The Initial Public Offerings Law Review: Germany
In line with global equity markets, activity in the German market for initial public offerings (IPOs) is particularly strong when financial markets show a stable positive trend. High market volatility, mainly driven by the global financial crisis in 2008 and political developments since mid-2016, has emphasised the cyclical nature of the IPO market. Nevertheless, since 2008 the regulated market in Germany saw over 114 IPOs.2
In 2019, trade tensions, uncertainty regarding Brexit, a shifting domestic political landscape and a lack of investor confidence have resulted in a weak German IPO market. In 2019, the number of listings on Prime Standard (see Section II.i) more than halved from 16 in 2018 to four.3 The proceeds from IPOs hosted by the Frankfurt Stock Exchange (FSE) totalled approximately €4 billion. Investors' appetite for companies focusing on one industry or product (pure play) continues to be an important driver of sizeable IPOs in the German market, which was prominently underlined by the IPO of TRATON. With the announced spin-off of central parts of Siemens' energy business, which is expected to complete in September 2020, this trend is set to continue and could be further increased by activist shareholders pushing for the breakup of conglomerates into pure play investment opportunities.
Recent years have shown that the IPOs of certain issuers can successfully be completed without significant participation of retail investors. Accordingly, in some instances issuers refrained from public offers and instead relied entirely on private placements of their shares with qualified investors. Following the successful completion of these private placements, the shares are admitted to trading. Although this approach was originally favoured for IPOs of small and medium-sized enterprises (SMEs), the Evonik IPO in 2013 demonstrated the strategic use of private placements for large companies and initiated a run of recent examples, including the IPOs of Hella, Schaeffler and Jost. Private placements are primarily preferred because of greater flexibility of the IPO process, but entail a different liability regime.
The regulatory framework governing the public offer or admission to trading of equity securities in Germany is almost completely directly regulated via applicable EU regulations, which require no implementation into German law for their full effect. EU legislation has achieved a high level of regulatory harmonisation with respect to the listing and trading of securities in the European Union. The EU regulatory framework conforms to global standards and shares regulatory similarities with other prominent global markets.
i Main stock exchanges
Although a number of major German cities host stock exchanges (e.g., Berlin, Düsseldorf, Hamburg, Hannover, Munich and Stuttgart), the only significant German stock exchange is the FSE. It is operated by Deutsche Börse AG, a listed company offering numerous trading platforms, including specialist floor trading and, most importantly, the electronic, secondary reference market Xetra. With around 750 different share securities, more than 90 per cent of all trading in shares at all German exchanges and almost 170 participants from 16 countries, Xetra is a leading trading centre globally, boasting some of the highest trading volumes in the world.4 In January 2020, the order book turnover at Xetra stood at €123.2 billion.5
Trading of securities on the FSE can take place on two markets: the EU-regulated market (comprising the segments Prime Standard and General Standard) and the exchange-regulated market (the Open Market) (comprising the segments the Quotation Board and Scale), each with differing transparency levels and listing requirements. As at 1 January 2020, the shares of more than 11,000 companies were traded on the markets of the FSE. Approximately 450 of these were listed on the EU-regulated market: 305 on Prime Standard and 147 on General Standard. The majority of the shares were listed on the Open Market, of which 49 are listed in the new SME segment, Scale.6
The markets of the FSE are differentiated by the level of transparency they demand from issuers; as a general rule, fewer transparency requirements mean lower listing costs. Prime Standard involves the most thorough transparency requirements of any German market, some of which go beyond those mandatory under EU and German law. It is therefore suited to large corporate entities offering a higher quality of investment, capable of complying with reporting obligations expected from a discerning international market. These post-admission obligations include the holding of annual analysts meetings and quarterly financial reports in addition to the transparency requirements under EU and German legislation, such as semi-annual and annual financial reports adhering to the German Securities Trading Act (WpHG) and the publication of inside information pursuant to the ad hoc requirements of the EU Market Abuse Regulation (MAR).7 Furthermore, it is only upon listing in Prime Standard that companies may be included in the indices DAX, MDAX, TecDAX and SDAX. Prime Standard resembles the Premium segment of the Main Market at the London Stock Exchange (LSE).
