on an EU-regulated market, a prospectus must be produced by the person making the offer.

The definition of ‘offer of securities to the public’ should be noted for this purpose. It is ‘communication to persons in any form and by any means, presenting sufficient information on the terms of the offer and the securities to be offered, so as to enable an investor to decide to purchase or subscribe to these securities’. However, there are exemptions available, of which the more important are as follows:

• Qualified investors: this is the terminology for ‘professionals’. The definition of ‘qualified investors’ was amended by the Prospectus Directive Amending Directive to include those persons who are classified as professional clients or eligible counterparties in accordance with MiFID II. This harmonisation is intended to reduce the administrative burden of determining investor status when conducting exempt offers. The MiFID II definition is broadly equivalent to the previous definition in the Prospectus Directive and includes authorised persons (such as investment banks, insurance companies and pension funds), supranational institutions and sovereigns and other institutions whose main activity is to invest in financial instruments, including entities dedicated to the securitisation of assets or other financing transactions. Large corporate investors are also included. These are large corporations (which have any two of the following three criteria:
• ‘own funds’ over €2 million;
• a ‘balance sheet total’ over €20 million; and
• a ‘net turnover’ exceeding €40 million.
• High denominations: non-equity securities with a denomination above €100,000 will also be excluded.
• High consideration: offers where investors will have to subscribe at least €100,000.
• Limited offers: offers to fewer than 150 persons per member state.

Any such offering prospectus must be produced in compliance with the Securities Prospectus Act and the Prospectus Regulation and be approved by BaFin (or, if available, another EU member state’s authority and passported into Germany under the European prospectus passport regime). Compared with equity securities, non-equity securities (ie, debt securities) require a less stringent disclosure regime and do not have specific requirements.

Prospectus requirements

In a public offering of debt securities, must the issuer produce a prospectus or similar documentation? What information must it contain?

Yes, the issuer of debt securities offering those to the public must produce a prospectus. The issuer can choose the form of the prospectus. If the issuer accesses the markets on a frequent basis, it may decide to produce a prospectus consisting of three parts (a ‘tripartite prospectus’). The first part, the registration document, contains the business disclosure. The second part, the securities note, is produced as and when an issue is made and contains details of the securities being issued. In addition, unless the issue is of non-equity securities in denominations of €100,000 or more, a summary note must also be produced at the time of issue. Alternatively, if the issuer is not a frequent user of the markets, it may opt to produce its prospectus as a single document. This must also contain all the elements that would be in a tripartite prospectus, including, unless the securities being issued are non-equity securities and have a denomination of at least €100,000, the summary. As a variant of the registration document or securities note format, it is possible to produce a base prospectus under a programme, with each issue or drawdown being documented by a set of final terms.

In either case, the prospectus shall contain all information that, according to the particular nature of the issuer and of the securities offered to the public or admitted to trading on a regulated market, is necessary to enable investors to make an informed assessment of the assets and liabilities, financial position, profit and losses, and prospects of the issuer and of any guarantor, and of the rights attached to the securities.

As mentioned in question 2, if the debt securities fall outside the scope of the Securities Prospectus Act, the prospectus regime for alternative investments under the Investment Act may apply. In respect of certificates of indebtedness (forming part of the German private placement market) no disclosure regime applies as these are regarded as loans and not securities.

Currently, a specific German requirement is the preparation of an additional product information sheet (three pages) as set out in the Securities Trading Act in the case of financial advice provided to retail investors. This regime has now been replaced or complemented by the EU Regulation No. 1286/2014 for prepackaged retail and insurance-based investment products (PRIIPs). Issuers will then have to produce a key information document to the extent the relevant kind of products are made available to retail investors. Although the PRIIPs regime has mainly set aside the local regime, but the German product information sheet regime still applies if the product is not covered by PRIIPs.

Documentation

Describe the drafting process for the offering document.

The key issues when drafting a Prospectus Directive-compliant prospectus are issuer disclosure, issuer-related risk factors and financial information. The issuer of debt securities needs to be ready for capital markets disclosure. This means the following, in particular.

