Germany's initial public offering (IPO) market has gone through different phases over the past few years. While, for many years, there has been a constant flow of large and highly complex carve-out and subsidiary IPOs and spin-offs by listed German blue chips, the number of traditional IPOs, especially among family and private equity-owned companies, was more limited.
Towards the end of the 2020 calendar year, there was a marked shift in sentiment in favour of IPOs, driven mainly by the beneficial equity capital markets conditions and outlook, which resulted in a significant increase in IPOs in 2021 compared to the previous year. In line with developments in the United States, the environment for IPOs started to deteriorate in the third quarter of 2021, especially for companies in the technology and e-commerce sector, which resulted in cancellations of a number of planned IPOs. Accordingly, the IPO market has been volatile since 2021. Nonetheless, a few sizeable IPOs have been carried out in the second half of 2021, such as the spin off and Frankfurt listing of Daimler Truck, the truck and bus business of the Daimler group, which was one of the largest-ever spin-offs in Europe. In the second half of 2022, the IPO and Frankfurt listing of Porsche AG, the second largest IPO globally by deal value in 2022, was successfully completed despite a difficult market environment for IPOs. However, the Porsche IPO was not an ice breaker for IPO activities and in the first half of 2023 the IPO volume dropped again significantly.
The wave of IPOs of special purpose acquisition companies (SPACs) did not continue in 2022 and to date in 2023. While it is expected that there will be a number of de-SPAC transactions (i.e., the business combination between a listed SPAC and a privately held target through which the target becomes public) during 2023, it is currently uncertain to what extent SPAC IPOs will play a meaningful role in the German IPO market in the near future. In this regard, it will be interesting to see whether the proposed new regulations regarding activities of SPACs will contribute to an increase of SPAC IPOs.
The German IPO market to date in 2023 and the outlook for the German IPO market depend on market sentiment improving for IPOs overall. The IPO and Frankfurt listing of thyssenkrupp nucera, a subsidiary of thyssenkrupp AG, might mark a starting point in that regard, which will, however, become clear after the summer break. The pipeline is significant, both in terms of the number of transactions and volume.
Governing rulesi Main stock exchanges
The main stock exchange in Germany for IPOs is the FSE, which operates two segments: the EU-regulated market and the Open Market (the regulated unofficial market).
Within the EU-regulated market, issuers have the choice between two sub-segments: the Prime Standard and the General Standard. The main difference between the two is that issuers opting for the Prime Standard are subject to post-admission reporting and disclosure requirements that go beyond the minimum requirements under applicable EU and German law, such as the requirement to publish quarterly financial information. In practice, most traditional German IPOs involve admission to the Prime Standard, whereas SPACs listed on the FSE typically opt for the General Standard.
Within the Open Market, issuers can choose between the Scale segment and the Quotation Board. The Scale segment is designed to attract small and medium-sized enterprises (SMEs) seeking a primary listing outside the EU regulated market but are prepared to meet certain increased transparency requirements. It is also a registered SME growth market according to EU standards.
Admission to the Quotation Board requires that the shares are already admitted to trading on another recognised stock exchange. It does not require the involvement of the issuer and can be requested by third parties. The Quotation Board is therefore primarily relevant for the inclusion of shares of foreign issuers in the trading on the FSE and does not play a role in the context of IPOs.
Listings on foreign exchanges have again become more popular for German issuers, driven mainly by mergers with US-listed SPACs.ii Overview of listing requirements
Issuers seeking to list on the regulated market of the FSE must meet the admission requirements, which are set out in the Stock Exchange Act, the Stock Exchange Listing Regulation and the rules and regulations of the FSE. The main admission requirements are as follows:
- a valid and approved prospectus pursuant to the EU Prospectus Regulation (the Prospectus Regulation);2
- the existence of an issuer and reporting history of at least three years;3
- a probable total value of the shares floated of at least €1.25 million;4
- a total of at least 10,000 shares to be admitted to trading;5 and
- a free float of at least 25 per cent of the total issue.6
In terms of the free float requirement, a lower percentage (10 per cent) is generally sufficient if orderly trading is ensured owing to the large number of shares.7 The FSE's rules regarding free float are more stringent than those on some other European exchanges, so it is important to bear this in mind when planning the transaction structure.
