Draft of the Future Financing Act (ZuFinG)

On April 12, 2023, the German Federal Ministry of Finance (BMF) and the German Federal Ministry of Justice (BMJ) published their draft bill for an "Act on the Financing of future-proof Investments" (Future Financing Act –
“Zukunftsfinanzierungsgesetz” (ZuFinG)). The ZuFinG is intended to make the German capital market more efficient and the German financial center more attractive. This Client Alert presents some stock corporation law and capital market law provisions from the draft which are extremely relevant for practice. In detail:

1. Electronic shares

The Electronic Securities Act (eWpG), which came into force in 2021, has only allowed bearer bonds and investment fund units to be securitized in electronic securities so far, but not shares in stock corporations. This is now to be changed, thus taking a decisive step toward digitalizing the capital market. In the future, registered and bearer shares can also be issued as electronic shares.

Bearer shares can be securitized electronically if they are entered in a central register – these are called central register securities. In case of central register custody, the electronic shares can be held either as an individual or collective (as it is the case with a global certificate) entry.

A central register security can be included in securities giro transactions (“Effektengiroverkehr”) and traded on the stock exchange like a paper share deposited with Clearstream Banking AG. In any case, this applies if Clearstream Banking AG is registered as the share’s holder and becomes the registrar.
Registered shares can also be issued as electronic shares as central register securities. However, they can also be issued as crypto securities, for example using blockchain technology. Issuing registered shares as crypto securities opens up new design possibilities (e.g. tokenization), i.e. in particular the facilitated transfer of shares from shareholder to shareholder from one electronic wallet to another.

The inclusion of shares in the eWpG is appreciated. The advantage of the electronic central register security lies in the simpler and faster issuance and deposit, as well as the fact that paper shares/collectible certificates no longer have to be deposited, thus eliminating the costs of custody. Shares issued as crypto securities can be transferred electronically from wallet to wallet in an easy manner.

2. Dual class shares

The ban on multiple voting rights introduced by act in 1988 (KonTraG) shall be removed again. Instead, the Articles of Association may provide for registered shares with multiple voting rights and thus, allocate more voting rights to a shareholder than he is supposed to have according to his share capital. For instance, the legislator has founders in mind who will be able to raise equity capital without losing significant influence – an instrument that is widely used in the USA, for example, as shown by Meta Platforms, Inc. (Facebook) or Alphabet, Inc. (Google).

However, the ZuFinG does not want to permit multiple voting rights without limits. They may not exceed 10 times the "normal" voting rights and require the consent of all shareholders. It is also possible to provide for differently structured multiple voting shares, i.e. with different voting powers.

In the case of listed companies, the multiple voting rights expire upon transfer of the share, but no later than 10 years after listing. This period may be extended (once) for a further period of up to 10 years at the earliest one year before its expiry, whereby the resolution requires a majority of at least ¾ of the capital stock represented at the shareholders’ meeting. As the approval of all shareholders is required for the introduction, the first-time establishment of multiple voting rights after an IPO is practically excluded.

It remains to be seen whether multiple voting rights will ultimately become established in Germany and whether investors will be willing to accept these. However, the option to do so is to be welcomed, even though the German partnership limited by shares (Kommanditgesellschaft auf Aktien – KGaA), for example, already provides founders or family shareholders with options for securing their influence in the long term.

3. Facilitation of capital increases (?)

In addition, capital increases will be facilitated in the future.

Among other things, the hurdles for a simplified exclusion of subscription rights in the case of a capital increase against contribution in cash will be decreased. Until now the exclusion of subscription rights in the case of such capital increase was permissible for listed companies if the share capital was increased by up to 10 %. In the future, such capital increases are supposed to be permissible with the exclusion of subscription rights by up to 20 %. The actual advantage is only indirect: If shareholders' subscription rights are excluded, the issue of the new shares is not a public offering, so no prospectus is required; this is also not necessary for the admission of the new shares if the capital increase is below 20 %. This entails that companies can exclude the subscription right to a substantial extent and, for example, decide on capital increases at short notice during favorable stock market windows, in particular if corresponding authorized capital can be used.

Yet another amendment is intended to solidify the legal grounds for capital increases connected with the exclusion of subscription rights and thus make it easier. Disputes about the appropriateness of the value of the contribution attributable to the new shares in the context of a capital increase with exclusion of subscription rights are no longer to be asserted by way of an action for annulment. In Result, this dispute can no longer prevent the registration of the capital increase. In the future, these disputes are instead to be settled in appraisal proceedings and only regarding a cash compensation payment made to the shareholders.

However, this compensation payment entails the risk for investors that "the capital increase" will be more expensive than originally planned – a risk that did not exist to this extent under the previous challenge concept. In the case of listed companies, no compensation should generally be owed if the stock market price is not significantly undercut - but cases of uncertainty remain here as well. A further disadvantage of the current draft regulation could be that the judicial review by an appraisal procedure with value adjustment already applies if the subscription right is only partially excluded, so that an exclusion of subscription rights to fractional amounts in fact opens up a new legal process already. This most likely means that the companies and investors from the capital increase – despite the recent amendments to the German Act on Appraisal Proceedings (Spruchverfahrensgesetz) – may have to deal with this long after the capital increase. This is especially the case as the statutory allocation of costs in the appraisal proceedings is hardly likely to deter applicants from making such an application.

4. Introduction of a German SPAC (“Börsenmantelaktiengesellschaft” – BMAG)

The Stock Exchange Act is supposed to contain provisions on the new legal form "Börsenmantelaktiengesellschaft" (BMAG, also known as Special Purpose Acquisition Company – SPAC), which intends to facilitate companies' access to the capital market and is essentially based on stock corporation law.
The business purpose of a BMAG is the management of its own assets, the preparation and implementation of the IPO and the search for a suitable company to be listed on the stock exchange through an acquisition/takeover by the BMAG. Various ways of acquiring the target company are possible, such as an acquisition of shares (share deal), acquisition by way of an asset deal or a merger, which must have taken place within a deadline specified in the articles of association of BMAG. Until the target transaction is carried out, the deposits must be held by a suitable trustee (a notary or a credit institution). The approval of the target transaction requires a majority of at least ¾ of the shares represented at the respective shareholders’ meeting. The draft also contains provisions on the protection of shareholders who vote against this target transaction, on stock options and on the termination of BMAG upon expiry of the deadline.

In particular, the introduction intends to shorten the process for listing on the stock exchange, provides a (German) legal framework, ensures adequate shareholder and investor protection, and provides legal certainty for entrepreneurs and investors.

Where IPOs have already been carried out by means of SPAC transactions in the past, foreign companies were required for this purpose. It is therefore appreciated that the possibility to go public via SPAC under German company law will also be introduced in Germany. This applies irrespective of the question, how challenging it is for companies to achieve a stock market listing from "zero to 100" by means of a SPAC transaction. In any case, the great SPAC euphoria of recent times already seems to be subsiding. For example, one SPAC has just announced that it is being wound up because no suitable target company was found within the deadline.

5. Legislative procedure/ draft bill

So far, the ZuFinG is "only" a draft bill, which is expected to be followed by a government bill. It is therefore not yet certain which regulations the law will finally contain. However, it seems certain that it will bring some exciting changes that will create significant flexibility for companies in stock corporation law.

Published April 2023