Listing of Foreign Companies on German Stock Exchange By Dr Herbert Harrer and Dr Claus Mößle, Linklaters LLP, Frankfurt, Germany The Frankfurt Stock Exchange has significantly increased its attractiveness as an international listing place, and foreign companies have increasing interest in accessing the German capital markets. In particular companies from CIS countries and from Asia have further growth potential. A large number of foreign companies are traded on the second quotation board of the Open Market of the Frankfurt Stock Exchange, in addition to their primary listing abroad. As of [30 June] 2009, 382 companies were listed in the Prime Standard of the Frankfurt Stock Exchange, the international quality segment of the Regulated Market of the Frankfurt Stock Exchange, including 34 foreign companies with four companies (Asia Bamboo, Business Media China, ZhongDe Waste Technology, Vtion Wireless Technology) from China and one company (CAT.Oil) from Russia, which have high market visibility. Emerging markets provide high growth potential and attractive investment opportunities for German and European countries. Deutsche Börse AG, a German stock corporation, is the operator of the market leading Frankfurt Stock Exchange and is itself listed in the Regulated Market (Prime Standard) of the Frankfurt Stock Exchange. Its market capitalisation as of the end of September 2009 was 10.1 1 bn and thereby significantly larger than its competitors NYSE, Nasdaq/OMX or the London Stock Exchange. Frankfurt Stock Exchange as a listing venue and its market segments A listing on the Frankfurt Stock Exchange provides a large variety of advantages, including access to international high quality investors, a competitive regulatory framework, high visibility, cost efficiency Dr. Herber Harrer Dr. Claus Mößle and high liquidity. As of 30 September 2009, 686 companies were listed in the Regulated Market including 72 foreign companies of the Frankfurt Stock Exchange 2 and more than 9,000 companies in the OTC market (Freiverkehr), most of them foreign companies, with a secondary listing are traded on the second quotation board of the open market (Open Market) of the Frankfurt Stock Exchange. This includes more than 500 Chinese and approximately 60 Russian companies. Emerging markets provide high growth potential and attractive investment opportunities for German and European countries.. More than 10,000 equity shares from companies from over 25 countries are listed on the Frankfurt Stock Exchange. Deutsche Börse AG facilitates easy access for foreign issuers, by providing extensive marketing activities, including international road shows, experienced listing partners such as audit firms, law firms or PR firms. Deutsche Börse AG has a particularly high market visibility in certain sectors such as renewable energy, chemical, software/ IT, financials or automotive. A listing on the Frankfurt Stock Exchange provides a large variety of advantages, including access to international high quality investors, a competitive regulatory framework, high visi- 1 www.deutsche-boerse.com, Investor Relations, The Share. For more information cf. Deutsche Börse listing guide, 2009; Deutsche Börse, Praxishandbuch Börsengang, 2006. 2 Spot Market Monthly Statistics, Cash Market September 2009, p. 40.
bility, cost efficiency and high liquidity. Based on the needs of the respective company. Deutsche Börse AG offers a broad range of choices from a listing on the EU-regulated market with the General Standard as the standard segment and the high quality standard Prime Standard to the non- EU-regulated market with the Open Market as the standard segment and the Entry Standard as the quality segment. The Regulated Market 3 of the Frankfurt Stock Exchange constitutes an EU-regulated market comparable to the main board of the London Stock Exchange 4 or Euronext in Paris 5. The Regulated Market is an organised market in accordance with 2 (5) Securities Trading Act and has two market subsegments, the General Standard as the minimum standard and the Prime Standard as the quality standard with additional transparency obligations. The Regulated Market 6 typically requires, inter alia, a minimum existence of the issuer of three years 7 and an expected share value / equity capital of at least 1.25 million 8 as well as consolidated financial statements prepared in accordance with IFRS or equivalent accounting standards. Details are set forth in 5 Securities Prospectus Act (Wertpapierprospektgesetz) and Commission Regulation No. 809/2004 of April 29, 2004, implementing Directive 2003/71/EC of the European Parliament and of the Council as regards elements related to prospectuses and advertisements, as amended. 9 Since 1 January, 2009, also foreign GAAP of the United States, China, Canada, Japan, South Korea and India is permissible as accounting 3 4 5 6 7 8 9 Cf. 32, 33 Exchange Act.; 43 et seq. Exchange Rules for the Frankfurt Stock Exchange (Börsenordnung) (July 2009) (hereinafter Exchange Rules) for General Standard, 42 Stock Exchange Act and 45 et seq. Exchange Rules for Prime Standard. Cf. www.londonstockexchange.com/companies-andadvisors/aim/documents/publications.html. Cf. www.euronext.com/landing/equitiesop-21363-en.html. Cf. 43, 44 Stock Exchange Admission Regulation (Börsenzulassungs Verordnung) (hereinafter Admission Regulation ). Cf. 3 Admission Regulation. Cf. 2 Admission Regulation. Hereinafter Regulation No. 809/2004. standard pursuant to new EU legislation 10. The subsequent listing requirements of the General Standard include mandatory publication of annual reports, prohibition of insider trading, ad-hoc publicity, directors dealings and reporting requirements in the event of crossing certain thresholds of shareholding. The Prime Standard of the Frankfurt Stock Exchange has, in addition to all requirements applicable to the General Standard, additional subsequent listing requirements which include the publication of a semi-annual report and two quarterly reports, publication of a corporate calendar, an annual analyst presentation and adhoc publication in English as well as the appointment of at least one designated sponsor. The Open Market (regulated unofficial market) is organised under private law and constitutes a non- EU-regulated market segment with very few regulatory requirements as a minimum standard. 