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Germany

Legislative reform of the German financial markets continues with the publication in April of the long-awaited draft of the Third Financial Markets Promotion Act. The bill is expected to come into force on January 1 1998.

The new legislation introduces changes in three principal areas. First, amendments which simplify securities listing procedures, modernize prospectus liability rules and improve investor protection. The legislation establishes for the first time a statutory right to de-list securities. Second, the range of permitted activities for investment management companies will be extended to permit umbrella and pension funds and they will be authorized to enter into a wider range of derivative transactions. Finally, the existing legislation on venture capital companies will be streamlined to promote better access to venture capital.

Listing. An objective of the amendments is to simplify the listing of securities by rationalizing existing procedures, cutting administrative hurdles and saving costs. The most significant of these measures are:

  • the minimum three-year track record for companies wishing to list shares in the regulated market will be abolished;
  • issuers which have been admitted to listing in a regulated domestic market for at least two years may be exempted from the need to issue a listing prospectus when applying for admission to official listing;
  • prospectus verification will be limited to one listing authority;
  • foreign language prospectuses can be accepted by the relevant listing authority without translation provided certain conditions are met;
  • the relaxation enabling domestic companies to obtain additional listings on German exchanges within six months of the original prospectus without having to publish a new prospectus is extended to foreign issuers; and
  • issuers which have been officially listed on a recognized exchange in the EU or EEA for at least three years may be permitted to list in Germany on the basis of abbreviated listing particulars without having to publish a full prospectus.

In addition, a number of technical changes have been made to the Stock Exchange Listing Ordinance to reflect changing market practices. They include recognizing book-building procedures common in large share issues for the purpose of the listing particulars and the use of master prospectuses for MTN programmes.

De-listing. The legal basis for de-listing securities has long been the subject of debate. The Act establishes a statutory right to de-list, subject to certain safeguards:

  • trading in the de-listed securities must remain possible in another domestic or foreign recognized market;
  • the listing authorities can suspend the de-listing for up to two years; and
  • the de-listing must be notified without delay in approved publications.

Prospectus liability. The Act introduces important amendments aimed at improving investor protection on the one hand and redefining prospectus liability on the other:

  • the abolition of the requirement that a damages claimant must have possession of the relevant security to bring a claim for loss arising from incorrect prospectus information;
  • an irrebuttable presumption in favour of investors as to causality for securities brought within six months of publication of a prospectus; and
  • the reduction of the limitation period for prospectus liability to three years from the date of publication or six months from notice of a claim, if earlier.

In addition, the limitation period for negligent investment advice will be reduced from 30 years to three years from the date of the advice or six months from notice of the claim, if earlier.

It remains questionable whether the proposed reduction of the limitation periods will survive the political process.

Investment management companies. The bill introduces extensive changes to the Act on Investment Management Companies aimed at extending the range of their activities and promoting an equity culture. The range of permissible funds is extended to include:

  • umbrella funds;
  • mixed securities and real estate funds, with an investment ceiling of 30% in real estate;
  • special pension funds, subject to investment limits of a minimum of 51% in substantial assets (shares or real estate) and a maximum of 75% in shares; a maximum of 30% of the fund's assets may be exposed to foreign currency fluctuations;
  • closed-end funds in the form of stock corporations.

The range of investment activities of existing securities funds will be extended to include equity index funds and the use of interest rate, currency swaps and OTC options will be permitted.

Real estate funds will be permitted to acquire majority shareholdings in domestic and foreign real estate companies, subject to certain safeguards, and to grant leasehold interests in real estate owned by the fund.

Venture capital companies. The Venture Capital Companies Act is perceived as having failed in its objective of providing private equity capital to small and medium-sized companies, particularly in start-up phases. By reforming the Act, the government hopes to improve the rule of such companies as a source of equity capital:

  • the minimum holding period required to secure tax exemption on disposals is reduced from six years to one year;
  • venture capital companies will be permitted in the form of limited liability companies and not just stock corporations as was previously the case;
  • holdings may be in the form of preference shares and venture capital companies will be permitted to raise capital through preference share issues as well as debentures;
  • majority shareholdings in non-listed companies are permitted but only in exceptional cases and for no longer than eight years;
  • investments in non-EU companies will be permitted, provided they do not exceed 25% of the company's capital; and
  • the limit on loans to companies in which stakes are held is increased to 25% of the venture capital company's capital.

Miscellaneous. The bill includes a number of modifications designed to remedy some of the shortcomings of the Securities Trading Act. In particular:

  • The requirement that foreign companies whose shares are listed in Germany must notify the relevant exchange before publishing price-sensitive information is relaxed. In practice, a one-off disclosure of price sensitive information will suffice.
  • The sanctions for failure to disclose changes in shareholdings in listed companies have been strengthened: all rights attaching to the shares in question will be suspended pending compliance.

Stephen Hodgson

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