On May 20, 2009, the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht - the "BaFin") issued an update of its Issuers' Guidelines. Without constituting a legal commentary, it is designed to provide hands-on guidance for domestic and international issuers whose securities have been admitted to trading at a domestic exchange on the interpretation and execution of the various laws applicable to financial market participants, in particular under the German Securities Trading Act (Wertpapierhandelsgesetz, the "WpHG"), and to outline BaFin's administrative practice in monitoring the financial market. Almost four years after the release of the previous version, the newly issued Issuers' Guidelines cover some substantive changes and amendments in order to take into account changes in the European and German legal environment as a result of the European Transparency Directive (2004/109/EC), the European Market Abuse Directive (2003/6/EC), the European Insider Directive (1989/592/EC) and the German Risk Limitation Act.
The following aspects of the updated Issuers' Guidelines are considered to be of particular relevance:
- revisions were made in the areas of ad hoc publicity, insider registers and director's dealings;
- newly implemented were sections on significant proportions of voting rights, information for the exercise of securities rights, supervision of financial statements of companies and financial reporting;
- no amendments were made for the administrative practice regarding reporting obligations under sec. 25 of the WpHG for the entitlement to reassignment of shares of the lender under a securities lending agreement and the repurchase obligation under a repurchase agreement.
This alert focuses on the amendments relevant for listed companies, i.e. ad hoc publicity, insider registers, director's dealing, supervision of financial statements of corporations and financial reporting. An alert on the amendments to the Issuers' Guidelines with respect to significant proportions of voting rights and information for the exercise of securities rights will follow shortly.
Ad hoc notifications
The WpHG imposes a statutory requirement on listed companies to notify the market of insider information. If companies fail to disclose the insider information or if they provide the information too late, false or incomplete, BaFin is entitled to intervene and to impose sanctions. The purpose of the ad hoc disclosure is to prevent other market participants are put at a disadvantage compared to company insiders and to equalize the information level and transparency in the market. Ad hoc publicity is also an important tool against the abuse of insider information.
Information qualifies as insider information, and must be disclosed by the issuer immediately, i.e., ad hoc, (i) if it contains specific facts about the issuer (ii) it is not public knowledge, (iii) if such information has the potential to influence the market price of the securities, and (iv) if it relates directly to the issuer. However, the question whether a certain fact qualifies as insider information and whether, and when, it must be included in an ad hoc disclosure can only be determined on the basis of experience and comparison with other cases. Therefore, companies are well advised to adhere to the cases and explanations provided by BaFin in the Issuers' Guidelines.
In addition to the examples provided, BaFin clarifies in the new Issuers' Guidelines that:
- circumstances which will highly likely occur in the future can qualify as insider information;
- insider information must be specific with a potential influence on the trend of the market price;
- information has a potential influence on the market price if a judicious investor would take this information into account when making an investment decision;
- as a matter of principle, there is no direct relation to the issuer in the case of general market data, purchase and sales agreements as well as decisions of supervisory authorities;
- exemptions and particularities must be considered in relation to financial instruments such as bonds, participating certificates and certified derivatives.
The latest amendments to the paragraph on ad hoc publicity relate to the exemption defined in sec. 15 (3) of the WpHG. An exemption requires that (i) non-disclosure is necessary to protect the legitimate interests of the issuer, (ii) there is no misleading of the public, and (iii) confidentiality of the information can be secured. The Issuers' Guidelines explain that legitimate interests exist, in particular, if ongoing negotiations may be affected or the approval of another corporate body of the company is outstanding. According to BaFin, making use of an exemption requires an express decision of the managing directors or a disclosure committee formed by the management board. The argumentum e contrario here is that if insider information has not been published immediately and representatives have not made a resolution on the exemption from the ad hoc disclosure, this will be an infringement of sec. 15 of the WpHG, even if there was a theoretical possibility of an exemption.
If information qualifies as insider information and no exemption applies, the ad hoc disclosure must be published Europe-wide via electronic information platforms, posted on the website of the issuer and submitted to the German Company Register. In addition, BaFin must be notified of the disclosure by submitting the document together with the publication certificate.
If capital markets are to be transparent, market participants must have an idea of when members of the managing and supervisory board of listed companies are dealing in their company's own shares (director's dealing). Therefore, sec. 15a of the WpHG requires members of the management and supervisory board of the issuer, as well as other persons with regular access to insider information who are entitled to make important managerial decisions (the "Director"), to notify both the issuer and BaFin of any dealings in the company's own shares within five working days. This also applies to associated persons, i.e., spouses, registered civil partners, dependent children and other relatives living in the same household for at least one year. In order to prevent circumvention of sec. 15a of the WpHG, legal entities, such as establishments acting in a fiduciary capacity and partnerships that are dealing in the company's shares, may also be subject to the disclosure requirement. Circumstances that will trigger the disclosure requirement for legal entities are: (i) the Director is a member of the management or supervisory board of the legal entity, (ii) the Director has a share of a minimum of 50 percent in the legal entity, (iii) the Director holds a minimum of 50 percent of the voting rights, or (iv) a minimum of 50 percent of the entity's profits are allocated to the Director, provided that the Director directly or indirectly controls the legal entity or performs managerial tasks in the legal entity.
Pursuant to the statutory law, the Director must disclose all transactions in relation to the stocks of the issuer, or any other financial instruments, to the issuer and BaFin. BaFin provides the following specific examples of transactions that trigger/do not trigger the disclosure requirements according to its administrative practice:
- Acquisition of financial instruments on the basis of an employee's contract, a gift or an inheritance will not trigger the notification obligation. The acquisition of stocks in connection with participation in an employees program, however, is subject to disclosure;
- Granting of options that are issued to shareholders in connection with a capital increase do not require disclosure. Trading of options, on the other hand, must be disclosed;
- Transactions in connection with trust agreements trigger a disclosure obligation of the trustor, not the trustee.
