The Initial Public Offerings Law Review: Germany
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 markable shift in sentiment in favour of IPOs, driven mainly by the beneficial equity capital markets conditions and outlook. This has resulted in a significant increase in IPOs in 2021 compared to the previous year, and the pipeline for German IPOs for the remainder of 2021 and 2022 is very strong.
The IPOs to date in 2021 have shown a good mix in terms of both size and sector, including some of the largest European IPOs, such as the carve-out IPO and Frankfurt listing of Vodafone's European towers business (Vantage Towers) and the IPO and Frankfurt listing of AUTO1 (an online platform for the purchase and sale of used cars). Other German IPOs to date in 2021 include the IPOs and Frankfurt listings of SUSE (a provider of open-source software solutions), SYNLAB (a clinical laboratory and medical diagnostics services company), ABOUT YOU (an online fashion platform) and Bike24 (an e-commerce platform for premium bicycles). It is particularly encouraging to see a large number of IPOs and IPO candidates in the technology and e-commerce sectors, as well as among family and private-equity owned companies.
In the first half of 2021, the wave of IPOs of special-purpose acquisition companies (SPACs) arrived in Germany with the successful launch of SPAC listings on the Frankfurt Stock Exchange (FSE), including Lakestar SPAC I SE, which was the first German SPAC IPO in a long time, the first tech-focused SPAC in Europe and the first to fully replicate all relevant features of the US SPAC structure.
Given the large number of German SPAC IPOs that are currently in the preparatory stages, this trend is expected to continue in the second half of 2021 and in 2022, depending primarily on continuing investor appetite for this type of product, the availability of investors in the market for private investments in public equity and whether the handful of SPACs listed so far will be successful in finding suitable targets for a successful 'de-SPAC' transaction (i.e., the business combination between a listed SPAC and a privately held target through which the target becomes public).
The large number of US-listed SPACs looking for targets in Germany and the increasing number of SPACs listed in Frankfurt and other European exchanges will also be a key driver for IPOs by German companies in the near term, albeit not in the traditional format but through a business combination with a listed SPAC. Recent examples include the listing of SIGNA Sports United on the New York Stock Exchange (NYSE) via a SPAC merger.
i 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 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 all SPACs listed on the FSE to date in 2021 have opted 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 (SME) seeking a primary listing outside the 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, such as the recently announced NYSE listing of SIGNA Sports United with an NYSE-listed SPAC. Given the large number of US-listed SPACs looking for targets in Germany, it is likely that the number of German companies listing in the United States as a result of a merger with a SPAC will increase significantly.
It will also be interesting to see whether the trend of German biopharmaceutical companies opting for US listings rather than a listing in Frankfurt or another European exchange will continue.
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:
- a valid and approved prospectus pursuant to the EU Prospectus Regulation (the Prospectus Regulation);
- the existence of an issuer and reporting history of at least three years;
- probable total value of the shares floated of at least €1.25 million;
- a total of at least 10,000 shares to be admitted to trading; and
- a free float of at least 25 per cent of the total issue.
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. 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 (Section 3 (2) of the Stock Exchange Listing Regulation).
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 on the basis of 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.
In addition to the approved prospectus, the following documents must be provided to the FSE as part of the application process:
- commercial register entry;
- articles of incorporation;
- resolutions of the management and supervisory boards;
- certificate of incorporation;
- a copy of the global certificate; and
- the annual audited financial statements of the issuer for the past three years.
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. 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.
The Prospectus Regulation and related EU rules and 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.
The offering process
The process and overall timetable for an IPO with a listing on the FSE is broadly similar to other EU Member States and listing venues; however, there are local requirements and market practices that are different from other jurisdictions, and it is important to be mindful of them before embarking on a German IPO process.
i General overview of the IPO process
A typical German IPO process starts with the appointment of (1) one or more underwriters as (joint) global coordinators for the IPO and (2) the issuer's and underwriters' legal counsel, as well the issuer's auditors. In particular, on larger IPOs the issuer's legal counsel is already on board before underwriters are mandated.
It has become increasingly common for German issuers or their shareholders to also appoint an IPO adviser for the IPO, whose main tasks are to provide independent advice to the issuer and its shareholders – in particular in relation to valuation, equity story and investor feedback – and to help manage the whole IPO process. Issuers with a complex financial history, which could result in the need to include pro forma financial information, carve out financials or combined financial statements in the prospectus typically also appoint accounting advisers to help them prepare those financial statements and financial information.
Once the joint global coordinators and advisers are appointed, the timeline for a German IPO process is driven by the targeted window for the launch of the IPO. Once the targeted IPO window has been determined, the entire process is then typically organised around the following key milestones.
