Law on the establishment of an economic stabilisation fund
The effects of the pandemic triggered worldwide by the coronavirus (“Covid-19 pandemic”) pose enormous challenges for German companies in particular. Accordingly, on 25 March 2020, the German Bundestag passed the draft ‘Act on the Establishment of an Economic Stabilisation Fund (Economic Stabilisation Fund Act – “ESFA”) (BT-Drucks. 19/18109. This draft law provides for the establishment of a special fund with no legal capacity, the so-called ‘Economic Stabilisation Fund’ (“ESF”). The ESF is to be used, in addition to the already planned assistance by the Kreditanstalt für Wiederaufbau (“KfW”), for a limited period of time to implement rapid and targeted measures to stabilise the German economy and to secure jobs to the extent necessary. These include in particular large-volume support measures to overcome liquidity bottlenecks and strengthen the equity base of companies that have fallen into difficulties as a result of the Covid-19 pandemic. The Federal Ministry of Finance (“BMF”) and the Federal Ministry of Economics and Energy (“BMWi”) will be jointly responsible for deciding on the stabilisation measures.
In order to provide the financial resources for the newly created ESF, the draft law has been primarily draw on the framework of the Financial Market Stabilisation Act (“FMStG”) from 2008 and 2009, which has been used its worth during the financial crisis. However, the former framework has been slightly adapted to the current requirements. In the opinion of the federal government, the instruments used there to support the financial sector can also be used for companies in the real economy. Accordingly, the draft of the ESFA not only provides for the creation of various authorisations to assume guarantees and to take out loans (see below under I.) but also for selective, temporary modifications of company law which allow for simplifications, in particular for procedural acceleration (see below under II.). However, these are limited to transactions and corporate action in connection with a stabilisation measure by the ESF. It is expected that the ESFA will be passed by the German Parliament (Bundestag) this week (see below under III.).
The key points of the ESFA can be summarised as follows:
I. Amendment to the German Financial Market Stabilisation Fund Act (FMStFG)
The first part of the ESFA provides for amendments to the Financial Market Stabilisation Fund Act to create the ESF and to define the application requirements for adopting stabilisation measures.
Stabilisation instruments. The ESF is to have three central stabilisation instruments:
- Guarantees. On the one hand, the ESF will be authorised to assume guarantees of up to 400 billion euros for debt instruments issued after the entry into force of the ESFA and for established liabilities of companies in order to eliminate liquidity bottlenecks and to support refinancing on the capital market. However, the term of the guarantees and the liabilities to be hedged may not exceed 60 months and the guarantees may only be assumed in return for an appropriate consideration.
- Loans. Furthermore, the BMF is authorised to take out loans of up to 100 billion euros to cover expenses and measures of the ESF within the scope of participation in direct recapitalisation measures of companies. These recapitalisation measures may include the acquisition of subordinated debt, hybrid bonds, profit participation rights, dormant holdings, convertible bonds as well as the acquisition of shares in companies and the assumption of other components of the equity of these companies if this is necessary for the stabilisation of the company. An appropriate remuneration must be agreed for the recapitalisation.
- KfW loans. In addition, the BMF is authorised to take out loans of up to EUR 100 billion for the ESF to refinance the loans granted by KfW in the implementation of the special programmes assigned to it.
There is no legal claim to recapitalisation and stabilisation measures by the ESF. Rather, the decision on the granting of such measures requires a corresponding application. An important interest of the part of the federal government in stabilising the company is required. Any recapitalisation is carried out at fair market conditions. Further details on the legal and economic conditions of the stabilisation instruments will be regulated in separate legislation.
Eligibility to apply. In principle, only those companies in the real economy (i.e. commercial enterprises that are neither companies in the financial sector nor credit or bridge institutions) that have fulfilled at least two of the following three criteria in the last two financial years before 1 January 2020 that have already been finalised in the balance sheet:
- a balance sheet total of more than EUR 43 million;
- more than 50 million euros in sales revenues; and
- more than 249 employees on annual average.
