The EU Commission presented proposals at the end of 2022 to facilitate stock market access and financing for small and medium-sized enterprises (SMEs). Among other things, the EU-Prospectus Regulation, the Market Abuse Regulation, the Markets in Financial Instruments Regulation, and the Markets in Financial Instruments and the Listing Directive are to be revised. A draft directive on dual class shares (Dual Class Shares Directive) was also presented. Up until 1998, dual class shares were permitted in Germany on the basis of a ministerial exemption, insofar as this was necessary to safeguard overall macroeconomic interests. Currently, the issuance of dual class shares is not permitted in Germany. This is about to change as a result of the new dual class shares. What is striking is that the EU Commission’s package of measures corresponds very closely in large parts to the proposals made by the German Federal Ministry of Finance in its key issues paper for a Future Financing Act.

What is the Advantage of Dual Class Shares for Company Owners?

According to the EU Commission, one of the main reasons for the reluctance of founders and families to go public is the fear of losing control over the company. A listing dilutes ownership, so founders and families lose influence over important investments in the company and operational decisions. Ownership structures with dual class shares are an effective way for a company’s owners to retain decision-making power in the company while obtaining financing through public markets. According to the draft Dual Class Share Directive, dual class shares are shares that belong to a specific and separate class and carry higher voting rights than other classes of shares that provide voting rights for resolutions of the general meeting of shareholders. According to the draft, member states must ensure that companies are allowed to introduce structures with dual class shares upon authorization of previously unlisted shares for trading on an SME growth market in one or more member states. A corresponding statement on the (re)introduction of the dual class shares in Germany is also contained in the Federal Ministry of Finance’s key issues paper for a Future Financing Act.

Blockchain-Based Dual Class Shares in Germany

The Future Financing Act is intended to enable companies to issue shares based on blockchain technology in addition to bearer bonds. The digitalization of share trading is intended to take a further important step towards increasing the attractiveness of the capital market in the process. To make this a reality, the Electronic Securities Act (eWpG) is to be opened up to shares. Even though it is already legally possible to issue blockchain-based registered shares today, an expansion of the eWpG to explicitly enable the issuance of shares in the form of crypto securities should provide more legal certainty in this area. This is because, as crypto securities, the shares would have the same legal effect as a security issued by means of a certificate. This should lead to an improved tradability of the shares, especially with regards to the possibility of a bona fide and unencumbered acquisition.

Atty. Dr. Konrad Uhink