The capital markets in Germany, one of the biggest economies in the world, provide liquidity for domestic and foreign capital in a wide range of products such as equity securities, equity-linked securities (eg, convertibles and exchangeables), debt securities, hybrid securities, interests in trusts, funds and other recognised management investment schemes. There are seven stock exchanges, of which Frankfurt is the largest. The stock exchanges have three markets, the Official Market (Amtlicher Markt), the Regulated Market (geregelter Markt), both governed by public law, and the Not Regulated Market (Freiverkehr) which is governed by civil law only.
At the end of 2006 the shares of more than 15,400 domestic and foreign companies were trading on the three different markets, eg on the Frankfurt Stock Exchange 308 German and 55 foreign companies on the Official Market, 348 German and 49 foreign on the Regulated Market, and 322 German and 6,950 foreign on the Not Regulated Market. The market value of all shares issued by German companies admitted to trading at year end 2006 was approximately US$1.9 trillion, approximately 80 per cent of the gross national product. During 2006 new shares of German issuers with a market value of more than €29 billion were issued. The market value of shares of German companies issued in 2006 in initial public offerings (IPOs) was approximately 9.3 billion (see www.deutsche-bourse.de).
There were about 38 takeover offers for listed German companies in 2006.
2. REGULATORY STRUCTURE
Since 1 July 2005 and the implementation of EU directive 2003/71/EC (Prospectus Directive) the regulatory framework for the offering and sales of securities in Germany is set by the German Securities Prospectus Act (Wertpapier-prospektgesetz) and the European Commission Regulation No. 809/2004 (EC Prospectus Regulation) which govern the public offering of securities in Germany and the contents, format and publication of prospectuses. Apart from the prospectus requirement which is governed by the rules mentioned before, the admission to trading and the admission to a quotation on any of the German stock exchanges is governed by the German Stock Exchange Act (Börsengesetz) and the Stock Exchange Admission Ordinance (Börsenzulassungsverordnung) for the Official Market and the German Stock Exchange Act and the Stock Exchange Rules (Börsenordnung) for the Regulated Market. For the offering and sale of investments not represented in securities the German Sales Prospectus Act (Wertpapier-Verkaufsprospektgesetz) and the Investment Sales Prospectus Ordinance (Vermögensanlagen-Verkaufsprospektverordnung) applies. The offering and sale of interests in trusts, fonds and other recognised management investment schemes is governed by the Law on Investments (Investmentgesetz). The following description focuses on securities other than those governed by the Law on Investments.
The Securities Prospectus Act applies to any public offering of securities. In principal every public offering of securities in Germany is required to be based on a prospectus. Although the Securities Prospectus Act in line with the Prospectus Directive contains several exceptions where a prospectus does not need to be published, those exceptions are both fewer and more limited in scope compared to the situation before 1 July 2005. Under the new German regime, the old distinctions between prospectuses prepared for a securities offering with and without a simultaneous admission to trading and between prospectuses for the admission to trading on the official and the regulated market are rendered irrelevant.
3. REGISTRATION OF THE ISSUER AND SECURITIES
An offering of securities in Germany does not require that the issuer is locally registered or licensed, nor does the issuer have to have a formal legal presence or a local agent to accept legal process, nor is a registration of the securities themselves required.
4. SUPERVISORY AUTHORITIES
The governmental authority responsible for the supervision of the German financial system is the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, ‘BaFin’), which was created in 2002 by a merger of the former Federal Supervisory Authority for Financial Institutions (Bundesaufsichtsamt für das Kreditwesen), the Federal Supervisory Authority for Securities Trading (Bundesaufsichtsamt für den Wertpapierhandel) and the Federal Supervisory Authority on Insurances (Bundesaufsichtsamt für das Versicherungswesen) by the law on the Federal Financial Supervisory Authority (Gesetz über die Bundesanstalt für Finanzdienstleistungsaufsicht) (22 April 2002, as amended).
In securities offerings, the BaFin, is competent for the approval of the prospectus, whether the prospectus is to be used for offerings or for admission to trading, while the Board of Admission (Zulassungsstelle) of the relevant stock exchange remains the competent authority for the admission to trading of the securities and the management of the respective stock exchange for the start of the quotation.
5. OFFERING DOCUMENTATION
In principal any public offering in Germany of securities needs a disclosure document. Contents, format and publication of the prospectus is governed by the EC Prospectus Regulation. No prospectus may be published prior to being approved by the BaFin. The BaFin must decide on the approval within 10 working days (or 20 working days in the case of an issuer whose securities are not yet admitted to a regulated market in the European Union and who has not yet made any public offering of securities). It should be noted that, should the BaFin regard the document to be incomplete or that supplementary information is needed, the BaFin should notify the issuer accordingly within 10 working days. In this case, the time limit for approval will be counted as from the date such information is provided to the BaFin.
The main purpose of the disclosure document is to give potential investors a complete and accurate view of the issuer, its business, its state of affairs and financial standing, as well as a special description of the securities offered including the risks or liabilities attaching to the securities, and the terms and conditions of the offer. According to the EC Prospectus Regulation (and based on the Prospectus Directive and the Securities Prospectus Act) the prospectus may consist either of one single document or three separate documents: a summary, a ‘securities note’ and a ‘registration document’. The EC Prospectus Regulation contains 17 annexes with schedules listing what particular information must be included for different types of securities such as shares, equity linked securities, debt etc.
According to the specific prospectus liability provisions included in the Stock Exchange Act and for securities offered but not to be listed the Sales Prospectus Act (‘Statutory Prospectus Liability’) the issuer and any person assuming liability for the disclosure document and any person who has commissioned the prospectus (in particular in case of a special economic interest, as could be the case of a major shareholder) are responsible for the disclosure document vis-à-vis investors purchasing the securities within six months after the first quotation of the securities on the Official or Regulated Market or up to six months after the publication of the disclosure document. This means that Statutory Prospectus Liability (i) is not limited to the initial purchasers but protects any investor buying the securities over the counter or on the stock exchange within the period mentioned, even if such investor has not even looked at the disclosure document, and (ii) covers in case of new shares issued all shares outstanding of the same class including shares issued before the issue of the new shares.
