German ‘Future Financing Act’ trails reform of stock corporation and capital markets law

The Cabinet adopted a government draft for the Act on the Financing of Future-Securing Investments (German Future Financing Act or ‘Zukunftsfinanzierungsgesetz’) on 16 August, following publication of a draft bill in April.

The government draft of the German Future Financing Act provides for a comprehensive package of measures in the areas of corporate law, capital markets law, tax law and supervisory law. They include in the area of corporate and capital markets law an increased volume limit for the simplified exclusion of existing subscription rights when a stock corporation wishes to raise additional capital; increased conditional capital volume limits; a new regulatory framework for Special Purpose Acquisition Companies (SPACs); the re-introduction of multiple voting shares; the introduction of electronic shares (e-shares); and facilitated access to the stock exchange.

Increased volume limit of 20% for simplified exclusion of subscription rights

Generally, when a stock corporation wishes to increase the capital it holds, this must be carried out while respecting the subscription rights of existing shareholders. In certain cases, however, the subscription right of existing shareholders can be excluded – for example, to enable the company to raise capital through new investors.

Currently, the German Stock Corporation Act (‘Aktiengesetz’) provides for a so-called "simplified" exclusion of subscription rights for capital increases, in which the capital increase against cash contributions may not exceed 10% of the current share capital and the issue price of the new shares may not be significantly lower than the stock market price. The reason why this exclusion of subscription rights is "simplified" is that the legislator expressly recognises the exclusion of subscription rights as legally permissible, provided that the aforementioned 10% limit and the appropriateness of the issue price are observed.

Under the German Future Financing Act, this limit would be doubled to 20%.

In practice, the simplified exclusion of subscription rights has already been used primarily in the context of so-called ‘authorised capital’. The provision in the corporation’s Articles of Association for authorised capital, which is created by a shareholders’ resolution, authorises the executive board of a stock corporation to increase the share capital of the company by up to 50% for a period of up to five years without obtaining a further shareholders’ resolution. Where such a provision exists in the corporation’s Articles of Association, usually the executive board can decide to exclude the subscription rights of existing shareholders in the case of cash capital increases up to the 10% limit.

Doubling the limit will make the linking of the simplified exclusion of subscription rights with an authorisation of the executive board for an authorised capital even more attractive in the future. In any case, by increasing the limit of the simplified exclusion of subscription rights to 20%, a welcome facilitation of capital raising is created for stock corporations.

Increased conditional capital volume limits for business combinations and for the granting of subscription rights to employees and executives

Currently, a stock corporation can create so-called conditional capital of up to 50% of the share capital for granting conversion or subscription rights on the basis of convertible bonds or for preparing business combinations. This is referred to as "conditional" because a capital measure using this form of capital only takes place to the extent that subscription or conversion rights are exercised.

To the extent that conditional capital is used for business combinations, the government draft of the German Future Financing Act stipulates that the limit should be raised from 50% to 60%. In practice, however, conditional capital is rarely used for business combinations, so there is probably little practical benefit to this proposed change.

Likely to be of more practical relevance is the increase in the limit of conditional capital for granting subscription shares to employees and members of the management. This was previously 10% of the capital stock and is to be doubled to 20%. This change will also increase the attractiveness of employee stock option programmes.

New regulatory framework for SPACs

A special purpose acquisition company (SPAC) is a type of shell company, without its own operating business, which is founded and then can be listed on a stock exchange with a view to later converting the SPAC into an operating company – for example, by contributing an operating company by way of a capital increase in kind. This mechanism, which is also referred to as a ‘reverse IPO’, offers easy access to the stock exchange. In our consulting practice, the use of SPACs via so-called reverse IPOs is already an established tool to provide companies with the possibility of financing via the capital market comparatively quickly.

The German Future Financing Act proposes modifications to the regulatory framework for SPACS which should further open up the German capital market to this financing model. The new provisions are to be made in a new section 4a of the German Stock Exchange Act (‘Börsengesetz’) under the somewhat unwieldy title "Shell stock corporation for the purpose of stock exchange admission". According to the government draft, this is intended to create a legal form variant of the German stock corporation. SPACs will be given the legal form suffix "shell stock corporation".

The new regulations in the government's draft of the German Future Financing Act provide, among other things, for certain requirements for the articles of associations of SPACs (such as with regard to the object of the company or the mandatory possibility of a virtual AGM). In addition, an explicit responsibility of the general meeting for the target transaction (i.e. with which company the SPAC is to be operationally equipped) is standardised.

It is also interesting to note a planned new provision that shareholders who have declared their objection to the resolution of the AGM on the target transaction in the minutes are to be entitled to a right to tender their shares to the company against repayment of the contribution and any premium. The conflict with the prohibition of the repayment of contributions to shareholders and the prohibition of the acquisition of treasury shares by the company (generally only possible up to a limit of 10%) is eliminated by the government draft by exempting the tender from the repayment of contributions under the planned new regulation in the Stock Exchange Act and raising the company's acquisition limit for the acquisition of treasury shares to 30% in this context.

Reintroduction of multiple voting shares

The last time multiple voting shares were recognised by the German Stock Corporation Act was in 1998. Multiple voting shares are shares that grant a shareholder more voting power than their share in the capital stock.

According to the government draft of the German Future Financing Act, multiple voting shares will now be reintroduced into German stock corporation law. The draft stipulates that multiple voting shares with voting rights of up to 10:1 should be possible.

The multi-voting share will make the choice of the legal form of a stock corporation even more interesting in the future, as founders can retain their influence on the company despite raising capital from external investors.

Introduction of electronic shares

The draft bill of the German Future Financing Act, which was passed in April, also provided for the introduction of electronic shares.

Facilitating access to the stock exchange

Finally, the regulatory requirements in connection with access to the capital market are to be simplified. For example, the minimum market capitalisation (expected market value of the shares to be admitted) for an IPO is to be reduced from the current €1.25 million to €1m. In addition, it should be possible to submit the application for stock exchange admission without the previously prescribed issuance companion as a co-applicant. Listing costs for issuers will also be reduced.

Final assessment

The German Future Financing Act contains some interesting measures that could achieve the desired regulatory effect. Above all, it will be interesting to see to what extent the EU Listing Act will flank the provisions of the German Future Financing Act to strengthen Germany as a capital market location.