Early-look meetings with investors
It has become market practice for IPO candidates to meet selected investors early in the IPO process to introduce the business and its management and provide potential investors with an opportunity to ask questions about the business. The meetings take place on the basis of a short presentation: the early-look presentation. In the context of IPOs or spin-offs of subsidiaries by listed companies, it is important to consider whether the early-look meetings constitute 'market sounding' for the purpose of the European Market Abuse Regulation (MAR).
The analyst presentation is a presentation by the senior management of the issuer to the research analysts of all members of the underwriting syndicate, who will then write independent pre-deal research, which is distributed once the intention to float (ITF) announcement has been published by the issuer. The preparation of the syndicate's research reports is governed by research guidelines, which are prepared by the underwriters' legal counsel.
On a typical German IPO where neither the issuer nor its parent has any listed securities, the analyst presentation is conducted as a private presentation to the analysts of the underwriting syndicate, without publication of the analyst presentation.
If, however, the parent of the IPO candidate is already listed or has listed debt securities of which the price could be affected by the planned IPO, then the analyst presentation is typically conducted publicly, for example in the form of a capital markets day.
In a typical process, the analyst presentation takes place at least six weeks before the ITF announcement and is an extended version of the early-look presentation.
This announcement is typically the first official announcement by the issuer regarding the IPO plans and is preceded by a go or no-go decision by the issuer or shareholders. Although there is no hard and fast rule preventing issuers from discontinuing the IPO process once this announcement has been published, it is paramount to only publish it if there is concrete intention to launch the IPO in short order as stopping the process thereafter is generally viewed as detrimental to an IPO process.
The announcement triggers the distribution of research reports by the syndicate analysts and the pre-deal investor education phase of the IPO, which typically refers to the period between the distribution of research reports and the publication of the prospectus.
Approval and publication of the prospectus
On IPOs with a public offer in Germany (which represents the large majority of German IPOs), the prospectus must be approved by the competent regulator (for issuers incorporated in Germany, BaFin) and published by the issuer before book-building can commence. As the final offer price will only be set at the end of the book-building, the prospectus includes an offer price range.
On German IPOs, the underwriting agreement between the issuer, the selling shareholders (if relevant) and the underwriters is signed before the publication of the prospectus and the start of the book-building period, subject to the execution of a pricing supplement once the price is agreed at the end of the book-building period. Unlike in the United Kingdom, there is, therefore, no requirement on German IPOs to have a registration statement published before the publication of syndicate pre-deal research to allow unconnected (non-syndicate) analysts the opportunity to write pre-deal research.
Roadshow, book-building, pricing and settlement
On a German IPO with a public offer, the offer period must last at least six full working days before the IPO can be priced. While historically book-building periods on German IPOs were longer than the statutory minimum of six working days, there has been a trend towards shorter book-building periods since the start of the covid-19 pandemic as a result of most of the roadshow meetings with investors taking place virtually rather than in person.
Assuming that the final offer price is within the price range included in the approved prospectus, it is communicated to the market via an ad hoc announcement without the need for a prospectus supplement.
Issuers should factor in nine to 11 weeks for the prospectus review and approval process by BaFin and at least three rounds of comments. Based on current practice, BaFin sends comments on the first, second and third submissions after 20, 10 and 10 working days, respectively. As long as the timeline has been pre-aligned with BaFin, it is possible to rely on BaFin providing comments on the pre-aligned dates; however, the length of the turnaround time between receiving comments from BaFin and the next submission will determine the ultimate time required until approval of the prospectus.
It is also advisable to leave some leeway at the back end of the review process to cater for situations where questions come up that require time to resolve or changes to the prospectus. It is also important to bear in mind that the draft prospectus must be as complete as possible in the first submission and, therefore, must include final historical annual financial statements, including signed audit reports, unless agreed otherwise with BaFin. The final interim financial statements must typically be included in the second submission.
As mentioned above, the prospectus review process, the scope of the financial statements included in the prospectus and any other topic that could result in non-compliance with the requirements of the EU Prospectus Regulation should be pre-aligned with BaFin at the beginning of the process. As this pre-alignment process can take time, it is advisable to have these discussions as early as possible, in particular if there are complex questions relating to financial disclosure or accounting.
The typical IPO process takes approximately six months; however, more time may be necessary if, for example, significant pre-IPO corporate re-organisations are necessary or there are other IPO readiness topics that need a longer lead time. For example, if the legal form of the issuer needs to be changed ahead of the IPO, it is important for this to be reflected in the key steps in the timeline as the change of legal form must be completed ahead of the approval of the prospectus by BaFin.