Disclosure requirements

Information about the issuer

The issuer needs to describe its history and development. This includes the legal and commercial name of the issuer, the place of registration of the issuer and its registration number, the date of incorporation and the length of life of the issuer, except where indefinite, the domicile and legal form of the issuer, any recent events particular to the issuer which are to a material extent relevant to the evaluation of the issuer’s solvency. In addition, the issuer has to describe its investments (ie, principal investments made since the date of the last published financial statements, information concerning the issuer’s principal future investments, information regarding the anticipated sources of funds). Furthermore the issuer needs to provide a business overview (ie, a description of the issuer’s principal activities stating the main categories of products sold or services performed and an indication of any significant new products or activities). This is complemented by a brief description of the principal markets in which the issuer competes. Finally, the issuer needs to provide trend information as well as profit forecasts or estimates.

Risk factors

In line with the information about the issuer, the key risk related to the business of the issuer needs to be described and published.

Financial information

The issuer must produce audited historical financial information covering the latest two financial years (or such shorter period that the issuer has been in operation) and the audit report in respect of each year. Such financial information must be prepared according to Regulation (EC) No. 1606/2002, or if not applicable to a member state’s national accounting standards. For third-country issuers, such financial information must be prepared according to the international accounting standards adopted pursuant to the procedure of article 3 of Regulation (EC) No. 1606/2002 or to a third country’s national accounting standards equivalent to these standards. If such financial information is not equivalent to these standards, it must be presented in the form of restated financial statements.

Private placement

In the case of a private placement, no prospectus is usually required as the private placement is usually structured to fall within the disclosure exemptions provided under the Securities Act and the Prospectus Directive, respectively.

Which key documents govern the terms and conditions of the debt securities? Who are the parties to such documents? How can such documents be accessed?

Under German law a security is created by signing of the relevant debt security by the issuer and issuing it to a third party (principles of scripture and public). Usually, debt securities are in bearer format and are documented in global form (ie, only the global bond is signed by the issuer and the fractions of such global bond are then booked via the clearing systems into the accounts of the ultimate holders). The terms and conditions are attached to the global bond and are published in the prospectus. If no prospectus is required, holders are entitled to receive a copy of the global bond at any time.

Does offering documentation require approval before publication? In what forms should it be available?

If a public offering of debt securities is planned, the prior approval of the prospectus by BaFin is required. Only upon such approval the prospectus may be made available to the public. Following approval of the prospectus it has to be published either in a newspaper in Germany, in print format and available to investors, or via the webpage of the issuer.

Authorisation

Are public offerings of debt securities subject to review and authorisation? What is the time frame for approval? What are the restrictions imposed, if any, on the issuer and the underwriters during the review process?

Yes, BaFin has to review and approve the offer prospectus. BaFin has 10 business days for any comments on the prospectus (20 business days in the case of a first-time issuer). Each time the prospectus is resubmitted BaFin has a further 10 business days. During the review process no restrictions are imposed on the issuer or underwriters. Of course, no public offer may start prior to final approval of the prospectus.

On what grounds may the regulators refuse to approve a public offering of securities?

BaFin is examining the prospectus against the requirements imposed by the Securities Act and the related European legislation. The prospectus has to be complete in light of the required information. BaFin may refuse a prospectus, if the information provided is not sufficient in light of the prospectus rules.

How do the rules differ for public and private offerings of debt securities? What types of exemptions from registration are available?

A private offering is usually structured in a way that it falls outside the scope of the prospectus rules. Hence, no prospectus is required in such case. See question 3, which sets out the requirements to fall outside the prospectus regime in Germany.

Offering process

Describe the public offering process for debt securities. How does the private offering process differ?

The public offering usually provides for a subscription period in which the product is marketed. This could be two to four weeks or even longer. The prospectus is used in that process together with any marketing material and the product information sheet (see question 4). Investors will subscribe to the product and only after the end of the subscription period will the product be issued and paid for. All investor communication is based on the information contained in the prospectus.

In contrast, the private offering differs substantially. Potential investors are approached prior to the launch of the transaction to solicit demand for the product. The product is launched on a specific day, investor commitments are collected by way of an accelerated book building during the launch date and finally the deal is priced on the same day. The deal is then settled and closed within a few days.

Closing documents

What are the usual closing documents that the underwriters or the initial purchasers require in public and private offerings of debt securities from the issuer or third parties?