In general, Statutory Prospectus Liability lies with the issuer and the banks signing the prospectus. Currently (this is about to change), no Statutory Prospectus Liability vis-à-vis investors lies with members of the management or supervisory board as such; board members are, however, liable under the Stock Corporation Act vis-à-vis the issuer for any damage – including Statutory Prospectus Liability – the issuer incurs. Under German law there is no Statutory Prospectus Liability for auditors or advisers.
Prospectus liability attaches when material information contained in the disclosure document is incorrect or incomplete, provided that the responsible person acted with knowledge or gross negligence. Whether a disclosure document is incorrect or incomplete is measured by (i) compliance with the rules on the contents of the disclosure document, eg the EC Prospectus Regulation, and (ii) reference to the so-called ‘average investor’. Except in cases of gross negligence, persons will not be liable under Statutory Prospectus Liability who did not know of the incorrectness or incompleteness of the disclosure document. With these provisions in mind, it is usual to carry out some sort of due diligence and ask for a comfort letter from the auditors and legal and disclosure opinions from the legal advisers. There is, however, no general rule that these are always needed.
6. DISTRIBUTION SYSTEM
According to the German Banking Act, only banks or financial services providers are allowed to be underwriters or distributors of securities. In addition, the application for trading on the Official or Regulated Market of a German Stock Exchange must be filed by the issuer and a bank or financial services provider.
7. PUBLICITY
With the implementation of the Prospectus Directive the restrictions on publicity contained in it were introduced. Due to liability concerns relating to publicity and due to the obligation contained in section 15 of the Securities Prospectus Act that information contained in advertisements and other publications be consistent with the prospectus, usually the issuer’s counsel drafts publicity guidelines detailing the limitations and setting up a clearance procedure for approving any corporate communications and marketing material to be released before an offering. In addition, the underwriters’ counsel typically prepares research guidelines specifying the restrictions applicable to the syndicate banks’ research reports.
It is common practice in Germany to advertise share offerings and especially IPOs in the media (newspaper, magazines, radio and TV) which as long as this advertisement does not constitute an offer or, if it does, as long as it refers to an approved prospectus, is legally not prohibited.
8. LISTING
The German Stock Exchange Act and Stock Exchange Admission Ordinance regulates the filing process if admission to trading on the Official Market is sought. If admission to the Regulated Market is sought, the filing process is regulated by the German Stock Exchange Act and the respective Stock Exchange Rules.
The admission requires that an application be filed with the Board of Admission of the relevant stock exchange, such application to be sponsored by a bank or by a financial services provider.
Some admission requirements (eg, free-float and minimum anticipated market value of security) are more stringent for admission to trading on the Official Market and the Regulated Market.
If there is no exception from the prospectus requirement under the Securities Prospectus Act any application for admission to trading on the Official or Regulated Market must be accompanied with a prospectus already approved by the BaFin or to be approved before granting the admission.
Because the admission to trading on the Official or Regulated Market is an administrative act, any appeal first has to go to the Board of Admission of the respective stock exchange and to the administrative court thereafter if the admission board does not redress the appeal.
The costs for the admission to trading and the additional annual costs for a quotation are regulated by the fee regulations of the prospective stock exchange. They are minimal, for instance, on the Frankfurt Stock Exchange they range between €10,000 to €15,000.
9. ONGOING COMPLIANCE REQUIREMENTS
With the implementation of the European Transparency Directive (2004/109/EC) as of January 2007 the basic rules for the obligations arising from admission to the Official or Regulated Market of a German Stock Exchange are contained in the German Securities Trading Act.
The German Securities Trading Act requires that an issuer whose shares are admitted to the Official or Regulated Market publishes at least three interim reports per financial year containing information on the financial condition and the general business operation of the issuer during the reporting period. In addition it requires, among other obligations, that the issuer (i) under similar circumstances treats equally holders of admitted securities, (ii) has at least one paying agent and depositary, (iii) informs the public and the Board of Admission about new developments on the issuer and the admitted securities, and (iv) applies for admission of new shares of the same class as the admitted shares.
In addition, under the German Securities Trading Act, the issuer of admitted shares must, inter alia, publish notices on certain corporate events, such as the convening of a shareholders’ meeting, declaration and payment of dividends, issuance of new shares and changes in the rights arising from the securities; notify the board of admission of any proposed amendments to its articles of association; as a rule, make its annual financial statements available to the public and the annual report to shareholders immediately upon approval; and, in general, publish in Germany at least the equivalent information relevant for the assessment of the securities as the issuer publishes in another country where the securities are also admitted to trading on an official market.
A breach of any of these obligations may trigger administrative fines and, if the violation continues after an appropriate cure period, the revocation of the admission.
In 2003, the Frankfurt Stock Exchange introduced two sub-sectors within each of the statutory Official Market and Regulated Market segments: a General Standard, reflecting the respective minimum statutory requirements, and a Prime Standard, imposing further ongoing obligations in addition to the statutory requirements. Application to have securities listed on the Prime Standard is voluntary. Admission to the Prime Standard, however, is a precondition to be included in share indices such as the German Stock Exchange Index (DAX). The additional requirements are laid out in the Stock Exchange Rules issued by the Frankfurt Stock Exchange and are designed to enhance transparency in accordance with international standards.
In addition [to the Stock Exchange Act and the Stock Exchange Admission Ordinance] the Federal Securities Trading Act contains further obligations and regulations for issuers, shareholders and investors of shares admitted to (or in the process of being admitted to) the Official or the Regulated Market of any German stock exchange.
(i) Insider regulations
The Federal Securities Trading Act contains a statutory prohibition of insider transactions, which implemented the European Community Insider Trading Directive and which was amended in 2004 due to the implementation of the directive 2003/06/EC of the European Parliament and the Council of 28 January 2003 on Insider Dealing and Market Manipulation (Insider Dealing and Market Manipulation Directive).
