New opportunities for capital funding for start-ups and growth-oriented companies

On Friday, 17 November 2023, the Bundestag (German Federal Parliament) passed the “Act on Financing of Future Investments” (Financing the Future Act – ZuFinG). One of the aims of this act is to make it much easier for young and fast-growing companies to raise equity capital and access the capital market. To this end, lawmakers enabled extensive amendments and changes to the company, capital market, and tax law. The legal form of public limited companies (AG and Societas Europaea -SE- with registered office in Germany) is to be strengthened by, among other things, the (re-) authorization of multi-voting shares and the promotion of employee share ownership to be expanded.

Access to the organized capital market to raise equity capital.

In addition to the existing regulatory framework and the not-inconsiderable costs that entrepreneurs are required to bear when accessing the organized capital market, small and medium-sized enterprise (SME) owners and founders, in particular, are concerned about the loss of influence and creative freedom that raising equity on the stock exchange has often entailed in Germany or the EU to date. Recognizing this challenge, the European Commission published a proposal for a regulation on 7 December 2022 (no. 2022/0411(COD)) to increase the attractiveness of public capital markets and facilitate access to capital for small and medium-sized enterprises (EU Listing Act), which is flanked, among other things, by the draft of a new directive regulating the structure of shares with multiple voting rights of companies that intend to have their shares traded on an SME growth market (EU Multiple Voting Rights Directive, no. 2022/0406 (COD)). These European rules ultimately strengthen the EU’s free movement of capital (Art. 63ff TFEU).

Revitalization of multiple voting shares.

At a national level, the authors of the Future Financing Act are taking up the considerations that have already been shaped by EU law and are proposing the renewed authorization of multi-voting shares with the introduction of a new Section 135a AktG (German Stock Companies Act).

What has indisputably been possible for a long time under the law of private limited liability companies (Section 47 (2) GmbHG) has been prohibited in stock corporation law since 1998 by the German Corporate Control and Transparency Act (KonTraG) in Section 12 (2) AktG. Shares that grant their holder more votes than their shareholding concerning the share capital (dual-class shares) may not be formed to create a match between capital investment and voting right influence (one share – one vote). This consequence was allegedly in line with the expectations of the capital market in 1998, and the lawmaker intended to improve “owner control” (RegBegr. BT-Drs. 13/9712,12). For this reason, the GmbH (German limited liability company) was the more favorable legal form for founders, as it is significantly more flexible in drafting articles of association than the AktG (German stock company) and allows for multiple voting rights.

However, the large economies and capital markets compete for tomorrow’s blue chips and unicorns. Companies that want to break into these categories are often SMEs today and need growth capital to cope with the sometimes enormous innovation costs. They raise this capital where the conditions are favorable (see DAI, foreign listings of BioNTech, CureVac & Co., 2021). Among other things, start-ups and growth companies report an increased need for multi-voting shares to ensure that founders and idea providers can maintain influence and control over the company’s strategic direction despite raising equity capital on the stock exchange. As other jurisdictions allow multi-voting shares, cited as essential for SMEs, Germany and Europe are now following suit in the competition between locations. For example, dual-class shares are standard for many tech companies in the USA. Mark Zuckerberg, for example, controls 57% of the voting power with 13.6% of the share capital in META.
While “ownership control” was still cited in 1998 as a reason against multiple voting shares, preserving “founder control” despite raising equity capital is now one of the objectives of the ZuFinG, alongside strengthening the domestic capital markets.

How can multiple voting shares be issued?

a. Reservation in the articles of association, registered shares, and sunset clause

According to the new Section 135a AktG, the articles of association shall provide for the issue of shares with multiple voting rights. They can only be issued as registered shares to strengthen those groups of people who will be granted more significant influence over the company’s direction and strategy. Although they can be admitted to trading on the stock exchange (organized market and open market), the multiple voting rights expire after the IPO if the share is transferred (new Section 135a (2) AktG), but at the latest after ten years (sunset clause) from admission to the stock exchange without transfer (with a possible one-off extension of the period by a further ten years). These framework conditions ultimately protect investors, as the legislator assumes that after 10 (20) years on the stock exchange, the owner-focussed concentration of voting rights should no longer be necessary, at least for financing on the international capital markets. Multi-voting shares, whose concept contradicts good corporate governance conditions and treats investors unequally, should give way to the basic idea of one share-on vote. Quite a few voices consider the benefit of such long periods of multiple voting rights to be questionable anyway, as the advantage of the initial protection of innovation and the related focus on implementation through multiple voting rights controls can become a stumbling block for corporate governance after the phase of growth and market conquest, as investors without multiple voting shares are less able to channel their impulses to the company.

b. Multiple voting rights

Multiple voting shares may convey a maximum of 10 times the single voting right, new Section 135a (1) AktG. However, the legislator does not provide a specific multiple voting rights ratio. For this reason, the Articles of Association can provide for several classes of multiple-voting shares based on different voting rights ratios.
This 10-fold restriction, borrowed from Swedish law, also protects investors, as the effect intends to force holders of multiple voting rights to hold a significant proportion of the company’s share capital to assert their influence.
Multiple voting rights are excluded from the appointment of auditors or special auditors to prevent abuses of voting rights and influence independent audits.

c. Approval resolution of all shareholders

The issue of shares with multiple voting rights requires the approval of all shareholders, new Section 135a (1) AktG. The issue of these shares can, therefore, only succeed unanimously. Hence, introducing multiple-voting shares is unlikely to succeed after an IPO and can only succeed beforehand if the number of shareholders is still in single figures and the interests are homogeneous. As it is impossible to issue shares with multiple voting rights as part of authorized capital, but as part of capital increases, it is advisable to establish shares with multiple voting rights in the articles of incorporation of stock corporations or SEs. As it has long been possible to create multiple voting shares under the law of the GmbH and this legal form is generally chosen by founders, a change of legal form to a stock corporation or SE is now possible due to the admissibility of multiple voting rights under stock corporation law following the provisions of the UmwG.

Accompanying measures to facilitate financing

As a further demand from the business community, the legislator has extended the right to the simplified exclusion of subscription rights for capital increases to capital increases of up to 20% of the share capital (previously up to 10%) in Section 186 (3) AktG. This legal concept allows growth companies to quickly increase capital to cover their financial requirements.

Conclusion

As a financial center, Germany is becoming significantly more attractive thanks to the new regulations and is catching up internationally. Start-ups and growth companies will have easier access to equity capital via the capital market and the AG’s legal form. However, companies should consider introducing multiple voting rights early to fulfill the unanimity requirement after taking on additional shareholders and investors.

Further information?

If you have any questions, please feel free to contact me easily via email at schmitz-schunken@dhk-law.com or by phone at +49 241 94621-142.