Economic Stabilization Fund - the concretizing Directives are (finally) there

Three Directives concerning the Economic Stabilization Fund pursuant to the German Economic Stabilization Fund Act (WStFG)

On October 2, 2020, three Directives concerning the Economic Stabilization Fund (WSF) created by the Economic Stabilization Fund Act - WStFG of March 27, 2020 (the "Act"), came into force.

The Directives issued by the Federal Ministry of Finance in agreement with the Federal Ministry of Economics and Energy concretize the provisions of the Act by filling out the corresponding powers of the Directives.

In particular, the regulations contain executive provisions on the administration of the WSF, on the instruments for stabilizing the economy and the associated requirements and conditions, and finally on responsibilities and costs.
The Directives contribute to an improvement of legal certainty in dealing with the WSF, but also leave some questions unanswered.
 

The Directives at a glance

• Economic Stabilization Fund Implementing Directive - WSF-DV ("Implementing Directive")

This Directive specifies the administration of the WSF, the conditions for the assumption of warranties and guarantees by the WSF as well as appropriate remuneration for this, the conditions for various recapitalization instruments as well as the requirements and conditions for stabilization measures.

• Economic Stabilization Fund Transfer Directive - WSF-ÜV

This Directive contains provisions on the organization of the processing of applications, the decision-making bodies and the cooperation between the authorities involved.

• Economic Stabilization Fund Cost Directive - WSF-KostV

This Directive specifies the distribution of the costs incurred by the authorities involved.
 

Concrete distribution of tasks

The ordinances are initially intended to provide clarity about which tasks are assigned to whom and to whom interested companies must address their requests.

Submission of applications

Applications for measures under the Stabilization Fund Act must be submitted to the Federal Ministry of Economics and Energy (BMWi). Applications that are to be examined by the Kreditanstalt für Wiederaufbau (KfW) are forwarded directly to KfW by the BMWi.

A working platform will be set up on which all applications and all documents submitted by the applicant will be posted immediately and from which the respective processing status can be determined. The Federal Ministry of Finance (BMF), the Federal Chancellery and the Finance Agency will have access to this platform. KfW will only be granted access to the platform with regard to the applications assigned to it.

The BMWi may allow applications to be submitted via KfW for measures under Section 21 of the Stabilization Fund Act, i.e. guarantees, if the guarantee amount applied for is less than EUR 500 million.
If the applications are not processed by KfW, the BMWi examines the applications and prepares the decisions for the WSF Committee. The BMWi may mandate third parties to perform these tasks.

Decision on applications

Depending on the scope of the stabilization measure applied for, either

• the WSF Committee (guarantee sums of EUR 500 million or more and recapitalization measures of at least EUR 200 million),
• the BMF in agreement with the BMWi (guarantee amounts from EUR 100 million and other recapitalization measures) and
• the KfW (all other guarantees)

decides on the granting of the measure in question.

The WSF Committee is also responsible for the decision on all applications of companies that do not meet the general requirements for support (balance sheet total > EUR 43 million, turnover > EUR 50 million and > 249 employees on an annual average), but which are eligible for support if they operate in a sector mentioned in § 55 of the Foreign Trade and Payments Regulation (Außenwirtschaftsverordnung; companies of critical infrastructure) or are otherwise of comparable importance for public security or the economy.

The BMWi and the BMF can take decisions on their own.

As far as questions of principle, matters of special importance or decisions on essential measures and conditions are concerned, the WSF Committee may reserve the right to take decisions.

Before the KfW decides, it must give the BMF and the BMWi the opportunity to submit a comment. In general, KfW informs the BMF and the BMWi as well as the Finance Agency about applications for the granting of stabilization measures under section 21 of the Stabilization Fund Act, intended or adopted decisions or other facts or activities of KfW under the Act. In performing the tasks assigned to it, KfW is also bound by the instructions or decisions of the Federal Ministry of Finance, which must be issued in agreement with the BMWi, and by the resolutions of the WSF Committee. The BMWi must prepare the decisions on the applications in detail and submit them to the respective decision-making body together with a proposal ready for decision.

Finance Agency as contracting party

The administrator of the WSF is Finanzagentur GmbH ("Finance Agency").

The Finance Agency is authorized to conclude contracts with companies on behalf of the WSF for the implementation of approved measures. These contracts must be designed in such a way that the benefits granted from the Fund are secured and that the adherence to conditions associated with the granting of these benefits is guaranteed.

The Finance Agency may make use of third parties in the performance of its tasks.

Within the first six months after the end of a fiscal year, the Finance Agency shall prepare annual financial statements and a management report for the WSF in accordance with the regulations applicable to large corporations. The annual financial statement and the management report are to be audited by the Finance Agency's auditor.