In a closing of an investment grade corporate bond, the following documents are usually required for closing:

• legal opinion of underwriter’s counsel in respect of enforceability of transaction documents;
• legal opinion of issuer’s counsel in respect of capacity of issuer;
• corporate authorisations;
• comfort letter by issuer’s auditor; and
• signature list.

Listing fees

What are the typical fees for listing debt securities on the principal exchanges?

In respect of a listing at the open market of the Frankfurt Stock Exchange the following level of fees should be expected:

• one-off fee for inclusion:
  • generally €50;
  • €100, provided that applications of more than one participant exist for the same security; or
  • €500, provided that the security is included in connection with an application for shares, certificates or fund shares (eg, any underlying shares);
• no ongoing listing fee; and
• fees payable to the participant for market making services.

In respect of a listing at the regulated market the fees are approximately:

• listing fee payable to the Frankfurt stock exchange: €5,500;
• annual listing fee payable to the Frankfurt Stock Exchange: €7,500 to €10,000;
• application fee for BaFin approval: €6,500; and
• fee to credit institution for introduction of bonds to the regulated market.

Key considerations

Special debt instruments

How active is the market for special debt instruments, such as equity-linked notes, exchangeable or convertible debt, or other derivative products?

The German market for convertibles and exchangeables is very active and many issuers are frequently issuing these type of instruments. In the past two years ‘equity-neutral transactions’ have become quite popu­lar. The company issues a cash-settled convertible and enters into a call option to hedge the price risk under the convertible (in contrast the German market does not see any call spread overlays transactions in order to hedge the strike price of the convertible owing to statutory limitations and usually limited authorisations by shareholder meetings).

In addition, the German derivatives market is very popular with retail investors. Certificates provide retail investors with an equity derivative exposure (eg, share-linked certificates, bonus certificates, express certificates, knock-in and knock-out certificates, index and performance certificates and discount certificates) - the retail equity derivatives market in Germany is worth €60 to €80 billion.

What rules apply to the offering of such special debt securities? Are there any accounting implications that the issuer should be aware of?

No specific rules apply to these instrument. Convertibles and exchangeables in the German market are issued exclusively to the private placement market.

Classification

What determines whether securities are classed as debt or equity? What are the implications for instruments categorised as equity and not debt?

For German capital markets law the distinction derives from the Securities Act in order to classify securities as debt or equity securities. The distinction is fundamental as different disclosure regimes apply to each set of securities. Equity securities are shares and other transferable securities equivalent to shares in companies, as well as any other type of transferable securities giving the right to acquire any of the aforementioned securities as a consequence of their being converted or the rights conferred by them being exercised, provided that securities of the latter type are issued by the issuer of the underlying shares or by an entity belonging to the group of the said issuer.

Transfer of private debt securities

Are there any transfer restrictions or other limitations imposed on privately offered debt securities? What are the typical contractual arrangements or regulatory safe harbours that allow the investors to transfer privately offered debt securities?

There are no transfer or trading restrictions applicable to privately offered debt securities. If the privately offered debt securities are sold on, the transferor needs to ensure they fall under the exemption from the obligation to produce an offer prospectus. Each on-sale needs to be analysed to see whether it constitutes a public offer and requires a prospectus. See question 3 in respect of the typical safe harbours for private placements and subsequent transfers.

Cross-border issues

Are there special rules applicable to offering of debt securities by foreign issuers in your jurisdiction? Are there special rules for domestic issuers offering debt securities only outside your jurisdiction?

There are no specific rules for either case. However, within the EU the European passport regime for securities prospectuses exists. The current EU prospectus rules ensure that adequate and equivalent disclosure standards are in place in all EU countries so that investors can benefit from the same level of information. Under these rules, once a prospectus has been approved in one EU country, it is valid throughout the EU (single passport for the issuers). Consequently, a foreign issuer (from within the EU) may offer debt securities in Germany based on a prospectus approved in its home country without approval by BaFin.

Are there any arrangements with other jurisdictions to help foreign issuers access debt capital markets in your jurisdiction?

Yes, BaFin may approve the prospectus of an issuer incorporated in a third country, if the competent authority of the issuer has approved such prospectus provided that:

• the prospectus has been drawn up in accordance with international standards set by international securities commission organisations, including the IOSCO disclosure standards; and
• the information requirements, including information of a financial nature, are equivalent to the requirements under the Securities Act.