(ii) Ad hoc disclosure requirements
In addition, the Federal Securities Trading Act obliges the issuer of securities which are admitted to trading on a domestic exchange to publish any inside information which directly concerns the issuer without undue delay, unless the issuer decides to delay the public disclosure so as not to prejudice his legitimate interests, provided that such omission would not be likely to mislead the public and provided that the issuer is able to ensure the confidentiality of that information.
(iii) Reporting obligations of major shareholdings
The issuer must publish notice when a third party notifies a German issuer, whose securities are listed on an organised market in Germany, that he has acquired, or that his shareholding has exceeded or fallen below certain thresholds (three per cent, five per cent, ten per cent, 15 per cent, 20 per cent, 25 per cent, 30 per cent, 50 per cent and 75 per cent of the company’s voting rights). Notification must be made in writing to the issuer and the BaFin without undue delay, and within four stock exchange trading days from the increase or decrease. The target company is then itself obliged to publish the notification without delay and in any event within three stock exchange trading days from receipt of the notification. The BaFin keeps a publicly accessible database containing such information.
If, and for as long as, these notification requirements are not complied with, the voting rights attached to the respective shareholdings are suspended: ie, votes cast are null and void.
(iv) Directors’ dealings
According to the Federal Securities Trading Act, persons discharging managerial responsibilities within an issuer of shares admitted to trading on a domestic exchange or within a German issuer of shares admitted to an organised market of the EU and persons closely associated with them shall notify the issuer and the BaFin within five working days of any transaction conducted on their own account relating to shares of the issuer, or to derivatives or other financial instruments linked to them unless such transactions are below €5,000 within one calendar year.
In line with the Prospectus Directive the Securities Prospectus Act requires the issuer of listed securities to publish each year an annual document including or referring to information which has been published by the issuer during the preceding fiscal year in connection with certain securities regulation such as, inter alia, directors’ dealings, ad hoc publications, publications required under the German stock exchange laws, etc.
None of the requirements just mentioned applies to unlisted issuers. There is, however, an obligation contained in the German Stock Corporation Act that shareholders of a stock corporation must notify it if their shareholding exceeds 25 per cent or 50 per cent of the shares in a German stock corporation. If, and for as long as, these notification requirements are not complied with, the voting rights attached to the respective shareholdings are suspended. The stock corporation itself has to publish the information received by its shareholder.
10. INSIDER TRADING
10.1 Regulatory regime
The Federal Securities Trading Act, amended in 2004 by the Investors Protection Act which itself implemented the directive 2003/6/EC (Market Abuse Directive) and the Commission Directive 2003/124/EC, contains in sections 12 to 14 the regulatory regime on insider trading.
10.2 Insider trading prohibition
Section 14 of the Federal Securities Trading Act contains the prohibition on insider trading (Insidergeschäfte). It prohibits: (i) using inside information by acquiring or disposing of insider securities for the insider’s own account or for the account of a third party; (ii) disclosing inside information to any other person or granting access to inside information without authorisation; (iii) recommending or inducing another person on the basis of inside information to acquire or dispose of financial instruments to which the information relates. Exemption exists for repurchase of own shares and stabilisation methods.
Insider trading is a criminal offence that may be sanctioned with a fine or imprisonment of up to five years.
11. INVESTMENT FUNDS
11.1 Introduction
After almost continuous growth in sales since the early 1990s, the German investment fund industry managed assets with an aggregate value of €1,240.2 billion at the end of 2006. Of this amount, €570.7 billion was managed as public (mutual) funds and €669.5 billion as special funds (Source: BVI). Special funds are investment funds for institutional investors and are limited to 30 unitholders, which may not be natural persons.
The regulation of investment funds in Germany has undergone an almost complete revision with the new Investment Act (Investmentgesetz), which came into force in Germany on 1 January 2004. The new Investment Act was triggered by the need to implement the European Union Directives 2001/107/EC and 2001/108/EC which amended the European Union Directive 85/611/EEC on UCITS (Undertakings For Collective Investment in Transferable Securities) – (UCITS-Directive).
Investment companies (Kapitalanlagegesellschaften) are the only institutions which may launch and manage investment funds in contractual form (as opposed to investment stock corporations, cf. 11.7). Apart from this principal activity, investment companies may only engage in certain ancillary activities as defined in the Investment Act.
When managing the investment fund, the investment company must act in its own name but for the joint account of all unitholders within the scope of the management agreement (the so-called fund rules). The investment company cannot legally bind the investment fund or its unitholders. Thus, the investment company opens with the depositary bank different cash and securities accounts in its own name as blocked accounts on behalf of each investment fund. When the investment company enters into transactions on behalf of the investment fund, the investment company is entitled, in accordance with the terms of the fund rules, to reimbursement of its expenses by the depositary bank out of the assets of the investment fund.
German investment companies, unlike their counterparts in most other European jurisdictions, are special credit institutions and thus subject not only to the Investment Act but also to the Banking Act (Kreditwesengesetz). Investment companies are supervised by the BaFin with a dual seat in Bonn and Frankfurt am Main.
(i) Capital requirements
Investment companies must be established as either limited liability companies (GmbH) or stock corporations (AG). In practice, investment companies are predominantly limited liability companies. The statutory minimum paid in share capital is €730,000 (€2.5 million if the investment company is authorised to manage real estate funds or to provide safe custody services for investment units) plus 0.02 per cent for the amount by which the assets under management exceed €3 million (with a maximum of €10 million), but in no case less than 25 per cent of annual expenses.
(ii) Board structure
The investment company must have at least two managing directors who are qualified for investment business as well as sufficient personnel to conduct and control its business. Mere letterbox companies are not permitted. In addition, a supervisory board of at least three members must be established, even in the case of an investment company in the legal form of a limited liability company, for which generally a supervisory board is otherwise not required.