General Standard, in comparison, requires disclosure on the basis of mandatory (minimum) EU or German statutory regulation, and therefore caters to medium-sized issuers more concerned with a cost-efficient listing entailing fewer post-admission obligations. The reduction in required transparency makes this market segment more fitting for companies aiming at the domestic capital market.
As a reaction to possible market manipulation, Deutsche Börse AG, together with the Federal Financial Supervisory Authority (BaFin)8 and market participants, restructured the Open Market in 2012, leading to the replacement of the former Entry Standard with Scale on 1 March 2017.9 The Open Market of the FSE roughly corresponds to the Alternative Investment Market operated by the LSE.
As listing requirements and post-listing transparency obligations are less comprehensive and laborious than on the EU-regulated market, the Open Market enhances access for SMEs and growth companies for which a listing may otherwise be too burdensome.10 Scale enhances transparency requirements compared with those of the low-cost Quotation Board, setting more conditions upon a listing to strike a balance between costs and rewards of a listing of an SME.11
The following preconditions must be met for admission to trading of securities on Scale or the Quotation Board: there must be no prior admission to trading on a regulated market of the FSE, the securities must have an International Securities Identification Number and be freely fungible, proper performance of the transactions must be guaranteed and no official prohibitions may prevent stock exchange trading.12
For admission to trading of securities on the Quotation Board, among other requirements, they must be admitted to trading on a stock exchange recognised by Deutsche Börse AG13 and the request to trade must be made by a specialist.14 As there is no obligation that the issuer of the securities is involved in the admission to trading, unlike the regulated markets of the FSE, the trading of large numbers of securities of foreign issuers takes place on the Quotation Board.
Of the companies listed on the segments of the EU-regulated market of the FSE, issuers based in Germany make up the overwhelming majority, while foreign companies comprise less than 10 per cent of the companies admitted on Prime Standard.15
The inherent benefits of the FSE's size and liquidity mean that a dual listing on another stock exchange in conjunction with the listing on the FSE is seldom pursued by German issuers.
ii Overview of listing requirements
Securities can either be listed on the EU-regulated market or on the exchange-regulated market. The specific market on which securities are listed determines the listing requirements of the relevant German stock exchange. Issuers seeking admission to the EU-regulated market will have to adhere to stringent, harmonised EU securities legislation, being either directly applicable or adopted by Germany. Those issuers seeking admission to the exchange-regulated market will be subject to the applicable regulatory provisions of the individual stock exchange to which they will be admitted. However, certain post-listing obligations are stipulated by EU legislation and apply irrespective of the market segment, such as the MAR.
In regard to the regulated market of the FSE, the initial procedural step for listing shares involves the company and the co-applicant (e.g., an underwriting bank), filing an admission application electronically, which is signed by both parties and submitted with all supporting documents. To qualify as a co-applicant there are numerous requirements to be met, including having the status of a credit institution or similar, satisfying certain capital requirements and being admitted for trading on a German stock exchange. The FSE has published a dedicated application form on its website. This form specifies the categories of information to be included and a checklist of documents to accompany the application.
Subject to certain exemptions, a public offering or admission of securities to trading on an EU-regulated market requires the prior publication of a prospectus approved by the relevant applicable supervisory authority of the home Member State of the issuer. Substantial portions of the offering and listing prospectus are mandatory and implement global standards as established in EU regulations.16
The prospectus may be drawn up in English, including a German translation of the prospectus summary.
There are numerous conditions to be satisfied before a listing on a regulated market can be completed. The submission of an approved prospectus is the central requirement, but it is also necessary for an issuer to provide audited financial statements and to evidence an operating history of a minimum of three years. Furthermore, the issuer must, for example, secure a free float of at least 25 per cent of the issued shares (subject to an exception where a lower free float, but at least 10 per cent, allows an orderly trading of shares with a sufficient diversification) and evidence an estimated market value of not less than €1.25 million. Admission to Prime Standard additionally requires the appointment of at least one designated sponsor for the shares.
iii Overview of law and regulations
EU and German laws applicable to listing and post-listing obligations on the FSE's EU-regulated markets are found mainly in the German Stock Exchange Act (BörsG),17 the German Stock Exchange Listing Regulation,18 the German Securities Prospectus Act (WpPG),19 the WpHG20 (implementing the disclosure requirements of the EU Transparency Directive)21 and the various rules and regulations of the FSE, which can be found on its website.
