General guidance

Overview of exemption criteria

Section 36 of the WpHG sets out that, when calculating the holdings of voting rights, voting rights attached to shares of an issuer are disregarded if they

• are held by credit institution or investment services enterprise in the trading book (section 36 (1));
• have been acquired for the sole purpose of clearing and settlement within the usual short settlement cycle (section 36 (3) no. 1);
• are held by a depositary and can only be exercised on the basis of specific instructions (section 36 (3) no. 2);
• are acquired or sold by a market maker (section 36 (5));
• were acquired for stabilisation purposes (section 36 (2));
• are provided to members of the European System of Central Banks to carry out their specific functions (section 36 (4)).

With the exception of shares held by depositaries (section 36 (3) no. 2 of the WpHG), voting rights that are disregarded under section 36 (1) to (5) of the WpHG may not be exercised (section 36 (6) of the WpHG).

Under section 38 (1) sentence 2 of the WpHG, the exemption criteria in section 36 of the WpHG also apply to voting rights relating to instruments.

Calculating holdings of voting rights for voting shares held in the trading book and by market makers

To calculate the voting rights in the trading and market making book, section 36 (8) of the WpHG sets out that the requirements in Article 9(6)(b) and 13(4) of the Transparency Directive must be observed. The regulatory technical standards (RTS) in Articles 2 and 3 of the directly applicable Commission Delegated Regulation (EU) 2015/761 of 17 December 2014 apply in this respect.¹ Under Article 2 of Commission Delegated Regulation (EU) 2015/761, the voting rights attached to shares under sections 33 and 34 of the WpHG and the voting rights relating to instruments under section 38 of the WpHG must be aggregated for the purpose of calculating the trading book and market making exemptions (“horizontal aggregation”).

Under Article 3 of Commission Delegated Regulation (EU) 2015/761, the trading book and market making exemptions within groups of companies – which comprise all parent-subsidiary relationships with the exception of the cases described in section 35 (2) to (6) of the WpHG – are calculated in accordance with section 34 (1) sentence 1 no. 1 of the WpHG, in other words from “bottom” to “top” (“vertical aggregation”).

Separate applicability of the trading book and market making exemption criteria

Provided the requirements of the individual criteria have been satisfied, they exist separately in parallel under BaFin’s existing administrative practice. This means that institution acting as a market maker and also holding voting rights in the trading book may utilise the maximum limits of both criteria to the full extent in each case. However, this practice is under discussion at European level, and there may be changes in the future in connection with European harmonisation.

Trading book (section 36 (1) of the WpHG)

Non-inclusion of voting rights in the trading book

Under section 36 (1) of the WpHG, voting rights attached to shares of an issuer whose home country is the Federal Republic of Germany are disregarded when calculating the holdings of voting rights if their holder

1. is a credit institution or investment services enterprise whose registered office is in an EU/EEA member state,
2. holds the shares in question in its trading book and this holding does not exceed 5% of the voting rights, and
3. ensures that the voting rights attached to such shares are not exercised or otherwise used to exert influence over the management of the issuer.

In the case of the trading book exemption, Article 5 of Commission Delegated Regulation (EU) 2015/761 must also be taken into account, under which “client-serving transactions” are assigned to the trading book. However, BaFin also presumed up to now that this type of transaction is covered by the trading portfolio or trading book exemption, as it could not be assigned to the non-trading book.

There is no requirement to file an application to use the trading book exemption, nor is there any need for confirmation by the auditor that the voting shares were held in the trading book in accordance with the applicable legal requirements.

Example	1	2	3	4	5	6	7	8
Non-trading book	2.9%	2.9%	4.0%	2.9%	2.9%	2.9%	9.0%	2.9%
Trading book	4.9%	5.0%	5.0%	5.1%	0%	0%	0%	5.0%
Market making book	1.0%	0%	0%	0%	6.0%	10.0%	2.0%	9.9%
Total	8.8%	7.9%	9.0%	8.0%	8.9%	12.9%	11.0%	17.8%
Notifiable thresholds	- - -	- - -	- 3% -	3% - 5%	- - -	3% 5% 10%	3% - 5%	- - -
voting rights	2.9%	2.9%	4.0%	8.0%	2.9%	12.9%	9.0%	2.9%

Non-inclusion up to and including a 5 per cent holding of voting shares

All voting rights up to and including 5.0 per cent attached to shares held in the trading book are considered to be exempt; above 5 per cent plus 1 voting right, however, all of the voting rights must be included.

