By establishing the Economic Stabilization Fund (“ESF” – a special fund of the Federal Government), a further instrument is created to support companies of the real economy in these difficult times. Therefore, the Financial Market Stabilization Fund Act and the Financial Market Stabilization Acceleration Act are amended accordingly. On 25 March 2020, the Bundestag passed the corresponding amending law and on 27 March 2020, the Bundesrat approved it without alterations. The law has been promulgated on the same day and entered into force on 28 March 2020. In the following, we would like to give an overview in the form of Q&As regarding the ESF.

What is its purpose?

To stabilize companies of the real economy by overcoming liquidity shortfalls and by creating framework conditions for strengthening the capital base of companies.

Which companies are intended to be “stabilized”?

Companies whose endangerment of existence would have a significant impact on the economy, technological sovereignty, security of supply, critical infrastructures or the labour market. This also involves, in particular, stabilizing production chains and securing jobs.
In principle, such commercial enterprises (not including companies in the financial sector, credit institutions, etc.) that have fulfilled two of the following three criteria in the financial years 2018 and 2019 should be eligible for such support:

• Balance sheet total > EUR 43 million,
• Sales revenue > EUR 50 million,
• Number of employees on annual average > 249.

However, an application made by companies which do not meet the above-mentioned thresholds may also be considered by the ESF at its own discretion if they are active in one of the sectors listed in section 55 German Foreign Trade and Payments Ordinance (“AWV”) (such as operators of critical infrastructure, developers / programmers of software for the operation of critical infrastructure, providers of cloud computing services, holders of licenses for components or services of the telematics infrastructure or a company in the media industry which contributes to the formation of public opinion by means of broadcasting, telemedia or print products and is characterised by its particular topicality and broad impact) or are of comparable importance for the economy or security.
In addition, it has been clarified for recapitalization measures (see details below) that start-ups are also eligible if they have been valuated by private investors in at least one completed financing round since 1 January 2017 with an enterprise value of at least EUR 50 million, including the capital raised through this round. To our understanding, only recapitalization measures are available for such start-ups, but not guarantees (see below for further details), although an explicit explanation therefore is not provided in the legislative materials.
Further conditions are that the companies did not meet the EU definition of an “undertaking in difficulty ” as of 31 December 2019 (see definition of e.g. https://ec.europa.eu/competition/state_aid/legislation/rescue_resctructuring_communication_en.pdf), i.e. they were neither facing insolvency nor otherwise in an economically critical situation as defined or even in a restructuring plan. Instead, the companies “eligible for support” must have a clear, independent prospect of continuing their business after the COVID-19 pandemic has been overcome and must guarantee a “sound and prudent business policy”.

What are the available stabilization measures?

Guarantees

The ESF may issue guarantees totalling up to EUR 400 billion for debt instruments or liabilities issued to or granted for companies “eligible for support” during the period from the entry into force of the amending law (on 28 March 2020) until 31 December 2021 and with a maximum maturity of 5 years. Guarantees are issued in return for an appropriate consideration. Further details of the guarantees (such as type and risks covered, amount of consideration and conditions as well as upper limits) will be laid down by the Federal Ministry of Finance by way of ordinance. The content of such an ordinance is not yet known.

Recapitalization measures

Subordinated debt, hybrid bonds, profit participation rights, silent partnerships, convertible bonds, the acquisition of shares in companies and the acquisition of other equity-like instruments of such companies up to a total amount of EUR 100 billion may be acquired or taken over by the ESF against appropriate compensation.
However, a participation of the ESF only will be worth considering if (i) the stabilization cannot be achieved in a better and more economic way by other means (i.e. a guarantee and/or other measures, e.g. by German development bank (“KfW”) alone, are not sufficient or are not applicableand (ii) there is an important interest of the Federal Government in the stabilization. The extent to which an “important interest of the Federal Government” goes beyond the criteria according to which the companies to be supported are already selected is not clear from the law.
In our opinion, it will also have to be awaited how the interaction with the investment control regulations under the Foreign Trade and Payments Act (“AWG”) and AWV will take place, especially if financing or participation offers from “critical” third countries necessary for maintaining a company “eligible for support” are made and these are to be prohibited under the AWG and the AWV: does the ESF then have to participate?

Refinancing of the KfW special programs

The ESF can grant the KfW loans totalling up to EUR 100 billion to refinance the special programs it has to fund.

What conditions do companies have to expect in connection with being granted stabilization measures?

General background

Granting stabilization measures may be accompanied by conditions (whether by contract, voluntary commitment or administrative act) concerning, inter alia, the following points: Requirements regarding the use of the funds, taking out further loans, remuneration of executive bodies, distribution of dividends, time period for fulfillment of the requirements, measures to avoid distortion of competition, accountability and rights of investigation for the Federal Audit Office, as well as sending representatives of KfW as experts or members as representatives of the ESF in supervisory bodies of the companies concerned. It is particularly important to note that a declaration of commitment to comply with requirements must be made and published by the representative body with the consent of the supervisory body. An indication of what the Federal Government defines as “principles of good corporate governance and investment management in the Federal Government sector” is provided by the Federal Government’s Public Corporate Governance Code, which can be accessed via the following link: https://www.bundesfinanzministerium.de/Content/DE/Standardartikel/Themen/Bundesvermoegen/Privatisierungs_und_Beteiligungspolitik/Beteiligungspolitik/grundsaetze-guter-unternehmensfuehrung.html. The requirements are to be specified and regulated in further detail through a legal ordinance. The content of the legal ordinance is not yet known.

