On April 13, 2023, the German Federal Ministry of Finance and the Federal Ministry of Justice published a draft bill for the Future Financing Act (hereinafter referred to as "Ref-E"). The key items of such bill were already presented in mid-2022. In addition to the proposals for a reform of ESOP taxation (see link below), the draft bill also contains a significant change in German stock corporation law: the possibility of dual class shares, i.e. with more than one vote per share.
The aim of the Ref-E is to make the German capital market more efficient and attractive. In particular the bill shall promote access to the capital market and the attractiveness of an IPO via a German stock corporation for startups. Overall, the provisions in the draft bill appear to be a fundamental, but nevertheless cautious adjustment of German stock corporation law.
1. Current stock corporation law does not allow for multiple voting rights - but this was not always the case
In contrast to the GmbH or the European stock corporation (Societas Europae (SE)), it is currently not possible for a German stock corporation to equip shares with multiple voting rights. The rule is: "one share, one vote". Only preferred shares may be renderednon-voting, but in turn receive other privileges, such as the right to a higher dividend.
In the more distant past, however, this was not always the case. In the original German stock corporation law, the regulation of increased voting rights in the Articles of Association was largely unrestricted.
Investor and minority protection are commonly cited as a leading factor against multiple voting rights. As the flipside of shares with more powerful voting rights, the remaining shares would inevitably have reduced decision-making power compared to their economic participation. A couple of negative consequences can be the result: The withdrawal of private profits by a controlling shareholder, the blocking of certain decisions, or even a general focus on the interests of the controlling shareholder. Shareholders with increased voting rights therefore might not always make decisions that are in the best interest the company.
2. Dual class shares exist in other jurisdictions – with increasing tendency
The lack of multiple voting rights is currently perceived as a disadvantage of the German legal system. This renders the German stock corporation less attractive compared to other jurisdictions that offer such possibilities (e.g. Sweden, the Netherlands or the US). Certain originally German companies have therefore opted for a foreign legal form: Both the hotel brokering platform Trivago as well as air taxi developer Lilium have chosen Dutch N.V.’s, which allows multi-voting shares.
Other jurisdictions such as Austria, Belgium or Portugal have also recently opened up with regard to multi-voting shares. Prominent examples of foreign companies with multiple voting rights are Airbnb with a voting weight of 20:1 or Facebook with a voting weight of 10:1.
The possibility of multiple voting shares can strengthen Germany as a startup location. Many startups have already gone through several rounds of financing with investors prior to an IPO. As a result of the accompanying dilution (and further dilution through an IPO), founders often no longer hold the necessary voting rights post IPO to control key decisions of the company. As a result, German startups avoid a German IPO and rather prefer a sale or an IPO abroad. By introducing multiple voting shares, the founders could maintain their influence on the company and still raise the required capital on the capital market.
The EU is also increasingly promoting the issue of multiple voting rights. In December 2022, the EU Commission presented a draft "Listing Act", which includes a guideline for multiple voting shares for companies in the SME segment. The aim is to achieve a minimum harmonization of multiple voting rights while at the same time maintaining investor and minority protection via suitable safeguard mechanisms.
3. Multiple voting shares to be permitted again under the draft bill - but with restrictions
The draft bill now provides for a departure from the fundamental ban on shares with multiple voting rights. In the future, shares with multiple voting rights are to be issued as a separate class and in a relatively flexible form. There are no plans to restrict the number of persons who may hold multiple voting rights (other than e.g. the United Kingdom, where multiple voting rights are restricted to members of the company's management). However, some restrictions are to be provided for so that minority protection is not completely undermined.
Restriction to registered shares (Namensaktien) - The granting of multiple voting rights shall only be permissible for registered shares (Namensaktien). This shall ensure that the multiple voting rights are granted to those persons whose influence on the Company is to be strengthened or maintained.
Ratio 1:10 - In terms of the amount, the multiple voting right under the Ref-E is limited to a maximum of ten times the regular voting right. Such a cap is widely used internationally for minority and investor protection reasons. It also ensures that the holders of the multiple voting rights must hold at least a relevant share of the capital stock to retain such control.
Time limit – The Ref-E also provides for expiration clauses (also: sunset clauses). On the one hand, the draft bill provides for a time-related sunset clause which limits the multiple voting rights to 10 years after the IPO (with a one-time extension option). This reflects the idea that the primary purpose of multiple voting shares is to facilitate the IPO itself by protecting the influence of the founders during a transition period.
Cessation following share transfers - Secondly, an event-related sunset clause is also to be found in the Ref-E: If and once a share is transferred, its multiple voting rights will lapse, as such a transfer is often also accompanied by the cessation of the need for control.
Consent requirement - The introduction of multiple voting rights requires the consent of all affected shareholders. Hence the consent of all shareholders is required, as both shareholders without multiple voting rights and shareholders with multiple voting rights will be affected by the proportional shift in their voting rights. This effectively means that an introduction of multiple voting rights is only feasible prior to an IPO. After an IPO, unanimity will practically no longer be achievable.
4. The proposed regulations increase the attractiveness of Germany as a stock exchange location
The new regulations on multiple voting shares proposed in the Ref-E would render Germany significantly more competitive as a stock exchange location - without, however, completely losing sight of investor and minority protection rights. Only reality will be able to show whether such structuring options will be used and lead to a noticeable increase in IPOs by startups and SMEs via a German stock corporation. At first glance, however, the proposed restrictions appear to be quite practicable.
More on this topic: Learn more about the draft bill for the Future Financing Act in our blog post "Pending landmark reform of the German ESOP taxation".