(iii) Outsourcing
The outsourcing of functions by an investment company is permissible if the requirements in both the Banking Act and the Investment Act are met. In particular, the outsourcing of portfolio management, ie the delegation of discretionary management to a third party manager, requires that the asset manager is licensed to perform asset management services and that the asset manager is subject to effective public supervision. It can generally be assumed that such effective public supervision exists in all member states of the Convention on the European Economic Area (EEA member states); in the past, BaFin has also accepted asset managers registered and supervised by the respective authorities in the United States, Switzerland and Japan.
Outsourcing of portfolio management to the depositary bank or to other parties whose interests may conflict with those of the unitholders is prohibited. The investment company does not require prior approval for outsourcing from BaFin but must notify BaFin of its intention to outsource certain functions in advance and must list in the prospectus (and simplified prospectus, if applicable) all functions which it has outsourced.
An investment company which manages at least one UCITS may use an EU passport to establish a branch office in, or to provide cross-border services into, another EEA member state after completion of a notification procedure. In the notification, the investment company must submit the name of the host member state, a programme of operations identifying the activities and services to be conducted in the host member state and, in the case of a branch office, some further information about the infrastructure of the branch, the head of the branch and an address in the host member state where documents may be obtained. In the case of the opening of a branch office, the home state regulator must transfer the notification to the host member state regulator within two months; the host state regulator must then notify the branch office within two months whether it may begin activities. When an investment company notifies BaFin of its intention to make use of the cross-border passport, BaFin must inform the host member state regulator within one month unless it has concerns regarding the appropriateness of the investment company’s organisational structure or its financial situation; the investment company must await the notification within this one-month-period.
Similarly, investment companies from other EEA member states may establish a branch office in, or provide cross-border services into, Germany. Although in principle these activities are subject to home state supervision, Germany reserves the right to impose certain regulatory requirements on the branch office or the provider of cross-border services. In the case of a branch office, these rules include certain reporting requirements pursuant to the Banking Act as well as compliance with the rules of conduct under the Securities Trading Act (Wertpapierhandelsgesetz). In the case of the provision of cross-border services, essentially the same requirements apply, with the exception of the reporting requirements.
In addition to the safekeeping of the assets belonging to the investment funds, the depositary bank’s main function is the control of the investment company. The investment company (branch or cross-border) passport does not obviate the need for a product passport, ie a UCITS passport for each individual investment fund. Consequently, if a German investment company wishes to distribute in another EEA member state a UCITS launched by it, it must also complete the notification procedure for the investment fund in such other EEA member state.
It is mandatory that the assets of investment funds are held in safekeeping by another credit institution, the depositary bank, which must be authorised to conduct deposit taking and custody business.
The Investment Act distinguishes between UCITS and the various categories of non-UCITS.
The rules in the Investment Act with regard to the content of the UCITS mirror the rules set out in the UCITS Directive.
UCITS now comprise what could previously be launched as a securities fund, a money market fund, a fund of funds or an index fund. Unlike the German Investment Company Act, the Investment Act permits the combination of these fund types and also permits a UCITS which invests primarily in derivatives.
In line with the UCITS Directive, derivatives may be employed not only for the purpose of hedging but also for investment purposes. Unlike in most other EEA member states, there is a specific ordinance on the employment of derivatives for UCITS, which was issued by BaFin and became effective on 13 February 2004. This ordinance gives the investment company a choice between two approaches for the measurement of market risk. Under the ‘qualified approach’ the investment company must use a specific risk measurement model (value at risk) to measure its market risk. Under the ‘simplified approach’ the market risk must be measured on the basis of a quantitative analysis. Whichever approach is chosen, the investment company must conduct stress tests on at least a monthly basis.
Non-UCITS funds may be organised as special funds or as public (mutual) funds.
The rules pertaining to real estate investment funds were significantly amended by the Fourth Act for the Promotion of Financial Markets, which came into force on 1 July 2002. The new Investment Act did therefore not contain many amendments for this fund type.
Real estate investment funds may invest not only in developed and undeveloped real estate, hereditary building rights and different forms of part ownership rights, but also in participations in real estate companies and usufructs (Nießbrauchrechte) in real estate which serves the purpose of performing public services. Investment by real estate investment funds in real property situated outside the EEA is permitted without limitation. The exposure to currencies other than the euro, however, is limited to 30 per cent.
The investment in real estate companies as defined in the Investment Act is geared to allow the use of the specific market expertise of local companies with respect to the acquisition and management of foreign real estate and to permit the use of potential tax advantages of direct investments (eg property acquisition tax). The holding of participations in real estate companies is limited to 49 per cent of the value of the investment fund. Minority holdings in real estate companies are permitted but limited to 20 per cent of the value of the investment fund.
Balanced Funds are investment funds which may invest not only in all the assets which an UCITS may invest but also up to 100 per cent of their net asset value into German real estate investment funds and up to 10 per cent of their net asset value in German or foreign (single) hedge funds.
Balanced funds can also be established as index funds which do not have to comply with the concentration rules applicable to UCITS.
Old age provision investment funds also qualify as balanced funds. As they can invest up to 30 per cent of their net asset value in real estate investments funds, they do not qualify for a UCITS passport.
Unlike all other types of investment funds, old age provision investment funds are not characterised by the eligible investments but by their investment objective (ie the provision of retirement savings). Old age provision investment funds therefore contain further special features, such as a prohibition against dividend distributions to unitholders.
The assets of an old age provision investment fund may only consist of securities, note loans, units in German real estate investment funds, real estate and participations in real estate companies.
The investment stock corporation with fixed capital was introduced as a closed-end securities fund in 1998. It carried none of the tax benefits of a mutual fund in contractual form. No investment stock corporation was ever launched until the new Investment Tax Act become effective in 2004 under which the taxation of shareholders in investment stock corporations is generally the same as for investors in investment funds in contractual form.
The Investment Act also introduced an open-ended investment stock corporation with variable capital, a vehicle hitherto unknown in German corporate law and similar to the Luxembourg SICAV and the UK or Irish OEIC. Unlike the investment stock corporation with fixed capital, an open-ended stock corporation does not have to be listed on a German stock exchange.
Investment stock corporations may also be organised as special funds.
