November 18, 2013
On November 12, 2013, the German Federal Supreme Court (Bundesgerichtshof – BGH) published a landmark judgment ("Frosta") concerning the requirements for a delisting of a public company from the regulated market in Germany. In this decision, the BGH explicitly reversed its 11-year-old ruling in the Macrotron case which had created several obstacles and had made delistings in Germany complex and costly. With Macrotron removed by Frosta, issuers and large shareholders will face less hurdles and have more certainty when considering to leave the stock exchange and — as a consequence — delistings will likely become more frequent.
While the Federal Constitutional Court (Bundesverfassungsgericht – BVerfG) had already limited the scope of Macrotron and criticized the reasoning of the BGH in 2012, it was by no means expected that the BGH would now seize the opportunity offered by the Frosta case to overturn the established case law in its entirety and remove essentially all corporate law conditions of a delisting. The case is also an interesting example of how the German Federal Supreme Court and the Federal Constitutional Court interact.
The Macrotron Ruling in 2002
In 1998 German securities law first allowed public companies to ask the stock exchange to withdraw the authorization to have their shares listed on the regulated market ("delisting"). As the statutory law was largely silent on shareholder protection in the context of such a delisting, the question arose whether (a) the board would need shareholder approval before making the filing and (b) the company or majority shareholder would be obliged — like in a merger or a similar corporate restructuring — to submit a purchase offer at a certain price to the minority shareholders.
In Macrotron, the BGH held that a delisting was only allowed if it had been previously approved by a majority resolution of the shareholders’ meeting and — surprisingly — based this finding on the shareholder’s constitutional right of private property. The BGH argued that a shareholder’s ability to sell its stock on a regulated market was an integral part of the ownership of listed stock and that a delisting would therefore adversely affect the shareholder’s right of property. Secondly, the BGH held in Macrotron that in order for the delisting to be permitted, the company or the majority shareholder would also need to submit a mandatory offer to the minority shareholders to purchase their stock at an adequate price and that such price could be verified by a judge in a special court proceeding (Spruchverfahren). It was no surprise that following Macrotron, delistings became much more complex and occurred less frequently.
The 2012 Decision of the Constitutional Court
On July 11, 2012 (see Gibson Dunn alert, "Back to Square One? German Constitutional Court Rewrites Delisting Rules"), the constitutional judges had to decide two more recent delisting cases. The first case related to a normal delisting where the majority shareholder had challenged the obligation to make a purchase offer. In the second case, a company had delisted from the regulated market, but at the same time had applied for a listing in a so-called qualified segment of the open market (Freiverkehr), a process usually referred to as "downgrading."
In its decision, the BVerfG made it very clear that a delisting from the regulated market would not infringe the shareholders’ constitutional right of property, thereby explicitly criticizing the federal judges and their application of constitutional law. Secondly, the constitutional judges held that while they did not share the reasoning (in particular the erroneous interpretation of the constitutional right of property) of the BGH, they found the results developed in Macrotron to be still within acceptable constitutional limits. The BVerfG thereby gave the BGH the opportunity to uphold its case law provided it could come up with a better reasoning at the next occasion. This is why many commentators expected the federal judges would rather maintain the rules and support them with a new reasoning.
Reversal of Macrotron in the Frosta Ruling
In Frosta, the issuer had applied for a delisting from the regulated market in Berlin and at the same time applied for a quotation on the — less regulated — open market in Frankfurt (downgrading). As the company had neither solicited shareholder approval, nor made a purchase offer, the minority shareholders decided to sue the company. Given that this was a mere downgrading, it would have been possible for the BGH to merely consider the downgrading situation and exclude this particular set of facts from the scope of Macrotron.
The federal judges, however, decided to review the entire Macrotron principles. Following the BVerfG’s ruling of summer 2012, the original reasoning (based on the premise that the shareholders’ constitutional rights were affected by the delisting) was no longer available. Thus, the BGH decided to review other theories that could possibly support the claims, e.g. whether the delisting was comparable to a merger, squeeze-out or similar measure, thereby justifying analogous requirements (shareholder approval, purchase offer and court review of the price). As the federal judges did not find sufficient analogies, they decided to explicitly give up the Macrotron case law in its entirety.
Thus, neither a shareholder approval nor a purchase offer is required by corporate law. Instead, the BGH acknowledges that the securities laws regulating the delisting filing afford sufficient protection to the shareholders. Many German listing rules provide that a delisting filing shall only be approved if there is either a purchase offer (which, however, is not subject to court review) or a sufficient time period before the delisting becomes effective so that investors have a chance to sell their shares on a regulated public market.
Evaluation and Consequences of the New Decision
The new decision is remarkable because the BGH did not choose the "graceful exit" offered by the BVerfG to develop a new reasoning and keep the Macrotron principles. Instead, the BGH accepted that the original reasoning based on constitutional rights was flawed and reconsidered the whole concept. The case puts an end to a long line of court rulings and heated discussions among scholars that was triggered by the Macrotron judgment in 2002. It is now clear that a delisting neither interferes with the structure of the corporation nor with the shareholder’s individual rights and that therefore the shareholders do not require the same protection as in, for example, a merger, squeeze-out or change of legal form. In other words, the delisting only concerns the market for the shares and not the corporation or the shareholder’s rights. Therefore, neither a shareholder approval is necessary nor a purchase offer that is subject to court review, provided the stock exchanges ensure that investors are sufficiently protected and can in fact divest before the delisting enters into force. It remains to be seen whether the stock exchanges will enact more detailed regulations on the requirements of a delisting now that corporate law no longer imposes any conditions.
What are the practical consequences?
First, a German public company can now file for a delisting without shareholder approval, thereby rendering the procedure much simpler and saving considerable cost and efforts. Shareholder meetings of public companies are not only expensive and time-consuming, but also create an opportunity for minority shareholders to challenge the resolutions passed over seemingly small procedural or formal glitches and thereby block or delay the whole process. Now the decision to apply for a delisting can be taken by the managing board, usually with the approval of the supervisory board.
Secondly, the question of the approval threshold required for a delisting has now become obsolete and delistings may well be possible even below a 75% majority. Obviously the free float will be a factor that the stock exchanges will consider when deciding on a delisting, but it is hard to imagine that they will not approve a filing if the protection of investors is ensured otherwise.
Thirdly, the requirement of a mandatory purchase offer that can be reviewed in a court proceeding is gone, too. This removes the risk that a majority shareholder makes a purchase offer and several years later is forced to increase it retroactively because a judge found it was too low. Rather, the amount of the offer is determined in advance, approved by the stock exchange and cannot be increased by a third party.
In summary, we expect that in future delistings will occur more frequently, especially when the listing has lost most of its purpose because the free float is small. The new decision may also facilitate public takeovers because when the majority of shares is sold to a new shareholder, a squeeze-out of the minority is only possible if the controlling shareholder owns at least 90% of the stock. Below this threshold, a delisting may now allow the buyer and the company to reduce costs and to convince minorities to tender their shares.
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. If you have any questions about these particular matters or would like additional information, please contact the Gibson Dunn lawyer with whom you usually work or any of the following lawyers in the firm’s Munich office:
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