In order to ensure uniform application, the Commission has adopted implementing measures stating that a third country ensures the equivalence of prospectuses drawn up in that country with European law, national law, or practices or procedures based on international standards set by international organisations, including the IOSCO disclosure standards.

Underwriting

What is the typical underwriting arrangement for public offerings of debt securities? How do the arrangements for private offerings of debt securities differ?

It is rarely that underwriters provide for a hard commitment prior to any back-to-back commitment from investors. Hence, in public offerings as well as in private offerings, the underwriters only commit their underwriting at the end of the book-building phase. Hence, the underwriting arrangements mainly covers the period from pricing to closing of the transaction. The underwriting banks have an incentive to get an attractive deal for issuers (size, maturity and pricing) as the fee schedule is based on these parameters. However, issuers do not know the market acceptance until the real launch. The main difference between a public and private offering in respect of the underwriting arrangement are the representations in respect of the disclosure. In the case of a public offering, the underwriters are also responsible in relation to investors regarding the prospectus and hence want to ensure that the issuer’s parts are correct, complete and not misleading. These representations are usually backed by a strong indemnity in favour of the underwriters.

How are underwriters regulated? Is approval required with respect to underwriting arrangements?

Underwriters are in all cases credit institutions as the activity requires a banking licence. Investment broking, investment advice as well as placement business are all regulated activities that require a banking licence (see question 2). No specific approval with respect to the underwriting arrangement is required under German law (except for any internal corporate approvals).

Transaction execution

What are the key transaction execution issues in a public debt offering? How is the transaction settled?

Following the pricing of the transaction a standard bond transaction will be settled within t+2. The issuer has signed the global bond and send the original to the issuing and paying agent on ‘t’. The paying agent ‘activates’ the global bond by authenticating it with its signature. It will deliver the global bond physically to Clearstream Frankfurt as the safe custodian. Meanwhile the underwriters have collected the issuance proceeds and on the settlement date, the paying agent ensures delivery of the bonds versus payment of the proceeds (DVP settlement). The issuance proceeds will be paid outside the clearing system directly by the paying agent (on behalf of the underwriters) to the issuer (fees and costs are usually directly deducted). The bonds will be booked into the accounts of the clearing members with Clearstream Frankfurt and to the relevant investors. The bonds are admitted to trading on the settle­ment date.

Holding forms

How are public debt securities typically held and traded after an offering?

Debt securities are commonly held in bearer form and in global format. The bonds are immobilised, which means they are held in book entry format via Clearstream Frankfurt as the clearing system. Each investor is a co-owner of the global bond. Definitive bonds are commonly excluded (except for specific tax reasons or a disruption of the clearing system).

Outstanding debt securities

Describe how issuers manage their outstanding debt securities.

Issuers may buy back any outstanding debt securities in the market at any time. Common bond terms and conditions provide for a specific clause allowing for such repurchase and a potential reissuance. Although such repurchase may be done on a case-by-case basis individually in the market, issuers often prefer a public tender offer in order to avoid any market abuse and insider considerations. Any such tender offer in Germany is usually structured as an invitation to bondholders to offer their bonds, which the issuer may accept after the end of the tender period. Hence the issuer is in control to buy back the bonds.

Regulation and liability

Reporting obligations

Are there any reporting obligations that are imposed after offering of debt securities? What information would be included in such reporting?

The initial prospectus makes disclosure of all the information investors need to take into account to make their investment decision. Thereafter, every year an issuer has to publish an annual or semi-annual report to the market under the Transparency Directive, which has been transformed into German law in the Securities Trading Act. Pursuant to sections 114 et seq of the Securities Trading Act, companies that issue securities as domestic issuers are required to prepare and publish annual financial reports four months following the end of the reporting period. Pursuant to the Securities Trading Act, companies that as domestic issuers issue shares or debt securities are required to prepare and publish semi-annual financial reports covering the first six months of the financial year. Companies that exclusively issue debt securities with a minimum denomination per unit of €100,000 (or the equivalent thereof) or companies that exclusively issued outstanding debt securities with a minimum denomination per unit of €50,000 (or the equivalent thereof) and which were admitted to trading prior to 31 December 2010 are exempted from the reporting obligations.