However, an inter-ministerial committee (“ESF Committee”) may, at its own discretion, also decide on applications from smaller enterprises which do not meet these criteria, provided that these enterprises are active in one of the sectors mentioned in section 55 of the Foreign Trade and Payments Regulation or are of comparable importance for security or the economy. In addition, the ESF Committee can also decide on applications from start-ups if they have been valued in at least one completed financing round since 1 January 2017 by private investors with an enterprise value of at least EUR 50 million, including the capital raised through this round. This should open up the possibility of also considering, on a case-by-case basis, young companies which, due to their short company history and/or their strongly technology-driven orientation and/or business model, do not currently meet the criteria but have the innovation potential to meet these criteria in the foreseeable future.
Prerequisite for application. Prerequisites for the implementation of stabilisation measures include the following:
- the company concerned was not already in financial difficulty on 31 December 2019;
- the company concerned has no other financing options available;
- the company has a clear independent going concern perspective after the Covid-19 pandemic has been overcome as a result of the stabilisation measure; and
- the company can guarantee a sound and prudent business policy, in particular by contributing to the stabilisation of production chains and safeguarding jobs.
To ensure the above conditions, terms may be agreed with the beneficiaries of the stabilisation measure. These terms concern, for example, the use of the funds raised, the raising of further loans, the remuneration of their governing bodies, the distribution of dividends and measures to avoid distortions of competition. The requirements may differ according to the type and addressees of the stabilisation measure. Further details will be regulated in separate legislation.
Competent authority or authorities. The BMWi is the technically competent authority for negotiations on stabilisation measures with the companies and the contact partner for applications. The Federal Ministry of Finance, in agreement with the Federal Ministry of Economics and Technology, then decides on the applications at its due discretion, taking into account the importance of the company for the German economy, the urgency, the effects on the labour market and competition and the principle of the most economical and economic use of funds. The ESF Committee decides on questions of principle, matters of particular importance as well as decisions on essential measures and conditions. For applications, the BMWi prepares the committee including the vote. The management of the participations acquired in the context of stabilisation measures and the custody and administration of the instruments taken over in the context of recapitalisation measures is primarily the responsibility of the Federal Ministry of Finance. It is also possible to delegate tasks to KfW by statutory order, which may also make use of suitable third parties to perform its tasks.
Taxes. The ESF is exempt from trade tax and corporate income tax and is not subject to turnover tax. No tax is to be withheld on capital gains of the ESF; the ESF is also not obliged to withhold capital gains tax. In the event of the acquisition of stabilisation elements by the ESF or their subsequent retransfer, existing loss carryforwards will remain intact: section 8c KStG (German Corporation Tax Act) and the last sentence of section 10a GewStG (German Trade Tax Act) do not apply. The legal acts undertaken in order to perform the tasks assigned to the ESF as acquirer are exempt from real estate transfer tax. Notwithstanding section 15 UmwStG (German Transformation Tax Act), in the case of spin-offs which represent a necessary preparation for a stabilisation measure, offsettable losses, remaining loss carryforwards, negative income not offset and interest and EBITDA carryforwards (section 4h EStG (German Income Tax Act) remain with the transferring corporation.
Comparable institutions of domestic local authorities. Upon recommendation of the Budget Committee (Haushaltsausschuss), the WStFG clarifies that any institutions of domestic local authorities (inländische Gebietskörperschaften) comparable to the WSF are also largely on a par with the WSF in terms of rights and privileges if they grant comparable stabilisation measures and are represented by a Finance Agency (Finanzagentur) under the law of these domestic local authorities.
Term. The stabilisation measures of the ESF are initially only possible until 31 December 2021. However, the ESF may also invest after 31 December 2021 in companies in which it already holds an interest on the basis of stabilisation measures to the extent necessary to maintain its equity interest in the company or to secure stabilisation measures granted.
II. Amendment to the German Financial Market Stabilisation Acceleration Act (FMStBG)
The second part of the ESFA deals with special requirements for stabilisation measures for the various forms of enterprise.
General. In this context, the legal form of the beneficiary company is basically not relevant for the granting of stabilisation measures.