In line with the growing European harmonisation of capital markets law, directly applicable EU regulations not requiring implementation through domestic legislation form mandatory law to be applied to an IPO on an EU-regulated market. In this respect, the EU Prospectus Regulation and related delegated acts governing the contents of prospectuses approved in EU Member States, and the MAR having specific significance in the regulation of insider information and managers' transactions, are especially relevant.
The EU Prospectus Regulation seeks to facilitate easier access to capital markets, particularly for SMEs, by simplifying prospectus requirements or even dispensing with the need for a prospectus. Further, it is aiming for lighter disclosure requirements for secondary issuances of companies already listed on an EU-regulated market. The entry into force of the EU Prospectus Regulation and related delegated acts in July 2019 forced market participants to review established drafting practices (e.g., regarding disclosure on risks, pricing, the length and format of the prospectus summaries, or the incorporation of documents by reference).
The MAR aims to improve market integrity and investor protection in the European Union. Through the MAR, the European Union also seeks to address, to a certain degree, the globalisation of financial markets and the emergence of new trading platforms by providing a harmonised European regime regulating market abuse. The predecessor regulations of the MAR were only applicable to issuers listed on an EU-regulated market (e.g., Prime Standard or General Standard), whereas the MAR also applies to issuers whose shares are listed on exchange-regulated markets (e.g., the Open Market), provided that the issuers actively sought their listing.
EU prospectus laws grant a regulatory remit to the competent authority of the home Member State of the issuer. For equity securities, the competent authority is always that at the registered seat of the issuer. This means that BaFin is responsible for German issuers of equity securities, and foreign EU issuers on German markets are to first receive prospectus approval from the competent authority in their home Member State. As an additional step, listing and admission to trading on the FSE is handled by its admissions office, regardless of the origin of the approval.
The European Securities and Markets Authority (ESMA) indirectly influences the German IPO process by adopting interpretation guidelines for European securities directives and regulations, which are generally followed by BaFin, in an effort to enable cooperation between European national regulatory authorities.
As a market regulated by the FSE by means of, inter alia, the Deutsche Börse AG General Terms and Conditions for the Regulated Unofficial Market of the Frankfurt Stock Exchange, the Open Market is not directly regulated by EU law. EU law does, however, still apply, alongside the FSE Exchange Rules, for example, in regard to the obligations resulting from a listing, such as insider trading rules under the MAR.
The offering process
The decision to take a company onto the FSE initiates various work streams. To manage the significant documentary requirements involved in the IPO process, an issuer usually establishes a data room. The governance structure of the issuer will have to be reviewed and may have to be aligned further with the expectations of equity capital markets investors. Further corporate preparatory steps may include the changing of the company's legal form,22 fine tuning of the capital structure, providing for contingent and authorised capital and cleaning up of the group structure. In terms of marketing the IPO, the initial and central joint task of the involved underwriters and the issuer will be to develop the issuer's equity story, and prepare a marketing strategy, with the aim of building buyer interest and developing a fair price for the shares. This involves preparing an analyst presentation with which the securities prospectus for the offering and listing of the shares must be consistent. Though different tasks will have precedence at different stages of the offering process, the crucial challenge is to keep the separately conducted legal and marketing work streams consistent as regards material content.
i General overview of the IPO process
Straightforward IPO preparations will generally span four to six months, and can be divided into the following four phases:
- creating IPO readiness (about six months prior to completion): initial preparation for the IPO, which may include appointment of the lead bank and issuer's counsels, changes to the financial reporting, the corporate governance and legal form of the issuer, and the establishment of a data room;
- execution phase (about 90 days): determination of the deal structure, and business, financial and legal due diligence; the drafting of the prospectus and further legal documents; and preparation of the analyst presentation, possibly holding pilot fishing presentations;
- regulatory review period (about 40 to 50 days): various filings of prospectus versions with BaFin, determining valuation, analyst presentation, publication of pre-deal research and pre-deal investor education; and
- marketing and settlement (about 10 days): approval of prospectus by BaFin, filing of listing application with the FSE, execution of the underwriting agreement, public marketing, building of order book, pricing, allocation, trading and settlement.
