New listing regulations: Neuer Markt

Author: | Published: 10 Oct 2001
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Introduction

Neuer Markt, the market segment for high growth and technology companies at Deutsche Börse, was established in 1997, modelled on the highly regulated NASDAQ.

Neuer Markt's issuers are typically innovative enterprises that develop new sales markets and that are expected to generate high turnovers and profits in the future.

At present, 337 companies are listed on Neuer Markt, out of which 55 are non-German companies, mainly from the US, Switzerland and the Netherlands.

In Europe, Neuer Markt is the most important growth segment and accounts for approximately 56% of the market value of all European new markets.

Listing on Neuer Markt

Trading on Neuer Markt is not organized under public law like the trading on the Official Quotation (Amtlicher Handel) or on the Regulated Market (Geregelter Markt). Instead, it operates as an independent trading segment of the Frankfurt Stock Exchange (FSE) and trading is organized under private law as over-the-counter dealings.

Admission of shares to Neuer Markt requires the prior admission of the shares to trading on the Regulated Market (however, the submission of an application for admission of shares to Neuer Markt constitutes a waiver by the applicant of the commencement of the quotation of the shares on the Regulated Market).

The regulatory landscape

Deutsche Börse has already fulfilled 90% of the regulatory density of the NASDAQ. However, the regulatory landscape in Germany is different than in the US, where the Securities Exchange Commission (SEC) plays a vital role as an independent regulatory agency and supervises the capital markets to prevent fraudulent and unfair behaviour. The SEC enjoys greater competencies than the equivalent German agency – the German Federal Supervisory Office for Securities Trading (Bundesaufsichtsamt für den Wertpapierhandel). These competencies include the right of action and the right to impose significant sanctions.

Deutsche Börse is seeking to assume a similar role to the SEC in governing Neuer Markt. It has amended the rules and regulations of Neuer Markt (RRNM) to increase possible sanctions, and has, for example, already imposed sanctions of euro 110,000 on Neuer Markt listed EM.TV for turning in annual statements and quarterly reports too late.

Quality control

Neuer Markt was established in March 1997 and had listed 160 companies by October 1999. This is in stark contrast to the NASDAQ, which started in 1971, grew slowly, had time to react to different market conditions and to adjust its regulations.

It can be said that Deutsche Börse was not quite prepared for such a boom in its first years, and that some issuers were not yet ready for a listing on a stock exchange. As the market has slowed and stock prices fallen, Neuer Markt faces a growing number of so-called 'penny stocks'.

Deutsche Börse has reacted to the weak market conditions and the downfall of stocks by planning modifications to the RRNM to de-list penny stocks. NASDAQ has had such regulations in place for years.

Some listed companies have tried to resist the penny stock rules, as they were not in place at the launch of Neuer Markt.

Planned modifications

Penny stock de-listings

Deutsche Börse aims to give Neuer Markt a sharper profile, and position itself with respect to further development of the high growth and technology segment. Thus, from October 1 2001, it plans to automatically de-list companies from Neuer Markt, based on two quantitative and one qualitative criteria:

  • a listed company's daily average price must not fall below euro 1 and a market capitalization of euro 20 million on 30 consecutive exchange trading days, nor fail to exceed these values on at least 15 consecutive days in the next 90 exchange trading days thereafter; and
  • Deutsche Börse will also de-list a company if insolvency proceedings are opened against a company's assets or dismissed for lack of assets.

In both instances, de-listing from Neuer Markt will occur one month after the announcement is made by Deutsche Börse.

The question has arisen of whether Deutsche Börse is entitled to change the RRNM unilaterally or whether it needs the consent, or any other kind of involvement, of the listed companies. This is dependent on whether the relationship between Deutsche Börse and the issuers of stock is governed by civil law or whether it is overlaid by public law.

One Neuer Markt listed company has already applied for a preliminary injunction against the planned exclusion of penny stocks, arguing that Deutsche Börse could not just amend the RRNM on its own, and that listed companies need time to prepare for such a modification and/or defend a possible de-listing (by way of a capital increase, for example). The plaintiff company argued that RRNM modifications, therefore, should not enter into force before October 1 2002.