The Finance Agency may partially transfer to KfW the right to enter into the contracts with the applicant enterprises necessary for the implementation of approved stabilization measures for the WSF, but only to the extent that the decision on these measures lies with KfW.

Kreditanstalt für Wiederaufbau

KfW generally assumes the management of the equity interests acquired in the context of stabilization measures and the safekeeping and administration of the other instruments taken over in the context of recapitalization measures, although the BMF determines in detail in which cases KfW performs these tasks and in which cases the execution of these tasks remains with the Ministry.

Like the Finance Agency, KfW may, with the consent and in accordance with further instructions from the BMF, use suitable third parties to perform its tasks.
 

Concretisation of the stabilisation measures

The core of the Implementing Regulation is the specification of the prerequisites, scope and conditions of stabilization measures, i.e. guarantees and other warranties as well as recapitalization measures, and other possible benefits provided by the WSF.

Scope of the granting of guarantees

In order to remedy liquidity bottlenecks of a company in a crisis as a result of the COVID-19 Pandemic or to support its refinancing on the capital market, guarantees or other warranties can be given in any suitable form for:

1. non-subordinated debt instruments or other liabilities such as bank loans and credit lines (within the meaning of section 3.2 of the Temporary Framework for State Aid) or
2. other forms of credit such as guarantees, letters of credit or derivatives, including a case-by-case approval, subject to the approval of the European Commission.

Included are both the respective principal claim and interest. The liabilities for which guarantees are assumed must be at least EUR 5 million. In addition, guarantees should only be granted for those liabilities for which no or at least no sufficient state coverage can be obtained through other programs.

Guarantees with a term beyond December 31, 2020, can only be granted up to twice the amount of the annual wage total of the beneficiary company for the year 2019 or the last year for which wage total data is available.

Guarantees with a duration beyond 31 December 2020 may also be granted, irrespective of the wage total, up to an amount of 25 percent of the total turnover of the beneficiary company in 2019 in cases duly justified vis-à-vis the European Commission, provided that proportionality is maintained and proven to the European Commission.

It has to be emphasized that claims under the guarantee expire if the guarantee beneficiary does not assert his rights immediately after the occurrence of the guarantee event, but at the latest after the expiry of six months after the occurrence of the guarantee event.

Appropriate consideration

The guarantee is not granted without further ado; it is linked to an "appropriate" consideration in the form of a remuneration which becomes due when the guarantee is invoked. Appropriateness must be determined using standard market criteria, taking into account the type of product, such as debt instruments, bank credit, credit line, loan or guarantee, the ranking of the receivable, the default risk and the amount of protection provided by the guarantee. Certain minimum premiums specified by the issuer of the Directive must be taken into account; these are calculated as percentages of the guaranteed amount per year and vary from 0.25 percent to 2.0 percent depending on the type of company (SMEs or large companies) and the term (up to one year or from the second year of the term or from the fourth year of the term).

If more than 90 percent of the liabilities are hedged with funds from the WSF (subject to the approval of the European Commission), a special market-based premium on the remuneration is payable.

Conditions for recapitalization

Recapitalization is intended to restore creditworthiness if the injection of subordinated capital or equity capital is required as a result of a crisis-related loss of equity. It can be combined with guarantees from the WSF.

The detailed conditions of the recapitalization are to be determined on a case-by-case basis. The decisive factor is the type of investment.

Recapitalization may only be carried out for reasons of public welfare, i.e. any threat to the existence of the company concerned must have a significant impact on the economy, technological sovereignty, security of supply, critical infrastructures or the labor market.

A recapitalization measure may only be granted if the company has not met the EU definition of "company in difficulty" as of December 31, 2019, and if the company has a positive economic going concern prognosis, taking into account the stabilization measures.

The recapitalization is intended to provide adequate capital resources for the foreseeable future. Adequate is what is required to ensure the company's creditworthiness in the long term. It is to be avoided that the stabilization measures directly result in the capitalization of the company probably becoming significantly better, not only in the short term, than it was before the COVID 19 crisis. The WSF is to work towards ensuring in individual cases that a recapitalization, if necessary, only takes place after taking into account possible contributions by the shareholders of the beneficiary company. These own contributions are not taken into account when comparing the capitalization before the COVID-19 crisis and after the granting of the stabilization measure.

Appropriate consideration

Even if recapitalization is used as the instrument, an appropriate remuneration must be paid to the WSF. This remuneration takes precedence over the profit participation rights of the other shareholders of the beneficiary company and may in particular take the form of a preferential allocation of profits or interest.
Here, too, the adequacy is measured on the basis of criteria customary in the market. In particular, the following must be taken into account:

• Characteristics of the instrument
• Rank of the claim
• Default risk
• all payment modalities
• Incentives to end support
• a suitable prime rate.