In line with international market practice, there are several key parties involved in a German IPO:
- Issuer's counsel, who are mandated to provide the issuer with legal advice pertinent to the transaction. This includes undertaking the necessary legal due diligence, preparing a prospectus for approval, reviewing and negotiating the underwriting documentation, ensuring that publicity relating to the IPO is controlled, and issuing legal opinions and disclosure letters to the underwriters.
- Auditors are needed to verify the financial information in a prospectus against audited annual accounts of the past three years and (where relevant) reviewed interim financial statements. At the later stages of the IPO process, the auditors issue comfort letters to the underwriters, giving differing levels of assurance for the accuracy of financial information in the prospectus.
- Large companies seeking a listing on the FSE will usually have selling shareholders. These shareholders will either be exiting their investment by way of the IPO or intending to raise additional capital for the issuer while retaining their shareholding, or a at least a portion thereof. Selling shareholders are usually represented by their counsel who provides them with advice on the underwriting agreement and the transaction from a shareholder's perspective.
- Investment banks are tasked with structuring the offering and coordinating, as well as managing the different channels of the offering. The global coordinators advise the issuer and coordinate on a global basis if there are offerings on more than one market. The bookrunners maintain the order book for the shares. The underwriting banks provide an underwriting for the shares to be offered.
- Finally, underwriters' counsel will usually be mandated to provide the underwriter with legal advice pertinent to the transaction (e.g., underwriting agreement, research publication). This usually consists of undertaking the necessary legal due diligence, reviewing and commenting on the prospectus, preparing an underwriting agreement, managing the admission procedure, and issuing legal opinions and disclosure letters to the underwriters.
The documentation standards typically applied to a German IPO reflect international market practice. Apart from the mandatory securities prospectus, the documents essentially required for the implementation of an IPO normally include an underwriting agreement, a pricing agreement, an agreement among managers, lock-up agreements, legal opinions from the issuer's and banks' counsels, comfort letters from the issuer's auditors and certificates issued by the management of the issuer.
ii Process management
The strategic allocation of party resources within the preparation process, especially for the issuer and the auditors, is an increasingly important consideration in light of a prospectus approval process consisting of three rounds of BaFin comments parallel to the analyst presentation and pre-marketing efforts, and, potentially, the preparation of the financials to be referred to in the prospectus and the limited response time generally at play in tight transaction timelines. However, these timing constraints can be mitigated through proper process management. At the start of the preparation process, and in a timely manner prior to the filing of the prospectus, BaFin should be contacted to agree on an individual timetable for the prospectus approval process. This ensures adequate drafting periods between receipt of comments from BaFin and resubmission of the prospectus. It is key for the offering process generally, and for the approval process particularly, that the issuer's counsel addresses potential obstacles early in the process. This may include, for example, reaching an agreement on exceptions from the otherwise required completeness of the prospectus upon its first filing, the inclusion of pro forma figures, or the necessity of a profit forecast based on previous or intended forward-looking communication of the issuer. In this respect, it helps that BaFin pursues a very constructive approach. Normally, this allows solving these issues in a very pragmatic and, even more importantly, reliable manner early in the process. It also warrants a smooth execution of the transaction in accordance with the envisaged timeline.
iii Considerations for foreign issuers
Foreign and domestic issuers are largely subject to the same legal requirements. This is, for example, the case in respect of financial information relied upon and presented in a prospectus by a foreign issuer. The financial information must comply with standards set in the EU Prospectus Regulation, meaning that the EU-adopted International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) are to be upheld. Where an alternative accounting standard is apparent on inspection of the issuer's financial statements, it must first be determined that the alternative accounting standards can be considered equivalent to IAS and IFRS.23 For example, the accounting standards prevalent in the United States, Canada, Japan, China and Korea are usually considered valid for listing purposes on German markets.