Non-consideration of all voting rights attached to shares in the trading book applies again as soon as the holding in the trading book reaches 5 per cent or less.

Non-consideration of voting rights relating to instruments (section 38 (1) sentence 2 of the WpHG) in the trading book

The following must be noted when section 36 (1) of the WpHG is applied to voting rights relating to instruments (section 38 (1) sentence 2 of the WpHG): based on the requirements of Article 2 of the directly applicable Commission Delegated Regulation (EU) 2015/761, both the holdings under sections 33 and 34 of the WpHG and the instruments must be aggregated (horizontal aggregation). Non-consideration under section 36 (1) of the WpHG can only be considered after aggregation.

Voting rights held for stabilisation purposes (section 36 (2) of the WpHG)

Stabilisation in accordance with Regulation (EC) No. 2273/2003 and the Market Abuse Regulation

Under section 36 (2) of the WpHG, voting rights attached to shares are disregarded when calculating the holdings of voting rights

• if they were acquired for stabilisation purposes under Regulation (EC) No. 2273/2003²,
• if the holder of the shares ensures that the voting rights attached to the shares in question are not exercised or otherwise used to exert influence over the management of the issuer.

Until it was withdrawn as of 3 July 2016, Regulation (EC) No. 2273/2003 set out the conditions for buy-back programmes and measures to stabilise the price of financial instruments; it was withdrawn by sentence 1 of Article 37 of the Market Abuse Regulation³. Since 3 July 2016, stabilisation measures have been governed by Article 5(4) of the Market Abuse Regulation in conjunction with Commission Delegated Regulation (EU) 2016/1052 of 8 March 2016.

Definition of (price) stabilisation

Price stabilisation means a purchase or offer to purchase securities, or a transaction in associated instruments equivalent thereto, which it is undertaken by a credit institution or an investment firm in the context of a significant distribution of such securities exclusively for supporting the market price of those securities for a predetermined period of time, due to selling pressure in such securities (Article 3(2)(d) of the Market Abuse Regulation).

This aims to enhance the confidence of investors and issuers in the financial markets, in particular in the case of larger share issues.⁴

Ancillary stabilisation is of practical relevance in connection with the agreement of over-allotment (greenshoe) options used when shares are oversubscribed. This agreement allows the underwriter (or underwriters acting in a syndicate) to accept subscriptions or offers to purchase in the underwriting agreement that are greater than the originally planned placement volume. Granting such an over-allotment option in favour of an investment services enterprise or a credit institution involved in the offer allows them to purchase a certain amount of additional securities at the offer price for a certain period of time after the offer.⁵

Addressees of the exemption

Based on the definition of price stabilisation, addressees of the exemption under section 36 (2) of the WpHG can only be investment services enterprises (Article 3(1) no. 2 of the Market Abuse Regulation) and credit institutions (Article 3(1) no. 3 of the Market Abuse Regulation).

Because of the clearly defined group of addressees, the exemption for stabilisation measures cannot be considered for retransfer claims (= instrument within the meaning of section 38 of the WpHG) of existing shareholders who made existing shares available to the underwriter in order to settle over-allotments (= greenshoe shares).

Clearing and settlement (section 36 (3) no. 1 of the WpHG)

This exemption applies only to clearing and settlement in the narrower sense, i.e. the shares in question must have been acquired on- or off-exchange solely for the purpose of clearing and settlement. An additional requirement is that the shares are not held for longer than three trading days. The clearing and settlement business does not have to be the sole service offered by the company, but the share purchase must be exclusively a clearing and settlement transaction.

BaFin has now changed its administrative practice regarding notification obligations when new shares are subscribed by an underwriter or an underwriting syndicate (sections 185 and 186 (5) of the AktG). It can be assumed in these cases that shares are held solely for clearing and settlement. If the other conditions set out in section 36 (2) no. 1 of the WpHG have been met, underwriters or syndicates can disregard such shares. The background to the change in administrative practice is the introduction of the exemption criterion for holding shares in conjunction with stabilisation measures (section 36 (2) of the WpHG) - if such transactions do not trigger any notification obligation, it would be contradictory to assume a notification obligation when such shares are subscribed. The same applies to the purchase of existing shares, i.e., shares that have already been issued, for the purpose of placing them on the market.