As a matter of principle, there is, however, no reporting requirement if the total sum of all transactions done by the Director is below Euro 5,000 by the end of a calendar year.
The issuer must send details of the reportable transactions immediately to the media for Europe-wide dissemination, i.e., press agencies, news providers, print media, websites for the financial market or electronic information websites. The company may decide in each individual case which media it will use as long as the Europe-wide dissemination can be secured. In addition, the issuer must forward the information immediately to the Company Register and provide BaFin with the publication document.
Financial Reporting Enforcement
Since early 2005, when accounting control was implemented by the German Act on Accounting Control (Bilanzkontrollgesetz), the accounting practices of listed companies have been subject to external monitoring, supplementing the internal audit function. The external monitoring process, known as financial reporting enforcement, applies to the companies' financial statements from December 31st, 2004 onwards. Reacting to international accounting scandals, it is intended to strengthen investors' confidence in the accuracy of financial statements. Consequently, the new accounting control procedure is supposed to secure that financial reporting of issuers will be controlled at least once every five years. BaFin added a new chapter to its Issuers' Guidelines that provides some explanations to the enforcement procedure and gives some guidance on the interpretation of the new regulations.
Subject to the examination procedure are the latest approved accounts. They will be examined as to whether they comply with the statutory financial reporting requirements. As regards German companies, financial reporting requirements of the German Commercial Act, the German Stock Corporation Act, International Financial Reporting Standards (IFRS) for consolidated accounts as well as European Directives apply. As regards foreign companies, IFRS , US -GAAP as well as all applicable national reporting requirements must be taken into account.
In order to strengthen the enforcement of accounting rules, the German Act on Accounting Control introduced a two-tier procedure:
(1) The German Financial Reporting Enforcement Panel (FREP) (Deutsche Prüfstelle für Rechnungslegung DPR e.V.) examines individual and consolidated financial statements (i) on a random sampling basis, (ii) with cause if there are concrete indications of an infringement of financial reporting requirements, or (iii) at the request of BaFin. Abbreviated financial statements and interim management reports are subject to examination only with cause.
(2) BaFin comes in at the second level if (i) a company does not participate willingly in the examination or does not agree with the findings of the examination, or (ii) if there are substantial doubts about whether the findings of the examination are correct or the examination was conducted properly.
It should be noted that proceedings will only end on the first level if a company agrees with all the findings of the examination. If a company does not agree with the examination in parts, BaFin will conduct its own examinations to the fullest extent, which can result in a high administrative fee for examinations and also deviation in the examination results to the disadvantage of the company.
Infringements of financial reporting requirements require publication of the major findings of the examination and the corrected accounts, which may only be avoided if there is no public interest in the publication or if the company can prove a legitimate interest, i.e., possibly in existence threatening or clear bagatelle cases, whereas negative impact on the market price is not sufficient. In the Issuers' Guidelines, BaFin takes the view of the German legislator that bagatelle cases will qualify as an infringement of the accounting rules but will not require correction of the accounts. However, due to a recent precedent of the Higher Court of Frankfurt, which decided that bagatelle cases will not qualify as an infringement, there remains some uncertainty about dealing with bagatelle cases in the future.
The Issuers' Guidelines also provide a detailed explanation of the cooperation between BaFin and other national or international authorities with respect to the enforcement procedure, i.e., circulation of information and data, as well as legal protection against measures of BaFin.
Provisions on financial reporting, which are laid down in sec. 37v et seq. of the WpHG, require publicly traded companies to prepare annual financial statements and half-yearly financial reports as well as interim management statements, or, alternatively, quarterly financial reports. The regulations have been introduced by the Transparency Directive Implementation Act (Transparenzrichtlinie-Umsetzungsgesetz) which implemented the guidelines set by the European Transparency Directive (2004/109/EG). A new chapter in the Issuers' Guidelines provides a useful checklist regarding timing and scope of financial reporting.
As a matter of principle, issuers must meet the following financial reporting requirements:
- Publish an announcement on the internet stating the date and the exact address of the webpage on which the accounting documents are being made publicly available. According to BaFin, the documents must be posted directly on the indicated webpage or, at least, must be accessible by just one link,
- Notify BaFin of the publication of the announcement and pass the announcement to the Company Register (Unternehmensregister), and
- Publish the complete accounting documents on the webpage and submit the documents to the Company Register in order to be stored there.
Particularities in relation to financial reporting requirements apply to short fiscal years where the end of the fiscal year does not correspond with the relevant publication period. Annual financial statements must include, in any event, (i) audited accounts, (ii) an annual report, and (iii) a compliance statement (Bilanzeid) pursuant to the German Commercial Act. The compliance statement has to be issued by the company's legal representatives who declare that, to their best knowledge, the financial statements and the report include a fair view on the development and performance of the company and the position of the group as well as a description of important events that have occurred during the reporting period and the impact of such events as well as a forecast in this respect.
Publication of annual financial statements on the website must be made publicly available at the latest four months upon the end of the financial year, whereas half-yearly financial statements must be published within two months upon the end of the half year. BaFin recommends publishing the announcement about one week prior to the publication of the statements.
The WpHG also requires that companies publish an interim management report that sets out the development of the business activities during the reporting period. An exemption applies where companies issue quarterly financial statements in accordance with the requirements of the WpHG. Different from the other financial reporting, this report only relates to the past.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.