The Future Financing Act Aims to Boost Investment in Germany

In mid-August, the German Cabinet adopted a government draft of the Future Financing Act (Zukunftsfinanzierungsgesetz).

The draft law aims to strengthen and revive Germany as a financial center and in particular to improve the legal framework for start-ups and small and medium-sized enterprises in Germany. The main points are changes in the German Stock Corporation Act (Aktiengesetz) and capital markets law, which will be accompanied by corresponding tax relief.

Increase of the volume limit for the simplified exclusion of subscription rights to 20%. If a stock corporation wants to increase its share capital, it must observe a so-called subscription right of its existing shareholders. In many cases, however, the subscription right, which serves to protect existing shareholders from dilution, makes it more difficult for the company to raise capital from new investors.

To counteract this, the German stock corporation act already provides for a “simplified” exclusion of subscription rights. The management board, with the consent of the supervisory board, may exclude the subscription rights of existing shareholders if the capital increase against cash contributions doesn’t exceed 10% of the current share capital and the issue price of the new shares doesn’t fall significantly below the stock exchange price.

According to the draft law, this simplified exclusion of subscription rights, which is important in German legal practice, will be further expanded. In the future, it will be possible to simplify the exclusion of subscription rights up to a maximum of 20% of the current share capital of the stock corporation.

Raising the volume limit of conditional capital for granting subscription rights to employees and executives. In the current legal situation, a stock corporation can create a “conditional” capital of up to 10% of the share capital for the granting of subscription shares to employees and executives. This is referred to as conditional because a capital increase is carried out depending on the exercise of the issued subscription shares by the employees or executives.

This previous 10% limit will be increased to 20%, so that German stock corporations will be able to make use of employee participation programs to a much greater extent. In this context the tax regulations for employee participation will also be made more attractive than before. For example, the draft law provides that the tax-free maximum amount for employee share ownership will be increased from 1,440 euros ($1500) to 5,000 euros. In an international comparison this tax relief still seems small, but from a German point of view it’s at least a step in the right direction.

New regulatory framework for SPACs. A special purpose acquisition company is an empty shell company that is listed on a stock exchange and offers an already operating company the opportunity to enter into it in several possible ways.

SPACs are a popular feature in the US and have experienced a real boom there in recent years. In contrast, they still play a relatively minor role in Germany.

In view of the regulatory requirements for SPACs, which have now also been tightened in the US, a regulatory framework for German SPAC companies listed on the regulated market is to be anchored in the German Stock Exchange Act (Börsengesetz).

Part of this new regulatory framework will be an explicit decision-making authority of the annual general meeting on the intended “target transaction"—i.e. which company the SPAC will acquire. Shareholders who have objected to the resolution of the annual general meeting on the target transaction will be granted the right to tender their shares to the company against repayment of their contribution and any premium.

The new regulatory framework for SPAC companies thus focuses on investor protection. However, it seems uncertain whether the improved investment protection will increase willingness to invest in a SPAC in Germany, and whether this model will develop into an established financing model on the German capital market despite the stricter regulatory environment.

(Re-) Introduction of multiple voting shares. Multiple voting shares are shares that give a shareholder more voting power than they normally would have according to their equity participation in the share capital. In 1998, German legal practice abandoned the possibility of multiple voting shares that had until then been legally permissible.

Now, according to the draft law, multiple voting shares will be reintroduced in the stock corporation act. The draft law stipulates that multiple voting shares with voting rights of up to 10:1 should be possible. According to the draft law’s objective, founders should be able to maintain their influence on their company despite the need to raise capital from external investors.

This certainly makes the legal form of the stock corporation more interesting for young companies. However, multiple voting shares can only have an effect on resolutions with a mere required majority of votes, such as the election of supervisory board members, but not on resolutions with an additionally required capital majority, such as capital measures.

An Assessment

According to the government draft, the German stock corporation law will be made more flexible.

Certain legal limits will be increased to 20% as explained above.

With the possibility of creating multiple voting shares, the stock corporation act abandons a position that has been valid for decades and aligns with the international legal sphere.

Finally, SPAC companies should also play a greater role in the German capital market in the future.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Martin Back is a lawyer (rechtsanwalt) with Pinsent Masons in Munich.

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