On August 16 2001, the district court (Landgericht) of Frankfurt decided in favour of the plaintiff company and partly granted the preliminary injunction. Despite Deutsche Börse's arguments that section 78 of the Stock Exchange Act authorizes it to change the RRNM unilaterally, the Frankfurt court rightly held that:

  • Neuer Markt is organized under private law, notwithstanding the public admission of the traded stock to the Regulated Market. The Stock Exchange Act does not authorize Deutsche Börse to enact the RRNM as a public regulation. Rather, the RRNM have to be judged as general terms and conditions (Allgemeine Geschäftsbedingungen) according to private law;
  • in principle, Deutsche Börse is entitled to change the RRNM according to private law, because when applying for admission to trading on Neuer Markt, the issuers agree to accept the RRNM in their "valid version at the respective time". However, this acceptance does not authorize Deutsche Börse to change the RRNM in an unfair way. It has to keep in mind the interests of the issuers;
  • Deutsche Börse did not keep in mind the interests of the issuers in that it did not consider that a listed company, threatened with a de-listing because of its low market value, should be given more time to take measures to prevent a de-listing; and
  • the plaintiff company should be allowed sufficient time to take such measures to prepare or defend itself (although, in this case, the court deemed sufficient time to be six months rather than the one year that was requested). The court partly granted the application for a preliminary injunction and the planned penny stock modifications will not be valid for the plaintiff company before April 1 2002.

Nevertheless, Deutsche Börse is in principle entitled to implement the penny stock rules.

The aforementioned Frankfurt court ruling is only binding between Deutsche Börse and the plaintiff company. It is not applicable to other companies listed on Neuer Markt. However, several more issuers are now considering an appeal against the penny stock rules to defer them.

Deutsche Börse has already announced that it will appeal against the Frankfurt court decision. Furthermore, it has announced that it will stick to the planned penny stock modifications and the planned time schedule.

Implemented modifications

Deutsche Börse has already implemented several modifications to the RRNM in 2001.

Quarterly reports

The essential part of these changes are obligations arising from the admission to Neuer Markt.

Quarterly reports have been further standardized and made more extensive to have the key figures of listed companies more easily obtainable and comparable. They must now include:

  • the balance sheet for the reporting period;
  • information concerning the number of shares of the issuer held by the members of the management board and supervisory board; and
  • the rights of members of the management board or supervisory board to subscribe for such shares. These rights must be listed separately for each member body.

Quarterly reports must be published on the internet and shall be prepared according to the same accounting principles as the annual financial statements, and therefore have to comply with either the International Accounting Standards (IAS) or US Generally Accepted Accounting Principles (US GAAP).

Until recently, it was not compulsory under the RRNM to prepare interim balance sheets, despite being required under US GAAP and IAS. This discrepancy has now been eliminated and interim reports are now required under the modified RRNM.

To assist listed companies, an electronic template for standardized quarterly reports has been provided by Neuer Markt on its website – www.neuermarkt.com.

Supply and publication of information

Companies listed on Neuer Markt have to meet high standards regarding transparency and information disclosure.

The obligation to provide information applies to the issuer, as well as to the institution, applying for admission. Both are obliged to provide Deutsche Börse with relevant information required for admission to Neuer Markt or with respect to subsequent obligations resulting from admission or orderly trading.

Pursuant to the Stock Exchange Act, Deutsche Börse may publish all of the facts related to a request for information, especially in cases where the issuer or the institution or enterprise applying for admission does not fulfill a request for information in a timely manner or fails to provide complete information.

In addition, Deutsche Börse may publish whenever an issuer fails to fulfil the obligations resulting from its admission to Neuer Markt in a timely manner or fails to fulfil them completely.

Fines have been increased in value and frequency. The issuer will be obliged to pay a fine of up to euro 100,000 for each non-performance, delay or incomplete performance of the obligations arising from the admission to Neuer Markt. The value of the fine is determined by Deutsche Börse.

The right of the Deutsche Börse to terminate the admission to Neuer Markt remains unaffected.

Director dealings

Since March 1 2001, issuers have been obliged to notify Deutsche Börse of every transaction that is effected by the issuer or any member of its management board or supervisory board.

Also requiring notification are transactions concerning shares of the issuer and derivatives (the price of which are linked directly or indirectly to the exchange price or market price of the shares of the issuer).

These reporting requirements also apply to rights that have been granted to any member of its management board or supervisory board (for example, convertible bonds or stock options).

Notifications must be received by Deutsche Börse within three exchange days after the conclusion of the transaction. Deutsche Börse has specifically listed which information must be included in such notification in accordance with the Securities Trading Act.

Dispute resolution

Disputes arising out of, or in connection with, admission to Neuer Markt shall, to the extent of its competence, be decided by a Primary Arbitration Panel which is comprised of three members.


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