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PLC Global Finance update for April 2011: Germany
Practical Law UK Articles 5-505-9907 (Approx. 3 pages)
PLC Global Finance update for April 2011: Germany
by Simmons & Simmons
| Published on 05 May 2011 • Germany |
The Germany update for April 2011 for the PLC Global Finance multi-jurisdictional monthly e-mail.
Frankfurt higher regional court revisits investment advice jurisprudence
Reinhard Bunjes
The German Federal Court of Justice (Bundesgerichtshof) (BGH) has decided that the claim of a non-partner lender against an insolvent company shall not be treated like a shareholder loan and therefore shall not be subordinated to other third-party loans solely because the lender is related to the partner of the insolvent company (judgment dated 17 February 2011 – IX ZR 131/10).
Judgment of the BGH
Since the codification of the German principles of equitable subordination of shareholder loans (eigenkapitalersetzende Darlehen) has been reformed in 2008, numerous questions of detail have been open (again) for the courts to decide. In its judgment dated 17 February 2011, the BGH had to decide on the classification of two loans which had been granted to a limited partnership. One creditor was the mother of the person who was at the same time sole shareholder of the general partner and sole limited partner of the limited partnership (Partner), the other creditor was another limited partnership who was controlled by the brother of the Partner.
After insolvency proceedings had been opened over the assets of the limited partnership that had borrowed these two loans, the insolvency administrator (Insolvenzverwalter) refused to recognise both loans as equivalent to other unsecured loans. He argued that the loans should be subordinated because both creditors had granted the loans based on their relationship with the Partner and that the loans should therefore be treated like they had been granted by the Partner themselves.
However, based on the reformed codification, the courts of all three instances found against the insolvency administrator and refused to declare the loans subordinated. In the final decision, the BGH accepted the argument that, under the reformed codification as well as before, under certain circumstances loans can be subordinated like shareholder loans even if the creditor is not the partner himself. However, to subordinate third-party loans there must be substantial evidence that allows the attribution of the loans to the partners. The position of the creditor as relative of the partners alone is not sufficient to allow for subordination of the relative’s loan.
New regulations for German IFAs
Dr Harald Glander and Norman Mayr
In Germany, the draft act amending the law for investment intermediaries and capital investments (Regierungsentwurf für ein Gesetz zur Novellierung des Finanzanlagenvermittler- und Vermögensanlagenrechts) (Draft Act) was published on 6 April 2011.
The Draft Act will involve changes for issuers (i.e. entities that issue or offer) and distributors of so-called “grey-market products”. In Germany, such products (referred to as Vermögensanlagen (capital investments)) are, for example, shares of German limited partnerships (Kommanditgesellschaften), registered bonds (Namensschuldverschreibungen) and profit participation rights (Genussrechte).
Under the current regulatory regime, capital investments do (in line with the MiFID) not qualify as financial instruments. The Draft Act will change the definition of a capital investment in the German Banking Act (Kreditwesengesetz) (KWG) and the German Securities Trading Act (Wertpapierhandelsgesetz) (WpHG) so that capital investments will in the future qualify as financial instruments. Those companies which already have a banking licence and do business involving capital investments will also have to comply with the regulations for financial instruments in respect of such products.
However, although capital investments will qualify as financial instruments, distributors who only sell capital investments will be exempted from regulation under the KWG and WpHG (as amended by the Draft Act). Such distributors continue to be regulated by German trade law (Gewerbeordnung) (GewO); the Draft Act provides for strengthened requirements under the GewO.
A new Section 34f will be included in the GewO which will apply to German independent financial advisors (IFAs) who advise on and/or distribute any of the following products without having a banking licence: investment fund units that are registered for public distribution in Germany pursuant to the German Investment Act (Investmentgesetz), units in closed-ended funds or capital investment units as defined in the Draft Act. Under Section 34f GewO there will be additional li-censing requirements for German IFAs.
Under the Draft Act German IFAs will have to comply with a number of additional requirements. As well as having to show that they have professional liability insurance (Berufshaftpflichtversi-cherung), they will have to present a certificate of competence (Sachkundenachweis) which can only be obtained after passing an exam to be taken at the German Chamber of Industry and Commerce (Industrie- und Handelskammer). The certificate of competence is designed to prove that IFAs have the necessary expertise in relation to the services they offer. Further details will be provided in a separate regulation (Verordnung) which has not been published yet.
In addition, German IFAs will be required to be registered in a newly created register (Vermittler-register), to be maintained by the German Chamber of Industry and Commence.
In order to ensure a high and uniform level of investor protection, certain requirements regarding the provision of information to clients, investment advice and documentation (which at the mo-ment only apply to banks and financial institutions) will be extended so as to apply also to German IFAs.
There will be a transition period for German IFAs that already have a licence pursuant to the GewO (at the moment section 34c, GewO). More than 80,000 German IFAs will be affected by the new licence requirements; they are required to apply for a licence within six months after the Draft Act comes into force. However, they have two years after the Draft Act comes into force to provide the certificate of competence; if an IFA fails to provide the certificate by this time it will by operation of law lose its licence.
As a consequence of these increased requirements it is expected that the German IFA sector will change significantly and achieve higher professional standards in the near future.