11 It is regulated by the General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market (Geschäftsbedingungen für Freiverkehr. This market segment is comparable to the Alternative Investment Market (AIM) in London or Alternext in Paris and targets informed, risk-aware investors with limited expectations with respect to transparency and liquidity. The Open Market is divided between the first quotation board for primary listings mainly for foreign issuers and the second quotation board for companies already admitted to trading on a domestic or foreign exchange-like market. 12 There is no requirement for a minimum existence of the company, for a minimum free float or to make ad-hoc publications in case of price sensitive information as well as no obligation of shareholders to report the reaching, passing or falling below certain thresholds of shareholdings. However, the prohibitions on insider trading and market manipulation apply. 13 The 10 11 12 13 Cf. Commission Regulation (EC) No. 1289/2008 of 12 December 2008 amending Commission Regulation (EC) No. 809/2004 implementing Directive 2003/71/EC of the European Parliament and of the Council as regards elements related to prospectuses and advertisements. Cf. 12 et seq. Securities Trading Act, 20a Securities Trading Act. Cf. Regulated Unofficial Market Rules. Cf. 12 et seq. Securities Trading Act, 20a Securities Trading Act
quality standard provides for additional transparency requirements, which include the obligation to publish interim reports, a company profile and share price sensitive information on the company s website. Stock exchange listings in Germany In general the regulator in Germany, BaFin is the competent authority for the approval of the securities prospectus in the case of a primary listing in Germany in accordance with implemented EU law and Deutsche Börse AG is the competent authority for the listing of the shares on the Frankfurt Stock Exchange. An introduction into the non-regulated market can be achieved within a few days by a short non-public issuer data form filed with the Frankfurt Stock Exchange 14, which does not result in a public offering 15 whereas in the case of a public offering in Germany, a securities prospectus has to be published after approval of BaFin. 16 If the shares of a foreign company are already listed on another regulated market of a European stock exchange, an additional listing at Deutsche Börse AG or a transfer to the Frankfurt Stock Exchange can be obtained without significant burden. Listing may occur on the basis of a prospectus notification pursuant to the European passport 17 and admission is also possible without a prospectus on the basis of a German-language summary 18. Alternatively, a listing is possible on the basis of a prospectus of the company incorporated in a non-eea member state 19 and finally, inclusion of shares already listed in a regulated market of a German stock exchange may occur 20. The decision which alternative provides the most convenient access and depends on the individual circumstances. Less stringent rules for companies from emerging markets In order to address specific needs of foreign issuers from emerging markets, the Exchange Rules (Börsenordnung) of the Frankfurt Stock Exchange provide for some reliefs for companies which have their offices in non-eu-countries or outside another contractual country of the Treaty on the European Economic Area for the Prime Standard and extended the publication period for quarterly and half year reports from the standard two months to an three months 21. If the German regulator, the German Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin ) grants an extension to the applicable publication period for the annual report of four months, the half year report of two months or the interim (quarterly) report, such exemption granted by BaFin shall be immediately applicable unless the granted exemption contradicts basic ideas of the Prime Standard 22. In addition, the management board of the Frankfurt Stock Exchange may grant exemptions from the publication requirements for quarterly, half year and annual reports to issuers with offices in non-eucountries or outside another contractual country of the Treaty on the European Economic Area, provided that the issuers are subject to similar rules of a non-eu-country or comply with such rules in whole or in part 23. Certain third country GAAP accepted as equivalent accounting standard On 1 January 2009, an amendment to existing EU regulations 24 became effective which significantly facilitates the listing of foreign issuers from certain third countries on the regulated market of European stock exchanges (including the Frankfurt 14 15 16 17 18 19 20 Cf. Open Market Circular No. 10/09 relating to the Issuer Data Form (previously Exposé ) of 25 June 2009. Cf. 2 No. 4 Securities Trading Act. Cf. 1 Securities Trading Act. Cf. Section 17 Securities Prospectus Act. Cf. Section 4 (2) No. 8 Securities Prospectus Act. Cf. Section 20 Securities Prospectus Act. Cf. Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004. 21 22 23 24 Cf. 66 (5) Exchange Rules. Cf. 65 (3) Exchange Rules. Cf. 65 (3) Exchange Rules. Cf. Commission Regulation 1289/2008 amending Commission Regulation 809/2004 implementing Directive 2003/71 as regards elements related to prospectuses and advertisements.
