The draft bill for Germany’s Financing for the Future Act (Zukunftsfinanzierungsgesetz - ZuFinG) was published on April 12, 2023. The planned modernization measures are intended to strengthen the performance of the German capital market and increase the attractiveness of Germany as a financial hub.
These objectives are to be implemented through the following amendments:
- In stock corporation law: Increase in the volume limit for the simplified exclusion of subscription rights and introduction of the appraisal procedure for the so-called valuation complaint, increase in the volume limit for conditional capital for business combinations and for the granting of subscription rights to employees and executives, (re)introduction of multiple-vote shares
- In the Stock Exchange Act: Introduction of special provisions for special purpose acquisition companies (SPACs)
- In the Electronic Securities Act: Introduction of electronic shares
Furthermore, the aforementioned regulations are flanked by changes in tax law and supervisory law.
Increase in Volume Limit for Simplified Exclusion of Subscription Rights; Introduction of Appraisal Procedure for So-Called Valuation Complaint
In order to facilitate and accelerate the implementation of capital increases, a simplified exclusion of subscription rights in the case of cash capital increases close to the stock market price shall in future no longer be permissible only in the amount of 10% of the share capital, but in the amount of up to 20% of the share capital. This change would make capital raising considerably more flexible, as the simplified exclusion of subscription rights allows companies to place new shares with investors on the market at short notice.
In the case of a capital increase with subscription rights, on the other hand, a two-week subscription period must be observed under German stock corporation law, and in economic terms the company usually has to accept a not inconsiderable discount. The increase in the volume limit for a simplified exclusion of subscription rights to 20% is also in line with prospectus law, which allows a prospectus-free admission of up to 20% of new shares within one year, provided that no public offer is made. However, it remains to be seen whether proxy advisors will support the increase in the simplified exclusion of subscription rights to 20%, as at least ISS recently only tolerated authorizations for an exclusion of subscription rights amounting to a maximum of 10% of the share capital, taking into account parallel authorizations (Glass Lewis is somewhat more generous with 20% in absolute terms).
Furthermore, a valuation complaint, i.e., a complaint that a company has issued new shares at too low a price, can no longer be lodged by means of an action for annulment; in the future, only the appraisal procedure will be used for valuation complaints. In addition, it is envisaged that the company will owe the shareholders compensation for an excessively low price for the new shares, but that the company may claim reimbursement or indemnification from the shareholder who takes over the new shares. Furthermore, the draft bill stipulates that the value of the new shares, which is to be used as a reference for assessing whether the price for the new shares was appropriate or too low, is in principle to be determined on the basis of the three-month average stock market price.
Increase in Volume Limit for Conditional Capital for Business Combinations and for Granting of Subscription Rights to Employees and Management
A stock corporation can currently have conditional capital of up to 50% of the share capital if granted by the annual general meeting. If the conditional capital is used to prepare a merger of companies, the current draft bill of the ZuFinG provides for the 50% limit to be raised to 60%. The practical benefit of this change is questionable since, in practice, conditional capital is not used for business combinations. This is due to the fact that conditional capital—as resolved by the annual general meeting—must already name the beneficiary, which makes it inadequate as a "capital reserve" for future business combinations.
In addition, the draft bill provides for the exclusion of subscription rights for the granting of subscription rights to employees and members of management to be raised from a maximum of 10% of the share capital to 20%. This provision would benefit young growth companies that have increasingly relied on stock options and/or subscription rights in recent years for employee and management compensation. On the other hand, difficulties could arise in implementing a 20% volume limit, which would have to be approved by the annual general meeting, due to the current recommendations by proxy advisors; for example, ISS generally favors an exclusion of subscription rights for equity-based employee and management compensation programs only up to 5% and a maximum of 10% for growth companies.
(Re)introduction of Multiple-Vote Shares
Following the abolition in 1998 of multiple-vote shares, i.e. clauses in the articles of association that grant shareholders more voting power than corresponds to their shareholding, the draft bill contains provisions that reintroduce multiple-vote shares into German stock corporation law. This is intended in particular to increase Germany's competitiveness and attractiveness as an investment and listing location because founders and investors in German companies often shy away from going public for fear of losing control of their (possibly still young) company. At the same time, they then have to forsake an important tool for raising equity.
The planned regulations are also in line with the proposed amendments to the EU Listing Act, under which member states are to provide for multiple-vote shares for companies seeking admission to trading on an SME growth market. Part of the planned introduction of multiple-vote shares are also various regulations on investor and minority protection; in this respect, multiple-vote shares are not to be permitted indefinitely, for example, but only up to a voting ratio of 10:1 and for a maximum of 10 years, or 20 years following an extension vote.