Stock corporations. The ESFA provides for special relief under company law in the context of stabilisation measures for certain forms of enterprise such as the public limited company (and, accordingly, for the European Company (Societas Europaea) and the partnership limited by shares). These include in particular that:
- shares can be issued to the ESF with preferential profit or priority in the distribution of company assets (liquidity preference);
- an exclusion of subscription rights in favour of the ESF is possible under considerably simplified conditions, since the issue price of new shares can also be below the stock exchange price, provided that only the lowest issue price is not undercut;
- advance payments on deposits by the ESF are possible;
- with regard to the holding of annual general meetings, the simplifications for holding a (virtual) general meeting already provided for under the German Act on Measures under the Law on Companies, Associations, Cooperatives and Home Ownership to Combat the Effects of Infections with the SARS-CoV-2 Virus (“GMCoV”) apply accordingly;
- the majority requirements for resolutions of the general meeting for the implementation of capital increases against contributions and the creation of authorised capital are lowered, as, in principle, only a simple majority of votes is required;
- the entry in the commercial register is not a prerequisite for the effectiveness of the general meeting's resolution required for the capital measures and the corresponding capital measures; the resolution and, if necessary, the implementation of the corresponding capital measure, unless they are obviously void, are to be entered in the commercial register without delay;
- shareholders may be liable for damages if they try to delay or frustrate a stabilisation measure necessary for the continued existence of the company for their own benefit;
- a conditional capital increase in connection with a recapitalisation may also be resolved to grant conversion or subscription rights to the ESF as silent partner;
- the facilitations for stabilisation measures also apply accordingly if the new shares are also or exclusively subscribed by third parties;
- facilitations exist for the issuance of profit participation rights and bonds with a qualified subordination to the ESF with the exclusion of the shareholders' subscription rights as well as for entering into silent partnerships of the ESF;
- there is no obligation to inform the economic committee (Wirtschaftsausschuss) or the works council (Betriebsrat) when the WSF acquires shares, nor is there any obligation to disclose information under securities trading law;
- the acquisition of equity interests by the ESF in listed companies is subject to far-reaching exceptions to the provisions of takeover law, since, among other things, no mandatory offer is required in the event of the ESF acquiring control through the stabilisation measures, and the provisions on acting in concert or the minimum price regulations in connection with stabilisation measures do not apply;
- the German stock exchange law requirement of an admission of new shares only applies in the event of a transfer of the shares subscribed by the ESF to third parties;
- facilitations exist for the squeeze-out of minority shareholders by the federal government or the ESF; and
- the provisions of stock corporation law concerning affiliated companies do not apply to the federal government and the ESF, among others, until 31 December 2021.
Other companies. Also for the GmbH (limited liability company), the GmbH & Co. KG (limited partnership) and dormant partnerships will also benefit from relief.
Further special features. Further restrictions exist with regard to the provisions on shareholder loans and economically comparable claims and the principles of hidden contributions in kind, which do not apply to legal transactions between the ESF and companies.
The bill provides the inapplicability of German rules regarding merger control (notification and approval requirement by the German Cartel Office), and regarding the prohibition of anti-competitive agreements and the abuse of a dominant market position. The European rules, however, remain applicable which has lead for certain stabilization measures during the financial crisis (e.g. majority share acquisitions) to consultations with the EU Commission.
Comparable institutions of domestic local authorities. In order to ensure that federal and state aid runs in parallel, the scope of application is also extended to include any institutions of domestic regional authorities (inländische Gebietskörperschaften) comparable to the WSF and their stabilisation measures.
State aid law. The implementation of the ESF stabilisation measures must also comply with State aid rules. In this respect, stabilisation measures of the ESF must also be notified to the European Commission. It is to be assumed that the federal government will make a framework notification of the planned measures and, if necessary, notify important individual measures separately.
III. Further amendments
Finally, appropriate amendments to the German Banking Act (KWG) and the German Securities Trading Act (WpHG) ensure that any special funds of the federal states are treated as federal funds.
IV. Further Course of the Legislative Procedure
The ESFA and GMCoV draft laws were passed by the German Bundestag this Wednesday, 25 March 2020, in an expedited procedure. Both laws will enter into force the day after their promulgation.
Any questions? please contact: Julian Schulze De la Cruz, Ingo Theusinger, Georg Edelmann, Felix Blobel, Ralph Schilha, Jens Kunz, Jens Peter Schmidt
Practice groups: Capital Markets, Financial Services Regulation, Private Equity, Tax,Antitrust