With regard to the specific calculation, the Directive contains more detailed information.

For interest-bearing hybrid instruments, the minimum remuneration is generally determined by the sum of the prime rate and certain premiums listed in the Directive. The prime rate is the 1-year IBOR or an equivalent interest rate published by the European Commission.

Here too, the legal regulation differentiates according to the type of recipient (SME or large company) and the term of the instrument (1st year, 2nd and 3rd year, 4th and 5th year, 6th and 7th year, 8th year and after) with a range of 2.25 percent to 9.5 percent.

For subordinated loans with a fixed interest rate independent of profit, without loss participation and without conversion rights (subordinated loans), the minimum remuneration is calculated according to other principles.

For preferential shareholdings, certain requirements regarding the subscription amount must be observed. This also applies to recapitalization instruments that provide for a right of conversion into equity interests with voting rights. In the case of preferential shareholdings, a non-ascending remuneration or a lower remuneration than the otherwise applicable minimum remuneration can also be agreed if a significant discount from the market value is made when determining the subscription price.

Special Provisions for Participations with Full Voting Rights

The Directive provides for the fulfillment of various requirements for the acquisition of shareholdings with full voting rights, which must be contractually secured, if necessary. These include in particular:

• The participation with full voting rights is to take place in particular if the confidence of the market in the continuation of the company cannot be established by other means. 
• The participation must generally consist in the subscription of new shares or company shares.
• In the case of listed companies, the base value for the subscription price should be closely related to the stock market price of the company at the time when the recapitalization measure becomes known. The provisions of the German Securities Acquisition and Takeover Act relevant to takeover bids with regard to the consideration to be offered shall apply accordingly. When determining the subscription price, the risk profile of the company, the special features of the chosen instrument, special effects in the stock market pricing and incentives for the termination of the measure must also be taken into account. This may result in an appropriate discount on the subscription price.
• In the case of non-listed companies, the base value for the subscription price must be determined by an expert opinion using recognized methods of company valuation. From a recapitalization in the amount of EUR 250 million onwards, a valuation in accordance with the IDW S1 principles of the Institut der Wirtschaftsprüfer e. V. is generally required. Below this amount, a simplified valuation method, e.g. based on multipliers, is sufficient.
• The conditions for the issue of shares must be such that they help to ensure that the participation is not maintained any longer than appears necessary in view of the stabilization of the company and the imperative of profitability. This must be ensured by
  • the issue of shares with a preferential dividend, 
  • the making of a substantial discount on the base value for the issue amount (discount of at least 50 percent) or
  • the making of a substantial discount on the underlying asset and the granting of rights to subscribe to further shares by the WSF in accordance with the provisions.
• In return for further subscription rights to shares, the WSF pays a premium in the amount of the discount on the issue amount as a premium. A subscription right in the volume of at least 10 percent of the nominal value of the shares subscribed by the WSF is due after four years, calculated from the date of the participation by the WSF, if the WSF has not sold at least 40 percent of its participation by that date, and after six years if the participation of the WSF has not been completely disposed of. The company must service the subscription rights from a conditional capital increase. The premium paid in is to be regarded as an advance payment to be offset against the obligation to make a contribution.
• Finally, the WSF may also acquire participations with full voting rights at market conditions in order to prevent or hinder an imminent takeover if the takeover is to be carried out by an investor from outside the European Union and the enterprise is active in a sector mentioned in § 55 of the Foreign Trade and Payments Regulation (enterprises of critical infrastructure) or otherwise of comparable importance for the public safety and order of the Federal Republic of Germany. In this case, the acquisition of a shareholding with full voting rights does not require that the market's confidence in the continuation of the company cannot be established by other means. Deviations from the conditions and requirements otherwise provided for may be made here. Decisions are made by the WSF Committee.

This "state participation to prevent a hostile takeover" of an operator of critical infrastructures or any other company particularly relevant for public safety and order, as provided for in § 7 paragraph 10 of the WSF-DV, is partly met with criticism, not necessarily because of its content, but mainly because of its coming about and its location. As is well known, the purpose of the WSF is to overcome liquidity bottlenecks and to strengthen the capital base of companies. The Directive now at least prima facie authorizes the WSF (beyond that) to acquire stakes in companies in order to prevent or hinder threatened takeovers by investors from third countries. Although the prevention of excessive influence of third country investors (including foreign sovereign wealth or state funds) on critical infrastructure operators may seem desirable, the question arises whether the implementation of such a scheme by including relevant provisions in a Directive issued for the implementation of the Economic Stabilization Fund Act is the right way forward from a legal and political point of view and whether the motto "the end justifies the means" was applied.
 

