Going Dark Under German Law – Towards an Efficient Regime for Regular Delisting

Abstract

Going-private transactions include all transactions which result in the withdrawal of a class of securities listed on a regulated stock exchange from listing on the regulated market. Going-private transactions may be the side-effect of a transaction with a different key objective. We refer to these transactions as cold delistings. For example, the transformation of an Aktiengesellschaft (plc equivalent) into a GmbH (ltd equivalent) leads to a cold delisting of shares because shares in a GmbH cannot be transferred easily and thus cannot be traded at regulated markets. Following the freeze out under ss. 327a et seq. Aktiengesetz (of the Aktiengesetz), all shares are transferred to a number of controlling shareholders meaning that a crucial listing requirement is no longer met, namely that shares be held by a wide range of shareholders. In contrast, this paper focuses on regular delistings (some refer to as “going dark”). We define a regular delisting as the withdrawal of a class of securities listed on a regulated market upon the issuer’s application and notice of intent to withdraw such securities from listing and/or registration, where the delisting is the primary objective of the transaction and its sole effect.

This paper analyses the current discussion about which requirements apply to a regular delisting in Germany. It is structured as follows: in part B we introduce the factual background to going-private transactions under German law. It is shown that going-private transactions are motivated by the failed expectations of management and controlling shareholders in stock market efficiency. Moreover, we argue that going-private transactions are related-party transactions. Part C provides an overview of the legal requirements for going-private transactions. While regular delistings pose the most pressing legal questions, the practical emphasis has been on cold delistings: up to October 2013 by far most going-private transactions were pursued by way of a freeze out. The German Bundesgerichtshof’s seminal Macroton judgement issued in late 2002 resulted in a state where regular delistings and cold delistings lead to almost the same costs for controlling shareholders. This explains the appeal of freeze outs compared to regular delistings. After the Bundesgerichtshof repealed its Macroton doctrine with its Frosta judgment in late 20132 – following a constitutional ruling in July 2012 – neither a shareholder resolution, nor a mandatory compensation is necessary for a going dark transaction under German company law. This judicature provides the background of an analysis of how an efficient delisting regime would look like which is given in Part D. While the analysis reveals significant deficiencies in the Macroton delisting requirements, it also criticizes the present state since the turnaround in late 2013 under which minority shareholders cannot invoke any company law-based protection. Considering ways to improve delisting efficiency, it is proposed that the prevailing compensation concept (i.e. the cash-out offer which is mandatory under German law) of the repealed Macroton judicature be replaced with a resolution concept under which minority shareholders resolve on the delisting; as an anti-corruption measure we also argue in favor of equal treatment for minority shareholders with regard to the benefits offered to them by the issuer and controlling shareholders.

Keywords: delisting, downlisting, going-private transaction, listed and non-listed companies, German corporate and securities law, Macroton, shareholder resolution

JEL Classification: K22, K23, K42