Stock Exchange) 25. Prior to this amendment, financial statements in accordance with International Financial Reporting Standards (IFRS) were required for a listing on the regulated market of European stock exchanges (such as the General Standard and the Prime Standard of the Frankfurt Stock Exchange) whereas third country GAAP was only accepted for non-eu regulated markets (such as the Open Market and the Entry Standard. Certain foreign issuers listed or seeking listing on EU markets are now able to prepare financial information in accordance with the Generally Accepted Accounting Principles (GAAP) of the United States, China, Canada, Japan, South Korea and India since they are considered equivalent standards to IFRS. A prospectus required to be published by an issuer seeking admission to an EU regulated market must contain financial information as set forth in the national law of the respective EU member state implementing EU law. That information must generally be prepared in accordance with IFRS or in some cases foreign GAAP, where the GAAP of that country have been adopted as equivalent by the EU. The same standards apply to ongoing financial reporting under the EU 26 Transparency Directive. This amendment significantly facilitates the listing of foreign companies from these jurisdictions on the Frankfurt Stock Exchange since there is no longer a requirement to provide financial information in accordance with IFRS, a reconciliation of such third party GAAP with IFRS or a narrative description explaining the differences. GDRs concept and Frankfurt GDR or direct listing of Shares GDRs 27 are the established structure for an offshore listing, whereby shares of the foreign company are deposited with a depository bank in the home jurisdiction of the issuer and the GDRs are subsequently listed at Deutsche Börse AG. GDRs constitute a substitute for the original share and provide similar investor protection and rights like the underlying share. A depository receipt program is an uncomplicated way to diversify the investor base geographically and to potentially achieve fairer valuation. It is also possible for foreign companies to establish a non-domestic holding company, i.e. in Germany or other suitable countries, which can directly list its shares on Deutsche Börse AG without the requirements to list such shares on a domestic stock exchange. However, permission under applicable local law may be required. Establishing a non-domestic holding company allows a direct in- The process is further simplified by the new Frankfurt GDR concept, which combines international 28 experience with GDRs with special expertise of Deutsche Börse AG. The Frankfurt GDRs are supported by a new custody and settlement structure offered by Clearstream Banking, Deutsche Börse s settlement and custody division. The Frankfurt GDR concept allows compliance with overseas regulations restricting certain companies from listing directly on a foreign stock exchange, and German collective safe custody rules. The Frankfurt GDRs address such foreign direct listing restrictions by way of an indirect issuance model, with the shares of the issuing company kept in custody in the local market by the depositary bank and the receipts evidencing ownership of the shares issued to investors overseas. The Frankfurt GDR investor is also entitled to convert its Frankfurt GDR into the underlying share on a continuous basis. 25 Cf. Commission Regulation (EC) No. 1289/2008 of 12 December 2008 amending Commission Regulation (EC) No. 809/2004 implementing Directive 2003/71/EC of the European Parliament and of the Council as regards elements re lated to prospectuses and advertisements. 26 Cf. Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004. 27 28 For American Depository Receipts (ADR) which are substantially identical with GDRs, cf. Werlen in Habersack/Mülbert/Schlitt, Unternehmensfinanzierung am Kapitalmarkt, 2nd edition 2008, 37 notes 167 et seq.; Strauch in Marsch-Barner/Schäfer, Handbuch der börsenorientierten AG, 2nd edition 2008, 11 notes 23 et seq. Cf. brochure of Xetra Deutsche Börse Group, Deutsche Börse DR Program: Frankfurt GDRs for International Companies, April 2009, Deutsche Börse listing guide, November 2008, Sections 5.3 5.7.