If an issuer does not meet the above-mentioned requirement of existence as a company for at least three years and has not disclosed its financial statements for the three financial years preceding the application, it is within the discretion of the Management Board of the FSE to grant admission if it is in the interest of the issuer and the public.8
This is particularly relevant in the context of SPAC listings, which typically do not have such a three-year track record. The FSE has announced that it has to date exercised such discretion based on the following conditions:
- the proceeds of the issue are paid into an interest-bearing escrow account;
- the intended use of the proceeds of the issue is detailed in the prospectus; and
- the SPAC provides evidence that:
- its existence will be limited to a fixed period;
- in the event of its liquidation, the assets in the escrow account will be returned to the investors; and
- it is ensured that the use of the assets in trust is decided with a shareholder majority of at least 50 per cent.
Regarding the requirement of a probable total value of the shares floated of at least €1.25 million, the German legislator plans to reduce this threshold to at least €1 million. According to the draft of the Future Financing Act of 12 April 2023, this reduction of the threshold is meant to strengthen the competitiveness of the capital market.
In addition to the approved prospectus, the following documents must be provided to the FSE as part of the application process:
- the commercial register entry;
- the articles of incorporation;
- resolutions of the management and supervisory boards;
- the certificate of incorporation;
- a copy of the global certificate; and
- the annual audited financial statements of the issuer for the past three years.9
The application for admission must be submitted by the issuer jointly with a bank or financial services institution authorised to participate in trading on an exchange in Germany, which is typically one of the underwriters of the IPO. However, the German legislator plans to enable German Stock Exchanges to limit this requirement of joint application only for the sub-segment of the EU regulated markets with further post-admission reporting and disclosure requirements (e.g., Prime Standard of the FSE). Accordingly, the draft of the Future Financing Act of 12 April 2023 intends to amend the German Stock Exchange Act with the aim of allowing issuers the possibility of an IPO with lower costs. The admission decision is made by the Management Board of the FSE shortly before the start of trading of the shares.iii Overview of law and regulations
In addition to meeting the admission requirements outlined above, the main requirement for a listing on the regulated market of the FSE is a prospectus that complies with the requirements of the Prospectus Regulation and is approved by the competent authority. For issuers incorporated in Germany, the competent authority is the Federal Financial Supervisory Authority (BaFin). Although IPO prospectuses in Germany are typically approved for both a public offer in Germany and the listing on the regulated market of the FSE, traditional retail campaigns are rare. However, the Porsche IPO in 2022 was also a milestone example for retail campaigns because it comprises six jurisdictions: Germany, Austria, Switzerland, France, Italy and Spain.
The Prospectus Regulation and related EU rules and (delegated) regulations, including the guidelines published by the European Securities and Markets Authority (ESMA), govern the content of the prospectus and provide the framework for the prospectus approval process. In particular, issuers must be mindful of the applicable rules in relation to the scope of the historical financial information that must be included in the prospectus.
If issuers are conducting a pre-IPO reorganisation or have made or are planning to make a significant acquisition or disposal, it is particularly important to check at the outset whether the issuer has a 'complex financial history' within the meaning of the Prospectus Regulation as this could trigger the requirement to include pro forma financial information in the prospectus.
On German IPOs where BaFin is the competent regulator for the approval of the prospectus, it is customary to pre-align the scope of the required financial statements to be included in the prospectus and the key dates for the prospectus approval process with BaFin at the beginning of the process. Both the pre-alignment process and the prospectus approval process with BaFin are led by the issuer's legal counsel.