The investment stock corporation must obtain a licence from BaFin and meet substantially the same requirements as an investment company, although the minimum initial capital is only €300,000. The registered seat and head office must be in Germany. The directors (no less than two) must pass the same fit and proper test as the managing directors of the investment companies. While the investment stock corporation can delegate certain of its functions under the outsourcing rules, it cannot delegate them to a ‘designated’ management company so that its management company effectively assumes all regulatory and civil liability for the management of its assets.
Both the open-ended and the closed-ended investment stock corporation are subject to the same investment restrictions as other investment funds. However, an investment stock corporation which adapts the UCITS investment restrictions still does not qualify for a UCITS passport. The investment stock corporation requires a licence to be issued by BaFin and is subject to various of the rules of the Banking Act applicable to financial services institutions, including shareholder transparency requirements, albeit in a modified form.
Hedge funds are characterised by the leverage they get from use of generally unlimited borrowing powers and the employment of derivatives and short selling. They must not invest in real estate or real estate companies. Eligible investments include securities, money market instruments, cash at bank, investments in other funds and derivatives (including commodity futures) but not direct investments in commodities other than precious metals. Investments in participations of unlisted companies are limited to 30 per cent of assets to avoid the creation of hedge funds which are substantially private equity funds. Investments in other hedge funds are limited to 50 per cent of assets to distinguish hedge funds from funds of hedge funds. German hedge funds are not subject to any other investment restrictions except for compliance with the principle of risk diversification, which is not specified any further in the Investment Act but implies the general prohibition of master-feeder fund structures.
Hedge funds can be established as investment funds in contractual form (in which case they must be managed by an investment company) or as investment stock corporations (with fixed or variable capital). In either case a custodian must be appointed with much the same responsibilities as the custodian of a UCITS, although individual responsibilities can be assumed by a comparable institution (prime broker). Hedge funds can be established as special funds or public mutual funds. In neither case, however, can they be publicly distributed and the distributors must always be either credit institutions or financial services institutions. There are no minimum investment criteria or other requirements for private investors in hedge funds.
11.8.2 Funds of hedge funds
Funds of hedge funds may only invest in German and foreign single hedge funds and may hold only up to 49 per cent of their net asset value in cash and money market instruments. The portfolio managers of a fund of hedge funds must, in addition to fitness for portfolio management in general, have sufficient experience in and practical knowledge of hedge fund investments. The fund of hedge funds must not use leverage or short sales and may employ derivatives only for the purpose of currency hedging. Investment in any single hedge fund is limited to 20 per cent of net asset value; however, a fund may acquire all the units of a target fund. No more than two funds held by a fund of hedge funds may be managed by the same fund manager or issued by the same issuer. The funds may thus all have the same issuer as long as no more than two of them have the same individual as a fund manager.
Funds of hedge funds may be established as special funds or as public mutual funds. In the latter case they may be publicly distributed (in this case, the distributor does not require a banking or financial services licence).
While up to the mid-nineties the distribution of (German and foreign) investment funds was effected predominantly through the branch networks of German banks, investment funds are increasingly marketed through other channels, such as fund supermarkets and fund shops, the internet as well as independent and tied agents who usually also distribute unit-linked life insurance policies and other financial products. Since their introduction in 1998, funds of funds have also proven to be effective distribution vehicles. The most interesting development, however, is the emergence of an open architecture under which many banks and investment companies are now willing to offer investors products of competitors.
Investment companies may, if their articles of association so provide, also distribute investment units.
Since 1 January 1998, independent intermediaries and structured distribution networks require a special licence under the Banking Act if they qualify as financial services institutions.
An exemption from the application of these rules applies, however, if the distributor (a) only markets unit certificates of German investment funds (except single hedge funds) or foreign investment funds which are admitted for public distribution, (b) only acts as intermediary between the investor and a credit institution supervised in Germany, a foreign investment company or a German branch of a foreign credit institution and (c) is not authorised to obtain title to or possession of investors’ money, unit certificates or units.
When distributing unit certificates of German investment funds, the distributor has to make available to the investor before the conclusion of the subscription and free of charge a sales prospectus together with the fund rules, the latest published report, and, if already published, a subsequent half-yearly report. Making available means the unsolicited offer to provide these documents, not their automatic handing over, which is only required in the case of the sale of hedge funds and funds of hedge funds, where subscriptions must also always be made in writing. A copy of the subscription form must be handed over or a contract note must be sent to the investor.
The implementation of the amended UCITS Directive heralded the introduction of a simplified prospectus, which is only permitted for UCITS. The content of the simplified prospectus is limited to specific information which must be worded and structured in a way that makes the key data of the relevant investment fund easily intelligible for an average investor. The Investment Act requires that the simplified prospectus be made available to subscribers before subscription, together with the full prospectus, and free of charge.
Foreign investment units are only eligible for public distribution after a notification procedure has been completed without BaFin having prohibited public distribution during a waiting period of two months (for UCITS) or three months (for non-UCITS) respectively following the filing of a complete notification. The Fourth Act for the Promotion of Financial Markets introduced the so-called amendment notification which is requested by BaFin if the original notification (or the last amendment notification) was incomplete. If this amendment notification is not submitted within six months after the submission of the original notification or the last amendment notification, the public distribution is deemed to be prohibited. BaFin does not grant express approval for public distribution in order to avoid giving the impression of supervision, or even a guarantee of the good standing, of the foreign investment company by BaFin. Furthermore, the competent supervisory authority of the foreign state must be willing to co-operate with BaFin in a satisfactory manner.
(i) Public distribution of foreign non-UCITS
Non-UCITS are all those foreign investment companies and investment funds which are not structured pursuant to the UCITS Directive and which thus have not received a UCITS certificate from a supervisory authority in a member state of the EEA. This also includes foreign investment funds which have been established, for instance, in Luxembourg or Ireland but which, due to their investment policy, cannot qualify as UCITS, such as funds of hedge funds.