Under the market abuse regime, an issuer has to disclose price-sensitive information to the market as soon as possible after receipt.

Liability regime

Describe the liability regime related to debt securities offerings. What transaction participants, in addition to the issuer, are subject to liability? Is the liability analysis different for debt securities compared with securities of other types?

The main areas of liability are prospectus liability and mis-selling claims.

Prospectus liability

Prospectus liability is mainly regulated in the Securities Prospectus Act (although the general principles under German civil law may also apply in addition). Paragraph 21 of the Securities Prospectus Act defines the potential debtor of any claim as:

• the person who takes responsibility for the prospectus (who is usually the issuer); and
• any person who has initiated the prospectus (who is usually the underwriter and arranger).

These persons are liable for any materially wrong or incomplete information. The same is true for any missing prospectus.

Mis-selling

The other area is the liability regime for mis-selling. German courts often construe the relationship between underwriter or arranger and investor as a financial advisory arrangement. Even without a specific advisory contract, credit institutions find themselves very easily (based on recent judgments) in the area of providing financial advice to investors (professional as well as retail investors). In this scenario, specific requirements need to be fulfilled in the sales and marketing process that may otherwise give rise to a mis-selling claim (a clear description of the product, exploring the needs of the investor, avoiding any personal conflicts of interest when providing investment advice, etc).

Remedies

What types of remedies are available to the investors in debt securities?

Bondholders may have various remedies in respect of an investment in debt securities:

• mis-selling claims (including claims in tort and fraud);
• pre-contractual wrongdoing when selling the product;
• breach of subscription agreement;
• breach of the terms and conditions of bond (including additional supplemental duties of the issuer); and
• prospectus liability.

Enforcement

What sanctioning powers do the regulators have and on what grounds? What are the typical results of regulatory inquiry or investigation?

BaFin has a broad range of tools to ensure compliance with the various regulations. Apart from information rights, it may request amendments to a prospectus, prohibit the distribution of a product or even request the unwinding of a transaction. In addition, BaFin may issue substantial monetary fines and prohibit the further issuance of securities. With the introduction of MiFID II, BaFin has more product intervention rights and may even prohibit specific types of product (which it had planned for credit-linked notes, but has paused for the time being).

Tax liability

What are the main tax issues for issuers and bondholders?

If straight corporate bonds are held as private assets by an individual investor whose residence or habitual abode is in Germany, payments of interest under the bonds are generally taxed as investment income at a 25 per cent flat tax (plus a 5.5 per cent solidarity surcharge thereon and, if applicable to the individual investor, church tax). The flat tax is generally collected by way of withholding and the tax withheld shall generally satisfy the individual investor’s tax liability with respect to bonds.

If straight corporate bonds are held as business assets by an individual or corporate investor who is tax-resident in Germany (ie, a corporation with its statutory seat or place of management in Germany), interest income from the notes is subject to personal income tax at individual progressive rates or corporate income tax (each plus a 5.5 per cent solidarity surcharge thereon and church tax, if applicable to the individual investor) and, in general, trade tax.

Subject to the saver’s lump sum tax allowance for investment income, capital gains from the sale or redemption of any bonds held as private assets are taxed at the 25 per cent flat tax (plus a 5.5 per cent solidarity surcharge thereon and, if applicable to the individual investor, church tax). The capital gain is generally determined as the difference between the proceeds from the sale or redemption of the bonds and the acquisition costs. Capital losses from bonds held as private assets are generally tax-recognised irrespective of the holding period of the bonds. If bonds are held as business assets by an individual or corporate investor who is tax-resident in Germany, capital gains from the bonds are subject to personal income tax at individual progressive tax rates or corporate income tax (plus solidarity surcharge thereon and church tax, if applicable to the individual investor) and, in general, trade tax. Capital losses from the sale or redemption of any bonds should generally be tax-recognised and may generally be offset against other income.

In respect of non-German tax-resident investors, generally no withholding tax shall be withheld, unless the bonds are held as business assets of a German permanent establishment of the investor or by a permanent German representative of the investor or the income derived from the bonds otherwise constitutes German source income (such as income derived from the letting and leasing of certain property located in Germany).