Obligations and conditions

The requirements and conditions for stabilization measures under the German Stabilization Fund Act must comply with the principle of proportionality and must generally be based on the type, amount and duration of the stabilization measure used as well as on the Company's economic situation. The conditions should be designed in such a way that they provide incentives for a speedy termination of the stabilization measure.

For recapitalization measures and mainly for guarantees with a guaranteed amount > EUR 100 million, the following applies in addition:

• As long as the company avails itself of stabilization measures of the WSF, members of executive bodies and managing directors may not be granted bonuses or other variable or comparable remuneration components, including any group remuneration. Likewise, special payments in the form of share packages, gratuities or other separate compensation in addition to the fixed salary, other compensation components placed at the discretion of the company and legally not required severance payments may not be granted.
• Until at least 75 percent of the measure has been repaid, no member of the Company's Executive Board may receive compensation in excess of the basic compensation of that member of the Executive Board as of December 31, 2019. For persons who become members of the Executive Board at the time of the measure or thereafter, the upper limit shall be the basic compensation of members of the Executive Board of the same level of responsibility as of December 31, 2019.
• If necessary, additional conditions are to be imposed to avoid distortions of competition.
• During the duration of the stabilization measure, generally no dividends or other profit distributions not owed by contract or law may be made to shareholders other than the WSF.
• Furthermore, the company may not buy back shares or other components of the company's liable equity capital and may not make any other payments to other shareholders or companies affiliated with them that are not contractually or legally owed.
• Companies that are part of a multinational group must confirm that WSF funds will not be transferred to non-cooperative jurisdictions as defined in the EU list of non-cooperative countries and territories for tax purposes. Companies located in non-cooperative jurisdictions cannot be beneficiaries of stabilization measures.
• Companies must report to the WSF within twelve months of the submission of the repayment plan and thereafter regularly every twelve months on, among other things, the progress made in implementing the repayment plan. Companies are obliged to submit to the BMF and the BMWi a strategy for the termination of the stabilization measure agreed with the Finance Agency no later than twelve months after the granting of the recapitalization measure. In particular, this strategy should contain considerations regarding the continuation of the company and a plan for the provision of compensation for the stabilization measure and repayments to the WSF.
• During the stabilization measure there are certain disclosure and reporting obligations, and a review of the business policy and its economic sustainability is also carried out in order to ensure a sound and prudent business policy.
• Listed companies may only deviate from the recommendations of the German Corporate Governance Codex with the approval of the WSF and only if there is an objective reason. Their contribution to the economic performance, to the stabilization of production chains and to the permanent safeguarding of jobs must be proven. Restrictions on compensation should also be imposed on employees at the downstream management level.
• If the recapitalization measures are likely to distort competition, the WSF may impose conditions on the beneficiary company for its business activities that are suitable to avoid such distortions of competition and certain conditions apply in addition.
• The WSF must have contractual rights granted to it by the beneficiary company within the framework of stabilization measures. These rights include a right of inquiry for the Federal Court of Auditors, verification of compliance with conditions and requirements by the auditor, consent to individual publication of the stabilization measures granted, appropriate information rights and the submission of a declaration of commitment by the bodies authorized to manage the business, in which any conditions and requirements are to be included. Obligations and conditions can also be contractually agreed.
• The Directive provides for the possibility of establishing contractual rights of termination, claims for damages and contractual penalties in the event of any breaches by the beneficiary company.
   

Termination of stabilization measures

Recapitalization measures must be terminated at the latest six years after being granted and guarantees at the latest ten years after being granted.

The recapitalization measure must be terminated by sale to a third party investor or existing shareholder at market price and in compliance with the principles of transparency and non-discrimination. To the extent legally permissible and economically justifiable, the buyback by the company itself is to be examined as a further possibility in addition to the sale on the market.Furthermore, stabilization

measures can only be continued if their termination would be uneconomical, would directly endanger public safety and order, technological sovereignty in high-tech areas or the continuation of the company or would have significant negative effects on the economy as a whole.
 

Costs

Orders the applicant to pay the costs incurred in processing the application. The reimbursement of costs is regulated in § 19 of the Stabilization Fund Act and will now be specified in more detail in the WSF Cost Regulation, in particular with regard to origin, scope and due date, but currently without more precise indications on the final amount.

The BMWi or the BMF can determine these costs by means of a cost notice or levy these costs on the basis of a declaration of obligation or a contract.