Similarly, corporate governance topics should be discussed early in the process to ensure that there is sufficient time to implement the desired structure and, if necessary, identify the right independent board members. The timeline for the preparation of the financial statements required for the prospectus should be discussed with the accounting advisers (if appointed) and the auditors as the financial statements are a key gating item for the entire process; final financial information must be provided to the analysts sufficiently ahead of the finalisation of research, and the final annual and interim financial statements must be included in prospectus drafts submitted to the regulator as part of the prospectus approval process.
It is also important to bear in mind that previously published or intended financial guidance could constitute a profit forecast within the meaning of the Prospectus Regulation, which must be reflected in the timeline, given the requirements relating to profit forecasts both in terms of content and review by the auditors.
In addition, if no reliable third-party industry information is available, it should be discussed early in the process whether a third party should be engaged to prepare data that can be used for the analyst presentation and the prospectus. As the process of collecting documents for the data room as part of the legal due diligence process also takes significant time, it is advisable to start with this process as early as possible. For this purpose, legal counsel prepare a documentary due diligence request list, and the issuer typically appoints an external virtual data room provider.
Although German IPO processes and the documentation are largely in line with international market practice, there are some differences to other jurisdictions. For example, while at least one of the underwriters must submit the listing application jointly with the issuer and act as listing agent, and the underwriters take on statutory responsibility for the prospectus, there is no formal sponsor regime for listings on the FSE.
For reference, the sponsor of an IPO with a Premium listing on the London Stock Exchange is required to make certain declarations to the UK Listing Authority – including in relation to the sufficiency of the company's working capital, the adequacy of its internal controls and financial reporting systems, and its ability to comply with the UK listing rules and disclosure rules; thus, an enhanced due diligence exercise (including the preparation of reports by accountants) is conducted to provide the sponsor with comfort in making these declarations.
Although there is no formal sponsor regime, and accountants' reports (other than the audit report included in the prospectus) are not customary on German IPOs, it is absolutely standard and necessary on German IPOs to conduct a comprehensive international style due diligence exercise. German market practice in terms of IPO due diligence follows the US model and, therefore, concentrates on documentary due diligence (review of documents in a data room prepared on the basis of a due diligence request list), management due diligence (discussions with management based on questionnaires), financial and business plan due diligence and auditor due diligence.
The key objective of the due diligence exercise is to avoid liability in connection with the IPO by ensuring the accuracy and completeness of the prospectus and, from the underwriters' perspective, establishing the due diligence defence. It is also the basis for the legal counsel to issue the customary legal opinions, which on IPOs by German companies typically comprise German and US legal opinions as well as US and German disclosure letters regarding the content of the prospectus. In addition, the auditors issue US and German comfort letters.
There has also been a trend towards allowing investors to participate in the offering as cornerstone investors who commit, on the basis of a cornerstone investment agreement, to participate in the IPO within the price range up to a certain maximum amount. Those cornerstone investments are typically entered into ahead of the execution of the underwriting agreement and approval of the prospectus, and they are disclosed in the prospectus and typically in the launch press release.
Cornerstone investors typically get access to drafts of certain prospectus sections ahead of the prospectus approval on the basis of a non-disclosure agreement. From a legal perspective, it is important to manage the information provided in such a way that there is no differential disclosure when compared with the other IPO investors.
ii Pitfalls and considerations
As the period required by BaFin for the review of the draft prospectuses has recently increased, it has become more important to allow for sufficient time for the prospectus review process. It is particularly important to address any disclosure items that deviate from the norm, such as complex financial history topics, with BaFin as part of the pre-alignment process early in the process to avoid negative surprises later in the process.
In case of secondary IPOs of issuers incorporated in Germany where shareholders are selling shares as part of the IPO, it is also important to consider whether German corporate law requires the selling shareholders to indemnify the issuer for any damages incurred by the issuer as a result of the IPO and to reimburse the issuer for costs incurred by the issuer in connection with the IPO.
Public offering of securities insurance (POSI) is also more common on German IPOs than in other European jurisdictions, and brokers should be appointed early in the process to allow for sufficient time to find the appropriate commercial solution and negotiate the POSI terms.
On a more general note, the amount of effort required from the issuer's management should not be underestimated, in particular in terms of drafting the analyst presentation and the prospectus. To allow management to continue to focus on its business, it is advisable to have a dedicated core team within the issuer's organisation to not only help drive the process together with the joint global coordinators, the IPO adviser (if appointed) and the issuer's external legal advisers but also to coordinate internally the input required from the issuer's management.
iii Considerations for foreign issuers
The environment for listings by foreign issuers on the FSE is generally very supportive. There are, however, a few important questions that should be considered before starting the IPO process, including determination of the competent regulator for the approval of the prospectus.
For issuers incorporated in another EU Member State, the regulator of the issuer's home Member State will be responsible for the approval of the prospectus, which will then be passported pursuant to the rules of the Prospectus Regulation to BaFin for purpose of the listing on the FSE.
