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but also has to adhere to the rules and regulations governing the capital markets, the so-called capital markets law. The following section will give some orientation in this complicated subject matter by introducing the basic concepts and sources of capital markets law and by providing three particularly important examples of German capital markets regulation.
2.6.1 Introduction
The term ‘capital markets law’(Kapitalmarktrecht) refers to the legal rules governing capital markets. It encompasses the totality of all legal rules and principles that regulate the flow of financial means between the investors and the undertakings. The investors supply capital to the undertakings, which supply corporate, governmental or private securities (Wertpapiere) in return.Apart from this basic definition, the exact scope of capital markets law is difficult to determine as both the terms ‘capital’ and ‘security’ are used in economics, legal and accounting with a variety of meanings, loosely describing different concepts at different times.148 Moreover, modern capital markets law is subject to constant and often fast-paced changes in order to adapt to the highly dynamic nature of its subject matter. Thus, although the essence of capital markets law is fairly concrete, its boundaries are not at all clear-cut.
2.6.1.1 Objectives of Capital Markets Law
Commonly, there are two different objectives of capital markets.149
Ensuring Market Functionality
Capital markets law aims at an effective protection of the functionality of the market as a whole (Funktionsschutz). In the interest of the economy as a whole, legislature has to ensure the systemic stability and general efficiency of capital markets as such. In order to safeguard an efficient functioning of a market, legislative means have to secure that it is:
•institutionally efficient, i.e. suitable market institutions exist, to which market actors have unhindered access and which are governed by a set of basic rules providing for its long-term integrity and stability;
•allocationally efficient, i.e. that invested capital is distributed to those undertakings which—from an overall public wealth point of view—need it the most and simultaneously create the highest yield for the investor. Such allocative efficiency implies an adequate degree of transparency and competition in the respective market;
•operationally efficient, i.e. that economic hindrances to an effective market functioning, especially transaction costs, are minimized.
148 See Davies 1997, p. 234.
149 For more detail see Heiser 2000, pp. 60 et seq.
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Protecting Investors
Furthermore, capital markets law also aims at protecting investors (Anlegerschutz), which also has two aspects.
First, a capital market ‘works’only if and insofar as investors have confidence in its integrity, stability and fairness. Therefore, legislature has to protect the investing public as a whole in order to accomplish an institutional functionality of capital mar- kets.Thisso-called‘institutionalinvestorprotection’(institutionellerAnlegerschutz) is primarily effectuated by transparency requirements, e.g. mandatory ad-hoc publicity in case of market-relevant developments in the company. Rules pertaining to institutional investor protection frequently are safeguarded by criminal sanctions.
Second, investor protection also refers to legal rules protecting the interests of individual shareholders. Investors are protected as individuals without considering them in their function in the market. This ‘individual investor protection’ (individueller Anlegerschutz) in Germany originates from the practice of German courts which began in the 1970s to award damages to individual investors for malpractice of their market counterparts. In recent decades, however, an increasing number of statutory claims for damages can also be observed.
The boundaries between both aspects, i.e. institutional and individual protection, is often far from being clear-cut. For instance, statutory rules primarily protecting the investing public as a whole may entitle an individual shareholder to damages under Sec. 823 para. 2 BGB if such rules can be considered to at least ‘also’ serve the individual interests of the materially damaged person. The increasing emphasis of the ‘ethical’ approach towards investor protection has made the borderlines between the two aspects even more fragile.
2.6.1.2 Sources of German Capital Markets Law
In Germany a single codification of capital markets law does not exist. The relevant rules are spread in a variety of acts of which the Securities Trading Act (Wertpapierhandelsgesetz, WpHG ) and the Stock ExchangeAct (Börsengesetz, BörsG) are the most important.150
Securities Trading Act
The WpHG contains the fundamental principles and requirements governing transactions on and the behavior of the market participants in the capital markets. The act distinguishes between different ‘markets’ or ‘trading segments’ and stipulates special requirements for each segment. The trading segments governed by the WpHG encompass the so-called ‘regulated market’(stock exchanges), multi-lateral trading facilities (MTF) (successful examples for such MTFs are Chi-X and Turqouise), the privately organized open market (e.g. the ‘entry-standard’of the Deutsche Börse AG ) and, finally, the so-called ‘systematic internalizers’, i.e. traders who regularly and systematically engage in security trading outside of a regulated exchange or MTFs, i.e. over-the-counter (OTC) trading. As a general rule, the WpHG does
150 An English translation of the most important supervisory legislation is available at www. bafin.de.
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not apply to the so-called ‘gray’ capital market (grauer Kapitalmarkt ). The gray market is a German specific and is not a capital market in the strict sense, since it is neither coherently organized nor used to trade fungible securitized investments. Financial products commonly traded on the gray market are shares in limited commercial partnerships (Kommanditgesellschaften).