Time limitation

While the duration of the guarantees is limited to a maximum of 60 months, the investments are in principle not limited in time, as it will not be possible to determine an optimal exit point as early as the entry of the ESF.

Who is my contact person and decides on the stabilization measures?

The first point of contact for the companies is the Federal Ministry of Economics and Energy (“BMWi”), which negotiates the conditions of stabilization measures with the companies and prepares the applications. The ESF is administered by the Federal Republic of Germany – Finanzagentur GmbH, which can build on its experience with the administration of the Financial Market Stabilization Fund (particularly with regard to risk controlling, reporting and notification).
Decisions on granting stabilization measures are generally made by the Federal Ministry of Finance (“BMF”) in agreement with the BMWi. However, decisions can also be delegated to the KfW in certain cases, if and insofar as the BMF and the BMWi provide for this by statutory order, as can the performance of other tasks. Decisions are made in due discretion, taking into account the importance of the company for the German economy, the urgency, the effects on the labour market and competition, and the principle of using the ESF’s funds as economic and efficient as possible. There is no entitlement to support by the ESF.
An inter-ministerial committee (the so-called “ESF Committee”), consisting of one representative each from the Federal Chancellery, the Federal Ministry of Finance, the Federal Ministry of Economics and Technology, the Federal Ministry of Labour and Social Affairs, the Federal Ministry of Justice and Consumer Protection, and the Federal Ministry of Transport and Digital Infrastructure, shall decide on fundamental issues, matters of particular importance, and decisions on essential measures and conditions by mutual agreement.

What happens after 31 December 2021?

Even though stabilization measures can, in principle, only be granted until 31 December 2021, recapitalization measures for companies in which the ESF already holds an interest at that time should also be possible after 31 December 2021 in order to protect against dilution or to hedge stabilization measures already granted.

Which special tax regulations apply to ESF investments (keyword: discontinuation of losses carried forward etc.)?

The elimination of losses carried forward in accordance with section 8c German Corporation Tax Act (KStG) and section 10a German Trade Tax Act (GewStG) shall not apply to the acquisition of investments by the ESF or their subsequent resale. Furthermore, the ESF is exempt from trade tax and corporate income tax and is not subject to turnover tax.

Is there an intention to simplify the company law requirements existing in the various legal forms for the preparation or implementation of stabilization measures?

Yes, and the protection of minorities will be considerably reduced, respectively predatory shareholders will face severe sanctions. In the so-called “Economic Stabilization Acceleration Act” the processes and majority requirements are greatly simplified. This applies in particular to joint-stock corporations where significant simplifications have been agreed on for capital increases, capital reductions or implementation of capital measures. This includes, inter alia, the reduction of the required majorities for capital measures to a simple majority of the votes cast and the coming into effect of corresponding resolutions of the Annual General Meeting and the implementation of capital measures as soon as they are published in the Federal Gazette and not only when they are registered in the Commercial Register. Additionally, the law introduces a claim for compensation against shareholders who delay a recapitalization measure necessary for the company’s survival, in particular by exercising their voting rights or lodging unfounded appeals, in order to obtain unjustified advantages for themselves. Requirements of securities law, namely the German Securities Trading Act (WpHG) and the German Securities Acquisition and Takeover Act (WpÜG), will also be reduced or temporarily suspended.
For limited liability companies and partnerships, the implementation of corresponding measures is also simplified so that (notwithstanding any provisions to the contrary in the articles of association) resolutions can also be passed with a simple majority of the votes present (limited liability company (GmbH) or the simple majority of the shareholders participating in the resolution (limited partnership with a limited liability company as it sole general partner or limited partnership (GmbH & Co KG, KG)); the wording regarding the GmbH & Co KG or KG also means, in our understanding, the simple majority of the votes cast. In the case of a GmbH, the reasons for exclusion of shareholders or retirement of shares are also extended by law, as it is possible to exclude a shareholder from the company with a majority of 75% of the votes present in return for a settlement or to retire his shares if this is necessary for the success of the stabilization measure.

Which are the legal privileges still to be introduced for the ESF?

In addition to the above-mentioned simplifications under company and securities law, the applicability of further regulations to the detriment of the ESF is excluded, e.g. exclusion of the applicability of rights to challengeunder the German Insolvency Code (InsO) or the German Contestation Act (Anfechtungsgesetz) as well as the regulations on shareholder loans in the InsO to stabilization measures or the regulations on hidden contributions in kind. In addition, change-of-control provisions in contracts (including service or employment contracts of board members or executives of the “supported” company) should not be applied to a certain extent in the case of ESF investments. However, it is unclear whether this only applies to ESF holdings in companies in the financial sector (this is the wording, although the legislator intended to extent the already existing rule to companies of the real economy) or also to holdings in companies of the real economy.

Are privileges of the ESF also valid for possible legal successors of the ESF and special assets of the federal states?

Privileges under the InsO and the Contestation Act shall, in certain cases, also be transferred to legal successors of the ESF. Numerous provisions of the Economic Stabilization Fund Act as well as the Economic Stabilization Acceleration Act are also declared applicable to the economic funds of the federal states. This applies in particular to the privileging of the fund or the stabilization measure under company law, the German Insolvency Code and the German Contestation Act.