For non-UCITS, the Investment Act contains minimum requirements as to the contents of both the fund rules/articles of association/trust deed and the sales prospectus. Foreign funds of hedge funds and closed-end funds must be structured in a manner comparable to their German counterparts. This means, for example, that foreign funds of hedge funds may not invest in target funds which themselves invest in other hedge funds.
In addition, non-UCITS must provide documents to BaFin which show that the company is subject to effective public supervision in its home state. Furthermore, the competent supervisory authority of the foreign state must be willing to co-operate with BaFin in a satisfactory manner.
(ii) Public distribution of foreign UCITS
UCITS are only subject to the supervision of their home state authorities. BaFin’s supervision is limited to the manner of public distribution in Germany. For this purpose, the current versions of the (simplified and full) sales prospectus, the fund rules (or the articles of association or trust deed, as the case may be) and the financial reports must be submitted to BaFin in the original, documents in foreign languages must be submitted together with a German translation. The Investment Act does not contain any specific requirements as to the contents of the fund rules (or the articles of association or trust deed); however, the sales prospectus must contain some specific Germany-related language. Furthermore, a guideline for the notification of foreign funds in Germany established by BaFin includes specific language for the declarations of the paying and information agent and for the explanation of the right of revocation which must be printed on the application form. The application form, however, does not have to be submitted to BaFin for review.
12. PUBLIC TAKEOVERS
12.1 Regulatory framework
The regulatory framework for takeovers is mainly set by the Act on Acquisition of Securities and Takeovers (Wertpapiererwerbs- und Übernahmegesetz, the ‘Takeover Act’ recently amended by the Law on the Implementation of the European Takeover Directive) and regulations issued under the Takeover Act by the Federal Ministry of Finance, the German Stock Corporation Act, the Securities Trading Act, the Law against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen), the Restructuring Act (Umwandlungsgesetz) and the Securities Prospectus Act and the Stock Exchange Act.
The main source of regulation is the Takeover Act. When determining whether or not the Takeover Act applies, it is the nature of the offeree or potential offeree company which is relevant, not the nature of the offeror. In principle, the Takeover Act applies to all offers for shares or other convertible securities that have been issued by a German stock corporation (AG) or a partnership limited by shares (KGaA), in each case having its registered office in Germany, provided that the securities for which the offer is made are listed on the Official or the Regulated Market of any of the German stock exchanges. For German companies having their securities listed on another regulated market in the EEA, which currently comprises the member states of the EU plus Iceland, Liechtenstein and Norway, only or for companies having their registered office in another member state of the EEA and their securities listed either on a German regulated market only or on a German regulated market or on another regulated market in the EEA, only certain provisions of the German Takeover Act apply.
Pursuant to the Takeover Act, the Federal Ministry of Finance has adopted a number of regulations, one of which contains important provisions governing the contents of an offer document, the consideration payable in a takeover bid and exemptions from the obligation to make a compulsory offer.
The Stock Corporation Act includes provisions relating to defences against hostile takeovers.
The Law against Restraints of Competition deals, among others, with the antitrust regime in Germany and the Restructuring Act contains the mechanics for a process of statutory merger between two German companies, which can be an alternative to a takeover offer. The Securities Prospectus Act and the Stock Exchange Act set out prospectus requirements when issuing new shares as consideration in a takeover.
12.2 Competent authorities
The BaFin is the authority responsible for supervising compliance with the Takeover Act. It has powers to investigate suspected breaches of the Takeover Act and impose fines.
12.3 Takeover bids
12.3.1 Types of takeover bid
(i) Voluntary bids
A bid may be either voluntary or compulsory. A voluntary bid may be either a ‘simple’ bid or a ‘takeover’ bid. It is a ‘simple’ bid if the acquisition of control is neither the consequence of nor the reason for the offer; that is, the person acquiring the shares merely intends to acquire a shareholding of less than 30 per cent or to consolidate an existing controlling shareholding (over 30 per cent). A voluntary bid is a ‘takeover’ bid if the acquisition of control (over 30 per cent) is intended.
(ii) Compulsory bids
A compulsory bid is required when a person acquires control of the target, that is, acquires, directly or indirectly, alone or in concert, shares carrying 30 per cent or more of the voting rights of the target company.
The BaFin may, on application, consider a waiver of the requirement to make a compulsory takeover offer, if (i) the shares are held in the trading portfolio of a financial institution; or (ii) the shares are acquired due to family succession or changes of corporate form/restructuring measures within a corporate group; or (iii) the presumption that a 30 per cent shareholding confers controlling power does not hold true, either because another person holds a larger stake in the target, or because high turnouts at the last three general meetings mean that the offeror’s shareholding cannot be expected to represent a simple majority at future votes, or (iv) the controlling shareholding is a result of a cancellation of voting rights; or (v) the transfer takes place only to secure a claim against the transferor (eg, under a share pledge); or (vi) the acquisition was part of a rescue restructuring of the target and the obligation to bid would be detrimental to the target and ultimately the outside shareholders as it would discourage or deter the rescuer.
Where exemptions from the obligation to make a compulsory bid are granted, they may be made subject to certain conditions. According to court decisions and the prevailing German legal literature any waiver granted by the BaFin may not be the subject of an appeal or subsequently challenged in court by outside shareholders.
The Act does not provide for any specific rules on takeovers after the acquisition of control by a concert party. Therefore, in theory, every concert party may be under a separate obligation to make a bid. However, since this would be confusing for shareholders, a single offer should be agreed between the concert parties and an exemption for the remaining parties should be sought.
Similarly, if the party acquiring the 30 per cent shareholding is a subsidiary of a parent company, the parent and the subsidiary and even any other subsidiary of the parent will technically be under an obligation to make the compulsory offer. It is unclear, in practice, which company will be required to make this bid and which will be exempted, which can pose difficult questions for acquisition vehicle structures.
(iii) Regulation of voluntary and compulsory bids
Voluntary takeover bids and compulsory bids are effectively governed by the same procedural rules. However, voluntary takeover bids can be made subject to any number of objective conditions, whereas compulsory takeover bids cannot be made subject to conditions, other than a condition relating to necessary regulatory clearances.
