Introduction
The new draft primarily contains comprehensive measures to strengthen Germany as a financial hub and is intended to make an important contribution to boosting the economy by mobilising capital for growth and innovation, particularly for small and medium-sized enterprises (SMEs). A special focus is on improving the framework conditions on the capital market and the financing conditions for companies, thereby aiming to implement the growth initiative adopted by the German government on 17 July 2024. However, the draft also introduces significant changes to delisting procedure under Section 39 of the German Stock Exchange Act (Börsengesetz – BörsG) which results in the revocation of the issuer’s admission to trading on the regulated market. This is of particular importance as the number of delisting tender offers on the German market has considerably increased since 2020 (either in combination or following a public takeover offer). This blog post outlines the status quo, followed by a summary of the key intended changes to the delisting process.
Status quo
Under the current legal framework, the revocation of admission to trading on the regulated market can either be instigated by the management of the stock exchange (Section 39 para. 1 BörsG) or can be applied for by the issuer (Section 39 para. 2 BörsG). In order to protect the rights of shareholders, in the latter case, which is in fact the most likely scenario, it is required to launch a delisting tender offer providing a cash consideration in euros and thereby allowing shareholders to divest before the delisting is effected. While such delisting tender offer generally follows the rules for a public takeover offer under the German Securities Acquisition and Takeover Act (Wertpapiererwerbs- und Übernahmegesetz – WpÜG), the adequacy of the compensation is determined based on the six-months volume-weighted average price of the issuer’s shares before the intention to make a delisting tender offer is published (see Section 39 para. 3 sentence 3 BörsG) instead of a three-months period as foreseen under the WpÜG. Nevertheless, this method cannot be applied and the adequacy of the compensation must be determined based on a valuation of the company under “special circumstances” where the share price does not accurately reflect the company’s true value. Such circumstances are exhaustively listed in Section 39 para. 3 sentence 3 BörsG and, for instance, include the scenario where the issuer’s shares were subject to market manipulation. In practice, however, the valuation is based almost without exception on the stock exchange price.
Key changes proposed by the draft ZuFinG II
The draft act proposes the following key changes:
1. Expanding the scope of delistings without a delisting tender offer: The amendments expand the scenarios in which a delisting application can be made without launching a delisting tender offer. Specifically, such tender offer would not be required either when insolvency proceedings have been initiated against the issuer or if – despite the revocation of the admission to trading on the regulated market – the issuer’s shares continue to be traded on so-called SME growth markets (i.e. trading venues that have been designed for SMEs such as the segment “Scale” of Deutsche Börse). With regard to the latter, the rationale of this change is explained in the explanatory note to the draft act. Despite the fact that SME growth markets have fewer post-admission obligations, the explanatory note states that SME growth markets would have a regulatory level closely resembling that of regulated markets. Furthermore, it is assumed that there will still be sufficient trading on the SME growth markets, allowing shareholders to divest before the delisting is implemented. Against this backdrop, there would be no need for a delisting tender offer.
2. Additional exceptions requiring valuation of the issuer: In case where a delisting tender offer is required, the draft act aims to introduce a more flexible interpretation of what constitutes "special circumstances” triggering the need for a valuation in order to determine the adequacy of the compensation. While under the current legal framework (and also in practice), the compensation is regularly determined based on the volume-weighted average share price and the “special circumstances” constituting an exception are exhaustive, the draft act intends to turn these exceptions into broader and non-exhaustive examples (Regelbeispiele). Unfortunately, no further guidance is given as to what might additionally qualify as “special circumstances”, increasing the risk of invoking this rule and thereby challenging or disrupting the delisting processes.
3. Introducing appraisal proceedings: In light of the abovementioned expanded scope of the valuation requirement, it is also intended to introduce appraisal proceedings (Spruchverfahren) allowing shareholders to challenge the adequacy of offered compensation without preventing the delisting from being carried out. While appraisal proceedings are common in the German market (e.g. in the context of squeeze-outs), past track records show that such proceedings take a number of years and can turn out costly due to the potential top-up payments and incurred interest during the entire lifetime of the proceeding.
4. No discretion of stock exchange regarding delisting: On a more technical point, the draft act provides that the stock exchange management's decision on approving the delisting will become a binding decision (gebundene Entscheidung), as opposed to the discretion provided under the current law. According to the explanatory note, the requirements for delisting and protection of shareholders are comprehensively addressed and therefore there would be no need to exercise any discretion.
Conclusion / outlook
So far, only the initial draft bill has been published, and ZuFinG II is expected to come into force in the second quarter of 2025. While further development of the legislative process and possible amendments will need to be closely monitored, some criticism has already emerged regarding the remaining degree of uncertainty due to the change in the "special circumstances" (see section 2 above). Combined with the introduction of appraisal proceedings, this could lead to increased litigation risks, which might act as a deterrent for delistings. Furthermore, the draft act does not (yet) take into account the fact that a delisting is often followed by a squeeze-out (usually driven by a majority shareholder on its path to 100% ownership of the company). In order to carry out a squeeze-out, the minority shareholders must receive adequate compensation, which can also be challenged in appraisal proceedings. It remains unclear whether and how such proceedings would be aligned with the delisting-related appraisal proceedings and whether the outcome could be different. Overall, the draft act exhibits certain inconsistencies that require further scrutiny.