Introduction of Special Regulations for SPACs
German corporate law structures do not yet permit the establishment of a SPAC based on the US model. The few SPACs listed in Germany are therefore mostly Luxembourg SEs. The draft bill therefore provides for an opening of German corporate and capital markets law for SPACs or, in the diction of the ZuFinG, "Börsenmantelaktiengsellschaften" (BMAG). It is planned to add the special standards for BMAGs, which will selectively modify the provisions applicable to stock corporations, to the Stock Exchange Act.
Introduction of Electronic Shares
Digitization is also increasing in securities law. Now that bearer bonds can already be issued as electronic securities, this option is also to be created for bearer and registered shares. The only difference between electronic shares and conventional shares is that they are not certificated, but instead entered in an electronic securities register. The draft bill provides that bearer and registered shares can be issued as central register securities in the future. In addition, but solely for registered shares, it will be possible to issue such shares as crypto securities using blockchain technology.
Custody of Crypto Assets
According to the draft bill, operators of crypto custody transactions must ensure in the future that crypto assets and cryptographic keys of customers are kept separate from the operators’ own crypto assets and cryptographic keys. This is already known from other areas, e.g., payment services or investment law, and will now also be introduced as special obligations for crypto custody.
In addition, it is clarified that the crypto value held in custody for a customer within the scope of a crypto custody transaction is deemed to belong to the customer, unless the customer has given consent to dispose of the value for the account of a third party. For the protection of customers, the same shall also apply to shares in crypto values in joint custody and to private cryptographic keys held in isolation.
Change in Tax Privileges for Transfer of Property Interests
The annual tax-free maximum amount concerning the grant of asset participations to employees as defined by Section 2(1) No. 1(a), (b) and (f) to (l) and (2) to (5) of the Fifth Capital Formation Act (shares, GmbH shares, etc.) granted by the employer or by a shareholder of the employer will be increased from €1,400 to €5,000 with effect from 2024 onwards. In the future, deferred compensation will no longer be favored, i.e., the asset participations must be granted in addition to the salary owed (Sec. 3 No. 39 EStG-E). If in these cases the asset participation is sold within three years, the proceeds from the sale, i.e., without deduction of the tax-free acquisition costs, are subject to the final withholding tax (Sec. 20 (4b) EStG-E).
The deferred taxation of the grant of asset participations (by the employer or—in the future—also within a group of companies as defined by Section 18 of the German Stock Corporation Act (AktG)) in excess of the tax-free amount pursuant to Section 19a of the German Income Tax Act (EStG) is to be made possible in the future even for significantly larger companies. Accordingly, the thresholds are to be examined on the basis of the double SME threshold, i.e., sales of no more than €100 million or an annual balance sheet total of no more than €86 million and employment of fewer than 500 employees (Sec. 19a (3) EStG-E). In addition, the time component of the threshold is extended from two to seven years and the startup period from 12 to 20 years.
Furthermore, in the future, instead of taxing the non-cash remuneration at the level of the employee, it will also be possible to subject it to a flat-rate wage tax of 25% at the level of the employer (Sec. 19a (4) EStG-E). In order to avoid the problem of taxation of "dry income" in cases of a change of employer or after a period of 20 years, it will be possible in the future to defer taxation until actual realization if the employer irrevocably declares that it assumes liability for the wage tax to be withheld and paid (Sec. 19a (4b) EStG-E).
Extension of VAT Exemption to Management of Loans and Loan Collateral and Management of Alternative Investment Funds
In addition, the administration of loans and loan collateral by lenders will also be exempt from value-added tax (VAT) in the future (Sec. 4 No. 8 lit. a, g UStG-E). In this way, a VAT "level playing field" is introduced for the taxation of administrative services provided by lender syndicate leaders. The aim is to create a level playing field for the German banking industry.
The same applies to the administrative services of all alternative investment funds as defined in Section 1 (3) of the German Banking Act (KWG), which are also to be exempt from VAT in the future (Section 4 No. 8 h UStG-E).
English Language Communication with Regulatory Authorities
The draft bill provides that English-language communication with supervisory authorities is now legally regulated and comprehensively possible. In particular, notifications, documents, and declarations to the Federal Financial Supervisory Authority (BaFin) and the Deutsche Bundesbank may in future be submitted wholly or partly in English. However, BaFin retains the right to require the submission of a (certified) translation.
At the same time, written form requirements in supervisory law will be supplemented by digital communication options. In addition, BaFin will be able to notify or serve administrative acts electronically in the future.
It is expected that the German cabinet will adopt a government draft in the near future on the basis of the comments and hearings received from the associations and open the legislative process. The aim is to pass the law in the current year 2023. Most of the new regulations are to come into force on the day after promulgation.