Depositaries (section 36 (3) no. 2 of the WpHG)

In Germany, the depositary exemption under section 36 (3) no. 2 of the WpHG applies to the activity of financial services institutions under section 1 (1) no. 5 of the KWG (safe custody and management of securities for others [safe custody business]). In Germany, however, the exemption is only of minor importance in practice because it only covers those depositaries that are the legal owner of the shares held in safe custody and exercise the voting rights attached to the shares held in safe custody (belonging to the depositary) only on the basis of instructions given in writing or by electronic means.

Under German law, the custodian (depositary) bank does not normally become owner of the shares held in safe custody, so non-consideration under section 36 (3) no. 2 of the WpHG is out of question; additionally, the custodian banks are not normally attributed the voting rights attached to shares owned by their clients under section 34 (1) sentence 1 no. 6 of the WpHG, as they can generally only exercise the voting rights in accordance with the instructions of their clients.⁶

This primary application case in practice is therefore that of depositaries of fund managers outside Germany, since the depositaries there may acquire title in the shares held in safe custody. The voting rights are attributable to the funds, as the economic beneficiaries (section 34 (1) sentence 1 no. 2 of the WpHG). However, it may be necessary in individual cases to agree the conditions for application of the depositary exemption with BaFin, because BaFin’s administrative practice means that the exemption set out in section 36 (3) no. 2 of the WpHG can only be exercised if the activity of the depositary is limited to pure safe-keeping. If other agreements are made by the depositary and the client over and above pure safe-keeping that grant the depositary (beneficial) rights to the shares held in custody in certain circumstances, e.g. in the context of prime brokerage services, the depositary exemption cannot be exercised. If the depositary exemption applies (and it the depositary is the owner of the shares held in custody), the depositary is not named in the notifications (see no. 4 in the mandatory standard form under section 12 (1) of the WpAV in conjunction with the Annex to the WpAV).

Market makers (section 36 (5) of the WpHG)

Under the legal definition in section 36 (5) of the WpHG, a market maker means any person that holds itself out on a market on a continuous basis as being willing to buy or sell, by way of proprietary trading, shares or other instruments at prices defined by it. The definition of a market maker in section 36 (5) of the WpHG corresponds to the requirements of point (n) of Article 2(1) of the Transparency Directive and covers activity on a publicly accessible market in which the market maker holds itself out as a buyer or seller on this market by submitting quotes in order to ensure the liquidity of a particular security. The term is therefore narrower than the concept defined in point (k) of Article 2(1) of the European Short Selling Regulation, which also includes fulfilling orders initiated by clients or in response to clients’ requests to trade.

In this regard, the designation as market maker is not decisive for being classified as a market maker; instead, what is decisive is whether the participant (e.g. as designated sponsor) satisfies the definition of a market maker and thus has to be considered a market maker. The holdings of a market maker are considered to be exempt if the person in question:

• acts in its capacity as a market maker,
• is authorised under section 32 (1) sentence 1 in conjunction with section 1 (1a) sentence 2 no. 4 of the KWG,
• does not intervene in the management of the issuer and does not exert any influence on the issuer to buy the shares in question or to support the share price, and
• notifies BaFin without undue delay, and at the latest within four trading days, that it acts as market maker, disclosing the shares in question.

Market makers must also notify BaFin if they no longer offer shares or other financial instruments on a continuous basis (section 4 (1) of the TranspRLDVO). Both notifications may be submitted to BaFin by mail or fax.

All voting rights attached to shares held in the market making book are considered to be exempt up to 10 per cent minus one voting right; if the voting rights attached to shares total to 10 per cent or more, all of the voting rights must be included.

Non-consideration of all the voting rights attached to shares in the market making book applies again as soon as the holding in the market making book falls below 10 per cent.

If so required by BaFin, the market maker must be able to prove which shares or other instruments it holds in its capacity as market maker and in what amount – if it is unable to do so, BaFin may order it to hold the shares or other instruments in custody in a separate account (section 4 (2) of the TranspRLDVO).

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