Underwriting arrangements for securities offerings in Germany

Underwriting arrangements

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.