There are three key considerations a foreign issuer must make before intending to list shares in Germany:
- the shares must satisfy the legal definition of securities in the BörsG (e.g., they must be tradable and fungible);
- the shares must be eligible for common depository safekeeping at Clearstream; and
- the shares must be eligible for an admission to trading on a regulated market in Germany.
In respect to the latter requirement, the shares must be represented by a share certificate valid under German law. Specifically, the share certificate must confer shareholders' rights to the respective holders of co-ownership interests in the share certificate. In certain circumstances, it may be challenging for foreign companies seeking to list in Germany to show that these requirements are met in relation to the form and quality of share certificates.
A listing on EU-regulated and exchange-regulated markets in Germany entails post-admission obligations for an issuer, which, in line with EU capital market rules, aim to ensure investor protection. EU regulations specifically focus on measures to combat insider trading and fraud by establishing transparency principles and measures against market abuse.
As discussed above, issuers have an option between Prime Standard – which, because of the FSE Exchange Rules, imposes additional disclosure obligations beyond the transparency obligations under mandatory EU law and is therefore better suited to those aiming at international investors – or General Standard with gradually less stringent ongoing transparency requirements, but still subject to the EU regulation.
Post-admission obligations of Prime Standard in respect of financial reporting include the publishing of financial statements in English and German, although English statements alone are sufficient in the case of a non-German issuer. Annual, half-yearly and quarterly financial statements must be published respectively within four, three and two months of the end of the relevant reporting period.
Other events requiring issuers on Prime Standard to make public disclosures include material events expected to have a significant influence on the share price (ad hoc disclosure), managers' transactions and notification of changes in shareholder voting rights for holdings equalling at least 3 per cent of all voting rights – notification necessary at the following thresholds: 3, 5, 10, 15, 20, 25, 30, 50 and 75 per cent of voting rights.24
An issuer on Prime Standard must ensure that an analyst meeting takes place at least once a year in order to publicise important elements of the annual financials. A continuous updating, publication and transmission of a financial calendar, including the most important corporate action events of the issuer, must be ensured. The issuer must transmit all above-mentioned reports and documents to Deutsche Börse AG via the Exchange Reporting System.
The post-admission obligations on the General Standard segment are significantly less than those of Prime Standard. Although the obligation to publish annual and half-yearly financial statements mirrors that of Prime Standard, quarterly statements are not required, and the English language alone is sufficient for publication.
The obligations in relation to ad hoc disclosure, managers' transactions and notification of changes in shareholder voting rights apply equally to issuers on General Standard.
The main objectives of the MAR are to secure market integrity and guarantee the harmonisation of investor protection throughout the European Union. The concrete legal mechanisms applied by the regulation to achieve this in respect of all EU-regulated markets include the obligation to publicise insider information by means of ad hoc disclosure and the provisions regulating managers' transactions and insider dealings. The provisions governing ad hoc disclosure stipulate that, subject to exceptions, inside information shall be disclosed without delay. An exception to this general rule applies where a delay is justified because the issuer's need to delay its publication outweighs the market's need for the information. In the case of a delay of an ad hoc disclosure of insider information, the issuer is subject to stringent documentation and monitoring requirements. Also, once the withheld insider information is published, BaFin requires a notification to this effect, with an explanation of the reasons for a delay and a clarification of how the record-keeping obligations under the MAR were complied with.
Further legal obligations arise for companies incorporated under German law upon listing on a regulated market in Germany. Annually, the management board and the supervisory board of listed companies must declare whether the company complies with the recommendations of the German Corporate Governance Code. If the company does not comply with recommendations of the Code, it must provide reasons for any lapse (the 'comply or explain' approach). Furthermore, where the listed company is subject to the relevant provisions of the Labour Codetermination Act, each sex must be represented by at least 30 per cent on the supervisory board. This board composition requirement must be complied with by the supervisory board as a whole. Under certain conditions, however, the employees' and the shareholders' representatives may require, by a majority vote, that this gender diversity requirement be fulfilled by each of them separately.
Outlook and conclusion
Because of the wide-ranging harmonisation of European capital markets law, the rules and regulations governing an IPO in Germany correspond to those of the other EU Members States. By and large, German capital markets standards, documents and market practices follow the same basic principles as US and established Asian market practices.