12.4 Procedural questions
12.4.1 Purchases of shares of the target in advance of a bid
Building a stake before making an offer is not forbidden in principle but subject to restrictions. Such purchases may also have an impact on the structure and pricing of the eventual offer.
(i) Securities Trading Act
There is no statutory defence which relates to the possession of information about the offeror’s own intention to make a bid. However, in the context of stakebuilding, the general view of the authorities and legal commentators is that purchases made by the offeror to facilitate a contemplated bid would not violate the provisions of the Securities Trading Act.
If the offeror gains further information during the takeover process (for example, through due diligence), it is uncertain whether it may continue to acquire shares on the basis of that information without violating the provisions of the Securities Trading Act. It may be able to do so only if it can be demonstrated that it is following a pre-existing intention to buy/make the offer. Neither the number of shares bought nor the price paid for them may be increased as a result of the due diligence findings.
In addition, the Securities Trading Act prohibits any person, other than the offeror itself, who knows that an offer is being contemplated from dealing in target company shares prior to the announcement of the offer. This means that a director, adviser or employee of an offeror who is aware of the imminent offer would not be allowed to deal in target shares.
(ii) The Takeover Act
Pursuant to the Takeover Act, purchases of shares in a target before making a bid may have an impact not only on the pricing of the eventual offer but also on the ability to make a ‘paper-only’ offer. The offeror will also have to be aware of the provisions relating to compulsory offers.
12.4.2 Purchases of shares of the target during a bid
(i) Offeror
An offeror may also purchase shares in the target once it has announced an offer, although it will obviously need to consider similar issues to those set out above. In addition, the effect of buying shares after the announcement of a bid on the consideration in the offer will be different.
There are no restrictions on sales of target shares by an offeror during an offer, except for insider dealing/market manipulation regulations.
(ii) Target
Acquisitions/sales of its own shares by the target during an offer may be restricted.
12.4.3 Disclosure obligations on purchases of shares in target
(i) Securities Trading Act
The Securities Trading Act provides that any increase or decrease in the percentage of a person’s direct or indirect shareholding in a German company either to, above or below thresholds of three per cent, ten per cent, 15 per cent, 20 per cent, 25 per cent, 30 per cent, 50 per cent and 75 per cent of the company’s total voting rights must be notified to the BaFin and the target company, regardless of whether a takeover offer is contemplated.
(ii) The Takeover Act
Under the Takeover Act, notification of the acquisition of ‘control’ must be published as soon as a person reaches the threshold of 30 per cent of voting rights. This provision does not apply, however, where the threshold is reached in consequence of a public takeover bid.
In addition, during the offer period, the offeror must publish his direct or imputed interests (for instance, of any subsidiaries or any persons acting in concert with it) on a weekly basis and, during the last week of the offer period, on a daily basis. Immediately after the end of the offer period, an additional disclosure of the final outcome of the offer must be made. The information must be published in at least one supra-regional official stock exchange gazette and on the internet. The information (together with proof of publication) must also be communicated to the BaFin.
12.5 Due diligence in advance of a takeover bid
Pre-takeover due diligence in Germany is usually limited in scope – more limited than due diligence on a private acquisition.
In the case of a hostile offer, the due diligence exercise will normally be limited to a review of publicly available information.
In the case of a recommended bid, the due diligence may be more extensive, although the target board will have to decide carefully how much information it is appropriate to disclose, taking into account its fiduciary duties. More sensitive information may be withheld until the offeror has proved its interest in the target.
German law is silent as to whether information given to one offeror in a due diligence exercise must also be passed on to another offeror. Previously the consensus was that no such obligation existed, but the issue is now debated. Consequently, the target should be prepared to disclose information revealed to one party to other potential offerors.
Where the offeror is offering its own shares as consideration, the target may well also insist in carrying out due diligence on the offeror itself.
12.6 Price and consideration offered
12.6.1 Price
In general, an offeror making a voluntary takeover bid, or a compulsory bid, must always offer a minimum price, which needs to be ‘adequate’. However, if the offeror is making a voluntary ‘simple’ bid (ie one not intended to acquire control), it is free to offer whatever price it wishes.
The offer price for a voluntary takeover or compulsory bid is generally ‘adequate’ if it is not less than the higher of (i) the highest price paid by the offeror for shares in the target during the six months before the publication of the offer document; and (ii) the average market price (weighted in relation to turnover) of the target shares during the three months before publication of the decision to make an offer.
If the shares are not traded on a German market, but on a market in another EEA state, the offer price must also not be less than the unweighted average stock exchange price at the stock exchange with the highest turnover during the three month period.
Where a company has more than one class of share capital, the consideration must be determined individually on the above basis for each class. Consequently, the price offered for each class is likely to be different.
If the offeror chooses to extend the offer to securities other than shares (for example, convertible bonds in the target) and if those securities are listed securities, the same rules also apply to the price offered for such securities.
In addition to the offer consideration, an obligation to make subsequent payments to shareholders who accept the offer will arise if the offeror pays a higher price than the offer price in buying outstanding minority shares within a year of completion of the bid.
12.6.2 Consideration
The types of consideration that may generally be offered comprise cash (in euros only) or shares (either ordinary or preference shares) or a combination of cash and shares. If shares are offered, and there is no cash alternative available, they must be traded on a liquid market within the EEA. If the offeror provides a cash alternative, it is also free to offer shares which are listed outside the EEA, so long as they are liquid. (These restrictions do not apply to simple offers (including partial offers)).
The offeror must, in any event, also provide a cash offer (or alternative) if the offeror has acquired for cash during the six months before publication of the decision to make an offer and prior to the expiration of the acceptance period, shares which represent five per cent or more of the target company’s voting rights.
12.7 Conditions of an offer
12.7.1 Level of acceptance
A voluntary offer may be made subject to a condition that it will lapse unless the offeror receives a certain level of acceptances. Acceptance level conditions are normally set at 50 per cent or 75 per cent of the voting rights of the target. An unusually high acceptance level condition might, depending on the circumstances (in particular, the initial holding of the offeror), be considered inappropriate. This is because, in effect, it could give the offeror a free option to withdraw the bid. The BaFin may, therefore, prohibit an offer containing such a condition.