Stock Exchange Act
The BörsG mainly contains organizational rules governing the structure of stock exchanges and its trading segments (regulated market, open market). In contrast to the WpHG, the scope of application of the BörsG is limited to the secondary markets: while the WpHG also applies to the pre-IPO and IPO phase of an initial emission of securities, the BörsG is limited to the post-IPO trading of stocks and bonds already placed in the market.
Other National Sources of Law
Further important statutes of German capital markets law encompass the Securities Acquisition and TakeoverAct (Wertpapierund Übernahmegesetz, WpÜG ), which is of particular importance in the context of M&Atransactions and will be explained in more detail later on151, as well as the Investment Act (Investmentgesetz, InvG), the Securities Deposit Act (Depotgesetz, DepotG ), the Act on the Prospectus for Securities Offered to Sale (Verkaufsprospektgesetz, VerkProspG ) and the Securities Prospectus Act (Wertpapierprospektgesetz, WpPG). Statutory requirements regarding or influencing market behavior are also contained in general statutes. For example, the accounting standards stipulated in Secs. 238 et seq. HGB can be considered a part of capital markets law, as they create transparency, thus, enhancing the trust of investors.
Sources of capital markets law ranking below formal acts of the Federal parliament comprise numerous ordinances (Verordnungen) clarifying the details of such acts, e.g. the Federal Securities Trading Reporting and Insider List Ordinance (Wertpapierhandelsanzeigeund Insiderverzeichnisverordnung, WpAIV) which specifies in detail the pre-requisites and procedure of the notification requirements under the WpHG. Other important sources are the trading regulations issued by the stock exchanges. Finally, in practice, decrees and announcements issued by the German Federal Security Supervisory Authority (Bundesanstalt für Finanzdienstleistungaufsicht, BaFin) are of particular importance. Although many of these announcements do not, as such, have an immediate legal effect, they clarify the opinion of BaFin, thus serving as a guideline for issuers and investors.
EU Law
In capital markets law, European legal sources are of particular relevance152 More than 80% of German capital markets regulations are estimated to be based on EU
151 See infra, Sect. 4.5.
152 For further detail on the following see Möllers 2010, pp. 133 et seq.
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legislation.153 The WpHG, for instance, has mainly been pre-determined by EU Directives.
The purpose of such EU legislation is to further the freedom of capital and the freedom to provide services within the common market. From the introduction of these freedoms in the 1958 Treaty of Rome until the mid-1980s harmonization in this area was left to the European Court of Justice and remained fragmentary. In 1985 the European Commission in its White Paper on the Internal Market declared a shift of focus away from court-led approximation of Member State law based on primary EU law to secondary EU legislation. To this purpose, until 1998 several EU Directives were adopted, including, inter alia, the Investment Services Directive which introduced the so-called passport principle, according to which investment firms and banks could provide specified financial services in other Member States on the basis of home state authorization and supervision. These legislative measures mostly adhered to the principle of ‘minimum harmonization’, i.e. the Member States were obliged to implement the minimum standard as set forth in the Directives but also allowed to stipulate stricter rules in the interest of market participants.
The European Commission in 1999 issued the Financial Services Action Plan, which addressed remaining deficiencies, such as differences between the Member States in several areas due to different national implementing legislation. To assess possibilities of further improving market integration and removing remaining hindrances for the free movement of capital within the Common Market, the Commission instated the so-called ‘Committee of the Wise Men’, which in 2001 delivered its final report (commonly referred to as ‘Lamfalussy report’ after the committee’s chairman Alexandre Lamfalussy).
The Lamfalussy report recommended the introduction of a new four-level ‘fasttrack’ legislative procedure (the so-called ‘Lamfalussy process’) and the establishment of two committees: a European Security Committee (ESC) and a Committee of European Securities Regulators (CESR) with advisory functions. The main element of the Lamfalussy process is that only the key political decisions are made by the European Council and the European Parliament and are stipulated in a general framework (Level 1), while EU level implementing measures containing the details are implemented by the European Commission with ESC and CESR providing advice (Level 2). Thus, the legislative procedure has been sped-up considerably.154 In Level 3, the Member States implement the EU rules into national law upon consultation with CESR. The final Level 4 of the Lamfalussy process serves the supervision and fine-tuning of the national implementation and the enforcement of enacted legislation.
153 See Frankfurter Allgemeine Zeitung as of 9April 2009, p. 11.
154 An average of 20 months was required to pass the four Level 1 Directives as opposed to an average of nine years for the enactment of a Directive prior to the introduction of the Lamfalussy process; see European Commission, The Application of the Lamfalussy Process to EU Securities Markets Legislation—A preliminary assessment by the Commission services, Commission Staff Working Document as of 15 November 2004.