The German IPO market is an established market with a proven track record of successfully hosting large issuances. This has made it an attractive market for private equity firms seeking exits from their investments in dual-track processes, where the IPO remains a viable option even though the trade sale often gains the upper hand. Spin-offs and carve-outs of German corporates and financial institutions (e.g., Uniper, innogy, Siemens Healthineers, DWS Group, TRATON) dominated the German IPO market in the past few years, especially as regards the larger transactions. With the announced spin-off of central parts of Siemens' energy business, which is expect to complete in September 2020, this trend is sure to continue and is likely to continue for the medium term. Apart from these transactions, it will remain key to de-risk IPO transactions and reduce the time to market in view of the current uncertainties in global politics: for example, through anchor investors, cornerstone investments and private placements prior to an IPO.
1 Alexander Rang is a partner and Caspar Schmelzer is a senior associate at Hengeler Mueller.
2 Statistics of Deutsche Börse Cash Market, found at: www.deutsche-boerse-cash-market.com/dbcm-en/instruments-statistics/statistics/primary-market-statistics.
4 Website of the Deutsche Börse Group, see: www.deutsche-boerse-cash-market.com/dbcm-en/secondary-market/xetra.
6 Statistics of Deutsche Börse Cash Market, found at: www.deutsche-boerse-cash-market.com/dbcm-en/instruments-statistics/statistics/listes-companies.
7 Regulation (EU) No. 596/2014 of the European Parliament and of the Council of 16 April 2014 (as amended).
8 BaFin is an independent federal regulator headquartered in Bonn and Frankfurt, and supervised by the Federal Ministry of Finance.
9 Harrer in Drinhausen/Eckstein, Beck'sches Handbuch der AG, 3rd Edition, 2018, § 20 Der Börsengang, Mn. 49.
10 As at March 2020, Scale comprised 49 companies: see deutsche-boerse-cash-market.com/dbcm-en/instruments-statistics/statistics/listes-companies.
11 See Deutsche Börse Group, FAQs Scale, the new listing segment, p. 6 f. found at: https://www.deutsche-boerse-cash-market.com/dbcm-en/primary-market/market-structure/segments/scale.
12 General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market (Freiverkehr) on Frankfurter Wertpapierbörse, § 7, Version 09.12.2019.
13 ibid. § 12(1).
14 ibid. § 10(1).
15 Statistics of Deutsche Börse Cash Market, found at: www.deutsche-boerse-cash-market.com/dbcm-en/instruments-statistics/statistics/listes-companies.
16 These standards are defined by the EU Prospectus Regulation (Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017). Further, the mandatory contents of prospectuses are governed by Commission Delegated Regulations (EU) 2019/979 and (EU) 2019/980.
17 German Stock Exchange Act (BörsG) of 16 July 2007, BGBl. I p. 1330 (as amended).
18 Stock Exchange Admission Regulation of 9 September 1998, BGBl. I p. 2832 (as amended).
19 German Securities Prospectus Act (WpPG) of 22 June 2005, BGBl. I p. 1698 (as amended). However, the WpPG has for the most part been superseded by the EU Prospectus Regulation.
20 German Securities Trading Act (WpHG) of 9 September 1998, BGBl. I p. 2708 (as amended).
21 Directive 2013/50/EU of the European Parliament and of the Council of 22 October 2013 and the German implementation of the Act Implementing the Transparency Directive Amending Directive of 20 November 2015, BGBl. I p. 2019 (as amended).
22 The legal forms entitled to perform issuances of equity securities are stock corporations, European stock companies, partnerships limited by shares or real estate investment trusts (REITs) (German REITs must be stock corporations pursuant to the German REIT Act of 28 May 2007, BGBl. I p. 1693 (as amended) (REITG).
23 Kunold in Assmann/Schlitt/von Kopp-Colomb, WpPG/VermAnlG, 3rd Edition, 2017, EU-ProspektVO, Anh. I, Mn. 171. Financial statements must include a balance sheet, an income statement, a statement showing either all changes in equity, or changes in equity other than those arising from capital transactions with owners and distributions to owners, a cash flow statement, and the accounting policies and explanatory notes.
24 Additional notification obligations apply to financial instruments.