Delisting Damages

Safer Times for Shareholders

A Gagfah apartment complex. The company's stock market exit stunned shareholders. Source: DPA
A Gagfah apartment complex. The company's stock market exit stunned shareholders.
  • Why it matters

    Why it matters

    A 2013 court decision created a gap in Germany’s shareholder protection, but a new plan by lawmakers in Berlin aims to make sure they aren’t left empty-handed when companies flee the stock exchange.

  • Facts

    Facts

    • According to a new proposal, shareholder compensation would be based on the average share price in the six months prior to the delisting announcement.
    • Backers say it would protect investors without deterring companies from withdrawing from the stock market.
    • The German Society for the Protection of Securities Holders says that the share price of a company that is being delisted can be manipulated, especially in the case of smaller values ,within half a year.
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    Audio

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The reaction came swiftly. Gagfah’s share price plummeted after it announced its exit from the stock exchange in April 2015.

The move, which followed the real estate company’s acquisition by then-competitor Deutsche Annington, now Vonovia, left shareholders with nothing.

It’s a scenario that German lawmakers would like to prevent in the future. On Wednesday, the Bundestag’s financial committee agreed on a proposal to better protect investors against price drops that result from a delisting.

According to the proposal, investors will be compensated when corporations withdraw from the stock market. The amount they receive will be based on the average share price in the six months prior to the delisting’s announcement.

The new rule beefs up a previous measure proposed by the government, under which compensation would have been based on the average share price in the three months prior to the delisting announcement.

“We are now protecting the interests of investors without deterring companies from withdrawing from the stock market. ”

Mathias Middelberg, Financial policy expert, Christian Democrats

If it turns out, however, that ad hoc reports were incorrect or not made, or if the issuer manipulated the share price, the compensation will be based on the company’s net value instead of the share price.

“We have found an intelligent compromise,” said Mathias Middelberg, a financial policy expert with Chancellor Angela Merkel’s conservative Christian Democratic Union. “In delisting cases, we are now protecting the interests of investors without deterring companies from withdrawing from the stock market. The process needs to be predictable for companies that wish to turn their backs on the exchange,” he told Handelsblatt.

The legislative activities were triggered by an October 2013 decision in the “Frosta” case by the country’s high court, which argued that delisting a company is a choice reserved exclusively for top management, and that neither a shareholders’ decision nor a cash compensation offer are necessary.

The change in case law regarding the delisting of corporations attracted the attention of investors. Because a takeover offer with a subsequent mediation procedure was now no longer required, there has been a veritable boom in delistings since the end of 2013, explained attorney and capital markets expert Martin Weimann.

This development came at the expense of small investors, critics say. “A gap in protection was created,” CDU politician Mr. Middelberg said.

According to Mr. Weimann, about 81 percent of companies experienced declines in their share prices averaging some 16 percent.

“If we compare volume-weighted closing prices since a delisting announcement with the closing price on the next day, this results in a €151 million ($168 million) loss of market value,” said Mr. Weimann, who champions the rights of small investors in the Consumer Protection Agency for Investors. These losses were not offset by the day trading ceased, he explained, but had quadrupled to up to €800 million.

But the German Association for the Protection of Investors (SdK) sees the changes envisioned by the coalition government as a “lazy compromise.” The SdK still believes that a resolution by the shareholders’ meeting on the delisting, as well as the introduction of compensation, verifiable by a court at the full market value, is indispensible in the course of the so-called mediation procedure.

The German Society for the Protection of Securities Holders agrees, noting that the share price of a company that is being delisted can be manipulated, especially in the case of smaller values, even within half a year.

 

Frank Drost is a Handelsblatt Editor in Berlin, covering financial supervision and banks. Peter Köhler is a Handelsblatt editor in Frankfurt, reporting on banks, private equity firms, venture capital and corporate funding. To contact the authors: drost@handelsblatt.com and  koehler@handelsblatt.com

 

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