For issuers incorporated outside the European Union that are looking to list on the FSE, BaFin would typically be the competent regulator for the prospectus approval; however, it must be confirmed that the issuer has not previously selected another EU Member State as its home Member State for the purpose of the Prospectus Regulation.
In addition, the financial statements must be prepared under International Financial Reporting Standards as adopted by the European Union or equivalent accounting standards and audited by auditors recognised under the Prospectus Regulation. The rules regarding equivalence and recognition of auditors are relatively broad; however, it is advisable to determine this early in the process and, if necessary, align views with the competent regulator. It is also important to check that the securities are eligible for listing and clearing through Clearstream.
Following the IPO and listing on the FSE, companies must comply with a number of post-admission reporting and disclosure requirements, pursuant to applicable EU and German law. Compliance with those requirements is monitored by BaFin.
Issuers with a Prime Standard listing are subject to obligations that go beyond the minimum requirements under applicable EU and German law, in particular the obligation to publish quarterly statements.
The key post-admission reporting and disclosure requirements are as follows.
i Financial reports and statements
Annual financial report and statements must be published within four months after the expiration of the reporting period. Half-yearly financial report and financial statements must be published within three months of the expiration of the reporting period. Companies with a Prime Standard listing must also submit a quarterly statement within two months of the expiration of the reporting period.
ii Ad hoc disclosure regime under MAR
Pursuant to article 17 of the MAR, companies must inform the public as soon as possible of inside information that directly concerns the company. Inside information is information of a precise nature, which has not been made public, that relates, directly or indirectly, to the company or to one or more financial instruments and that, if it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of a related derivative financial instrument (i.e., a reasonable investor would be likely to use the information as part of an investment decision).
Inside information must generally be disclosed without delay. According to current BaFin practice, this requires the company to take the necessary measures to ensure disclosure on short notice (i.e., typically within one or two hours, depending on the complexity). Companies may, however, take reasonable time to assess the situation and, as necessary, consult with external counsel.
Pursuant to article 17(4) of the MAR, companies may delay public disclosure of inside information, provided that all of the following conditions are met:
- the immediate disclosure is likely to prejudice the legitimate interests of the company, and those interests outweigh the interest of the capital markets for immediate disclosure;
- the delay of disclosure is not likely to mislead the public; and
- the company is able to ensure the confidentiality of the information.
When a company has delayed the disclosure of inside information, it must inform BaFin, together with a written explanation of how the conditions for delaying inside information were met.
iii Insider lists
Companies must draw up an insider list of all persons who have access to inside information and who are working for them under a contract or employment, or who otherwise perform tasks through which they have access to inside information, such as advisers, accountants or credit agencies.
iv Managers' transactions
Companies must ensure that transactions in shares, debt instruments, derivatives or other financial instruments of or linked to the company by persons discharging managerial responsibilities (PDMRs) within the company and persons closely associated with them (PCAs), of which the company has been notified by the respective PDMRs or PCAs (managers' transactions), are made public promptly. PDMRs and PCAs must notify the company of any such transaction once a total amount of €5,000 has been reached or exceeded within one calendar year.
Subject to certain exceptions, PDMRs must not conduct any transactions on their own account or for the account of a third party, directly or indirectly, relating to the company's securities during a closed period of 30 calendar days before the announcement of a financial report (i.e., the annual financial report or half-yearly report).
v Notification and publication of voting rights
Notification of voting rights by shareholders and publication thereof by the issuer if the following thresholds are crossed: 3, 5, 10, 15, 20, 25, 30, 50 and 75 per cent of voting rights.
vi Other requirements
Issuers with a Prime Standard listing must also publish their documents in German and English and must also hold an analyst conference or information event for analysts and investors at least once a year.
Certain additional requirements apply to issuers incorporated in Germany, including an annual declaration regarding compliance with the recommendations of the Corporate Governance Code or an explanation of why it does not comply, as well as rules regarding board composition.
Outlook and conclusion
The FSE is a very attractive listing venue for IPOs for both domestic and international issuers. It benefits from a reliable regulatory framework, which is based on EU law and includes relatively limited additional requirements that go beyond requirements under EU law. Although the prospectus approval process takes a significant amount of time, BaFin is a very professional and responsive regulator, which helps in terms of certainty of execution.
The outlook for the German IPO market is very positive, and the pipeline for the remainder of 2021 and 2022 is very strong, with a great mix of deals across the board in terms of size and sector. It will be interesting to see how the SPAC IPO market will develop. Although there are signs of this market slowing down, a significant number of German targets are expected to list in the near future via a SPAC merger, either in Frankfurt or elsewhere.
1 Marco Georg Carbonare is a partner at Linklaters LLP.