In practice, the offeror may decide to waive the acceptance condition, or lower the specified threshold once it has reached a sufficient percentage to give it control, since most shareholders will not continue to resist an offer once it becomes obvious that it will complete. There is no minimum acceptance level that must be achieved by the offeror.
However, if the offeror waives or lowers the acceptance threshold during the last two weeks of the offer, it must keep the offer open for a further two weeks, and it cannot lower the threshold again during that extended period.
12.7.2 Other conditions
The Act does not make provision for pre-conditions to an offer (ie conditions which, once satisfied, will cause an offer to be made). The Act instead provides that, once a decision to make an offer has been reached, the offer must be submitted within a defined period of time.
The completion of the offer may, however, be subject to certain conditions, provided that they are not ‘subjective’. Subjective conditions are those which can be fulfilled exclusively by the offeror, its concert parties, their subsidiary undertakings or their advisers.
Compulsory offers may not be conditional on shareholder resolutions or acceptance levels. However, it is generally accepted that they can be conditional on obtaining merger clearance.
12.7.3 Most common types of pre-conditions and conditions
As noted above, the concept of pre-conditions is not really provided for under German law. Common conditions attached to a voluntary bid include: (i) any resolutions necessary to implement the offer being passed by the shareholders of the offeror (and registered on the commercial register); (ii) where the consideration involves the issue of new listed securities in the offeror, the admission of those shares to listing on an organised market; (iii) all necessary competition or antitrust approvals or clearances having been obtained; and (iv) the absence of specified defensive measures being implemented by the target (for instance, the sale of its most valuable assets).
Offerors may also seek to include some kind of objective force majeure or ‘material adverse change’ condition. However, such a condition may, depending on the drafting, be viewed as subjective by the BaFin.
If any ‘unusual’ conditions are being considered, it is advisable to consult the BaFin in advance.
12.8 Timetable
12.8.1 General
| Publication day | Offer document must be published on the internet and in the official |
| (no later than submission | stock exchange gazette as soon as approved by the BaFin. |
| day + ten working days) | Offer document may be approved earlier by the BaFin but is |
| deemed approved if the BaFin does not comment within | |
| ten working days. | |
| Transmission of proof of publication of offer document to the BaFin. | |
| Transmission of offer document to target management board. | |
| Promptly following | Management board notification to works council. |
| publication day | |
| Promptly following publication | Publication of target management/supervisory boards' opinions on |
| day (normally within two | the offer and opinion of works council. |
| weeks) | (The opinions must also be reissued after any amendment to the |
| offer document). | |
| Weekly intervals after | Announcement of level of acceptances (minus, if applicable, any |
| publication day | withdrawals). |
| Publication day + four weeks | First possible closing date for acceptance period. |
| Last week of | Daily announcement of level of acceptances (minus, if applicable, |
| acceptance period | any withdrawals). |
| Publication day + ten weeks | Last possible closing date for acceptance period (unless offer |
| increased in last two weeks). | |
| Last possible date for increase of the offer. | |
| Publication day + 12 weeks | Last possible date for acceptance period (if offer increased in last |
| two weeks of original acceptance period). | |
| Offer wholly unconditional | Acceptance period automatically extended for extra two weeks if |
| + two weeks | the offer is unconditional by the end of the original acceptance |
| period. |
12.8.2 Variations of the timetable
Where a competing offer has been announced, both offers will normally be bound by the timetable established by the publication of the competing offer document, and the acceptance period for the first offeror will be extended accordingly.
Where it is not possible for an offeror to act within the timetable due to requirements relating to cross-border offers or the need to hold an offeror shareholder meeting (for instance, to increase share capital), the BaFin may extend the four week period for submission of the offer document, up to a maximum of a further four weeks.
Where a shareholders’ meeting of the target is called in connection with the offer, the acceptance period is automatically extended to ten weeks from the publication of the offer document, provided that the notice of meeting is issued after the publication of the offer document and before the end of the original acceptance period.
Where an increase in the offer is published within the last two weeks of the acceptance period, the acceptance period is automatically extended by a further two weeks. However, no further increases in the offer are allowed during the extended acceptance period.
12.9 Main documents and offer documents
12.9.1 General overview
There are a number of key documents involved in a public takeover bid. Although in practice, depending on whether the bid is hostile or recommended, these can vary significantly in number, style and content, the main documentation for recommended and hostile offers does not differ.
Set out below is a pro forma illustrating the main relevant public documents:
In addition, there will be a number of press announcements; for example, weekly/daily announcements of acceptance levels. In a hostile bid, there are also likely to be further documents sent to target shareholders by both the offeror and target at regular intervals over the offer period, setting out their arguments.
12.9.2 Review of the documents by regulators
The offer document must be approved by the BaFin before publication to ensure that it complies with the requirements. If the BaFin decides that the offer document does not comply, the offeror must amend the draft submitted.
If the offer document is not approved, the BaFin disallows the bid, in which case the offeror is barred from relaunching an offer for the same target for 12 months. Any share acquisitions and transfers effected as part of a disallowed bid are void.
12.10Contents of the documents
12.10.1 Offer document
The offer document must be complete and correct. It must also contain all information necessary to allow a reasonably informed decision to be made about the offer, and be written in German in a style that is easy to read. There are many specific content requirements, including details of the offer, conditions of the offer and the offeror’s plans for the target company. In the case of a recommended offer, the offer document may refer to the fact that the target management board has agreed to support the offer. If the consideration for the shares to be acquired consists of securities the information required with respect to these securities has to be the same as for public offerings of these securities, eg the EC Prospectus Regulation has to be complied with.
12.10.2 Other
There are no specific content requirements for any other document to be published during an offer (including the opinion of the target board(s)), except for the listing prospectus which must comply with the relevant rules if no exception applies.
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