Back to Square One? German Constitutional Court Rewrites Delisting Rules

July 24, 2012

On July 11, 2012, the German Federal Constitutional Court (Bundesverfassungsgericht — BVerfG) released an important judgment concerning the conditions of a delisting of a public company from the regulated market in Germany. In this decision, the BVerfG overruled the 10-year-old landmark judgment of the German Federal Supreme Court (Bundesgerichtshof — BGH) in the Macrotron case arguing in plain language that its constitutional reasoning was erroneous. Although for the last decade Macrotron had deterred most companies from seeking a delisting, the new decision will likely re-open the discussion. The key questions now are what parts of Macrotron — if any — will survive and whether, as a consequence, Germany will see more delistings in the future.

The Macrotron Ruling in 2002

It was only in 1998 that German securities law first allowed public companies to ask the stock exchange to withdraw the authorization to have its shares listed on a so-called 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 to submit a purchase offer at a certain price to the minority shareholders.

In Macrotron, the BGH used a rather creative approach and developed two new rules for delistings. Firstly, the BGH held that a delisting was only allowed if it had been previously approved by a majority resolution of the shareholders’ meeting. In an unusual reasoning, the BGH based the requirement for shareholder approval on Article 14 of the German Constitution, i.e. the individual’s right of private property. The BGH argued that a shareholder’s ability to sell its stock in a regulated (and thus more liquid) 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. The BGH based its finding on several prior decisions of the BVerfG, even though these cases were factually distinct. As a result, the BGH held that shareholders must approve the board’s decision to file for a delisting with a simple majority (this point subsequently has been challenged and some argue that today a 75% majority is necessary). Because in a delisting scenario there will usually be a large shareholder, the need for a shareholder resolution normally does not change the outcome. Nevertheless, the need for a shareholder resolution can significantly increase the cost of a delisting and the risk of shareholder litigation.

The second rule of Macrotron went even further. The BGH held that in order for the delisting to be permitted, the company or the majority shareholder also would need to submit a mandatory offer to the minority shareholders to purchase their stock at an adequate price. The BGH stressed that the shareholder also had a right to have a court verify the purchase price in a so-called special valuation proceeding (Spruchverfahren) prescribed by statutory law in certain corporate restructurings. In Macrotron, the BGH based the obligation to make a mandatory purchase offer on both a need to protect the minority shareholder and an analogy to the concepts foreseen by statutory law in case of certain corporate restructurings, e.g. a corporate transformation or the entering into a so-called subordination agreement. The BGH argued that a delisting usually would put pressure on the stock price, a result that would not be counterbalanced by the delisting requirements of the stock exchanges (grandfathering rules, etc.), therefore exposing the minority shareholder to a monetary damage.

The New Decision of the Constitutional Court

In the new judgment, the BVerfG decided on two separate 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." The qualified segments of the open market have many of the features of the regulated market, but are not governed by statutory law. In this case, the company’s board had considered the downgrading to be factually distinct from the situation in Macrotron and thus had neither obtained shareholder approval nor made a purchase offer for the minority stock. The minority shareholders challenged this approach and the BVerfG seized the opportunity to examine the set of rules established by the BGH in Macrotron from a constitutional point of view. This led to two major findings:

First, the BVerfG made it very clear that a delisting from the regulated market would not affect the scope of the shareholders’ constitutional right of property. The constitutional judges argued that the delisting would not affect the legal or monetary rights of the shareholder, unlike, for example, in a squeeze-out (whereby the shareholder loses the stock) and a subordination agreement (whereby the substance of the shareholder rights is changed). Contrary to the BGH’s holding in Macrotron, the BVerfG stressed that the listing of stock is a mere value factor and only represents an opportunity to realize value. A sale would still be possible even without a listing and the improved disclosure regime of a listed company would not constitute a legal right of the individual shareholder, but rather a set of rules aimed at safeguarding the general functioning of the capital markets.

The second finding is equally important. In so far as the BGH had required a mandatory offer to the minority shareholders, coupled with a court proceeding to verify the adequacy of the price offered, the BVerfG limited its examination to the question of whether in Macrotron, the BGH had exceeded its judicial authority by putting itself into the position of the legislature. The BVerfG found the analogy developed by the BGH in Macrotron to be still within acceptable constitutional limits. Interestingly, the BVerfG made no effort to hide that the analogy developed by the BGH was not required from a constitutional perspective and that it did not share the view of the federal judges. Rather, it pointed out that the analogy developed by the BGH was questionable as there were fundamental differences between corporate restructurings and a delisting where the structure of the company would remain untouched. In dicta, the BVerfG furthermore stated that in its view there is no evidence that the announcement of a delisting would put pressure on stock prices.

Evaluation and Consequences of the New Decision

The decision is a typical example of a difference of opinion between the two highest courts in Germany. The constitutional judges made it very clear that they did not appreciate the attempt of the federal judges to extend the right of property. On the other hand, the BVerfG tried to avoid making the same mistake as the BGH and exercised judicial self-restraint by stating that the analogy on the mandatory purchase offer was not totally unacceptable. Nevertheless, between the lines the BVerfG showed that it did not share the BGH’s view on the analogy.

What are the consequences? The Macrotron decision is largely based on the (erroneous) application of constitutional law. The BGH’s requirement to obtain shareholder approval was entirely reliant on the reasoning that the minority shareholder’s right of property is adversely affected. The BVerfG removed the basis of this requirement with very clear words and also did not limit the scope of its findings to a mere "downgrading" — which would have been sufficient in the case at hand. Even if the BGH is technically free to apply different reasoning in a future decision, it is unlikely that it will reestablish this requirement. A public company thus currently can file for a delisting without shareholder approval, thereby saving considerable cost and efforts. Also, the current discussion on whether a qualified majority is required has now become obsolete and delistings will be possible even below a 75% threshold.

The second leg of Macrotron is still standing. The rules regarding a mandatory purchase offer to the minority shareholders are not unconstitutional and remain applicable, as does the need for a judicial review of the price offered. While the BGH may still consider the unusually strong criticism expressed by the constitutional judges, it will not necessarily reverse its own case law. Before the BGH writes the next chapter of this book, companies therefore will have to ensure that either the company or the majority shareholder makes a purchase offer concurrently with the delisting and will need to be prepared that a court will review the price offered.