vestment of foreign investors into the shares of a company which may have all of its assets in the foreign country and also permit the direct listing of the shares rather than GDRs on a foreign stock exchange. In such structures, typically a foreign NewCo is established prior to the stock exchange listing and the operating foreign business is transferred to the NewCo and constitutes subsidiaries of the NewCo. Required documentation for listing In line with international market practice, a listing on the Frankfurt Stock Exchange requires customary documentation. The most important document of a listing process is the securities prospectus, which addresses all factual and legal circumstances which are material for the assessment of the shares to be admitted, and the prospectus has to be complete and correct. The contents of the securities prospectus are set forth in the German Securities Prospectus Act (Wertpapierprospektgesetz) which implemented the EU Prospectus Directive in July 2005. The minimum review period of BaFin for the prospectus is 20 business days, in practice approximately six weeks. For foreign issuers, the general requirement to publish the prospectus in the German language does not apply, and foreign issuers may file an English language prospectus with a German language summary. The prospectus must contain, inter alia, information about the company, risk factors, a business description as well as a management discussion and analysis of the financial situation and financial statements. The financial statements must be audited and must relate to the last three financial years and include in specific circumstances pro forma information in the event of material changes. In addition, a credit institution or certain other entities is required as listing sponsor for a listing on the regulated market of a German stock exchange. Manifold criteria for selecting the listing venue For foreign companies, a public offering of shares and a simultaneous listing on the Frankfurt Stock Exchange may be attractive and trigger only limited additional requirements, related costs and time. A listing on the Frankfurt Stock Exchange improves liquidity, which leads to enhanced investor awareness and also allows a fairer valuation. Furthermore, it may be advisable for a foreign company, in a period of economic complexity, to geographically diversify its operations away from the Anglo- Saxon business world and the restrictions of the Sarbanes-Oxley Act 29, which may result in significant additional costs and management time spent on overly burdensome regulatory requirements Recent history shows that foreign companies tend to delist from stock exchanges in the United States and that foreign companies increasingly obtain listings on European stock exchanges such as the stock exchanges in London, Luxembourg or Frankfurt. The number of German companies listed on the NYSE declined from 16 on 31 December 2009 30 by more than 50 % to 7 on 30 September 2009. Examples are the delistings of the German companies Bayer AG, BASF AG, Infineon Technologies AG and SGL Carbon AG, or from the NYSE and the recent listings of the China originated companies Asia Bamboo, Business Media China, ZhongDe Waste Technology and on the Regulated Market (Prime Standard) of the Frankfurt Stock Exchange. Reasons for these changes are manifold varying from expected significant cost savings in case of a reduction of the listing venues and reduced compliance obligations from deviating consequential listing and reporting obligations and an expected increase of liquidity on the remaining stock exchanges in case of previous multiple listings. Typically, also improved brand recognition for the issuer and specific sector focus of the respective stock exchange and increased market visibility are relevant. The Frankfurt Stock Exchange is particularly prominent in the renewable energy, chemical, software/it, financials and automotive sector. IPO candidates tend to obtain a listing on a stock exchange, on which its peer group is listed and monitored by analysts which have the required sector expertise. 29 30 Cf. 18 U. S. C. Sec. 1350. With respect to Certification of Disclosure in Companies' Quarterly and Annual Reports 17 CFR 228 ff., Release Nos. 33-8124, 34-46427, IC-25722, File No. S7-21-02. Cf. nyse.com/financials/1022221393065.html (Investor relations financials transactions statistics).
However, the specific needs and expectations of the issuers deviate significantly. Some companies require only a foreign listing to raise additional equity capital and dept financing. This is the case inter alia for certain listings of foreign companies on a non-eu regulated market in Luxemburg, London or Frankfurt for its GDRs to safeguard a successful private placement to international investors in addition to the offering of shares in its home market, on which the shares also have their primary listing. Other companies may choose to obtain only a foreign listing to raise equity capital abroad without having a separate primary listing in the home market. This is the case for example for the shares of Asia Bamboo, Business Media China, ZhongDe Waste Technology and Vtion Wireless Technologies, which are technically German companies, however, have their operations exclusively in China. Conclusion This article shows that the listing of a foreign company on a German Stock Exchange can provide an attractive alternative for raising equity capital and to increase market visibility and recognition for the company. The creation of the Frankfurt GDR as well as the recent amendment of the EUlegislations to accept certain third party GAAP as equivalent accounting standards for listings in Europe has further facilitated the process. Dr. Herbert Harrer, Rechtsanwalt (Frankfurt) and attorney at Law (New York), partner, Linklaters LLP, Frankfurt; Dr Claus Mößle, Rechtsanwalt (Frankfurt), Managing Associate, Linklaters LLP, Frankfurt. The international law firm Linklaters LLP is listing partner of Deutsche Börse. Published in I.C.C.L.R. 2010, 96 et seq: