Downlisting: Possibility of switching to the OTC market to save costs

published on 17 March 2025 | reading time approx. 4 minutes

A listing on the regulated market opens up increased visibility and awareness among (institutional) investors as well as the associated opportunity to raise equity and debt capital quickly and easily. However, a listing on the regulated market also entails a lot of legal obligations. In particular, the strict requirements regarding financial reporting lead to a high level of effort and can increasingly become a burden for companies - especially in difficult economic times. If the existing listing on the regulated market no longer serves the company's strategic and financial objectives, opportunities arise through a downlisting. This applies in particular if the company’s shares are held by a large majority shareholder or a group of larger shareholders.

Downlisting is an option for companies that want to realize potential savings while retaining their valuable access to the capital markets. This is a change of market segment in which the shares remain tradable on the over-the-counter (OTC) market but no longer have to meet the strict requirements of the regulated market. This article provides a brief overview of the key points and special features that need to be considered in the event of a downlisting.

The stock exchange segments and their legal requirements

Capital market regulations essentially distinguish between two market areas: the regulated market and the OTC market. In these areas various stock exchange segments have been formed. For example, the Prime Standard and General Standard segments of the Frankfurt Stock Exchange (FWB) belong to the regulated market within the meaning of the stock exchange regulations. The Open Market (FWB) and m:access (Munich Stock Exchange) segments for example, have been established in the OTC market on the major stock exchanges.

Admission to the regulated market, for example, is linked to numerous provisions of stock corporation law and securities legislation, which result in high administrative costs for the companies. These include accounting in accordance with the International Financial Reporting Standards (IFRS), the declaration of compliance with the German Corporate Governance Code (DCGK), the obligations towards security holders under the German Securities Trading Act (WpHG) and the applicability of takeover law under the German Securities Acquisition and Takeover Act (WpÜG). In particular, the preparation of financial reporting in accordance with IFRS incurs considerable additional costs each year compared to reporting in accordance with the German Commercial Code (HGB).

While segment changes within a market segment (e.g. from Prime to General Standard) are also accompanied by a reduction in obligations, a change from the regulated market to the OTC market (e.g. change from General Standard to Open Market) in particular leads to major relief due to the elimination of many of the aforementioned obligations.

Downlisting procedure

The procedure for downlisting - as well as for the delisting - is regulated in Section 39 of the German Stock Exchange Act (BörsG). According to Section 39 (2) BörsG, the stock exchange revokes the admission of shares to trading on the regulated market at the request of the issuer. This revocation may not contradict the protection of investors. The background to this is that the tradability (fungibility) of the shares can sometimes suffer as a result of a change to the OTC Market. The law therefore stipulates that in such a case, one or more shareholders must submit a mandatory delisting acquisition offer to all other shareholders to sell their shares.

Specifically, the law stipulates that a unconditional delisting acquisition offer has to be made to the shareholders in accordance with the provisions of the WpÜG.

This means that one strategic factor to be clarified in the beginning is the decision, who of the main shareholder or shareholders will submit the delisting acquisition offer as a bidder or bidding consortium. A bidding consortium is formed by coordinated behavior with one or more other shareholders (so-called acting in concert). Therefore, a careful examination of the shareholdings of all parties involved in the transaction is required.

Usually, the statutory minimum price is offered to the shareholders, thus reducing the probability of acceptance. The statutory minimum price per share corresponds to the weighted average domestic stock exchange price of the last six months. Since the bidder or the bidding consortium must be in a position to take over all of the shares at the offer price, the amounts involved are usually high. Therefore, it is essential that the bidder or bidding consortium develop a solid financing concept. According to the requirements of the law, a bank confirmation must be obtained that confirms that the bidder or bidding consortium has sufficient financial resources to pay the offer price. In addition, the individual steps for preparing the necessary documents and applications for a downlisting must be carefully planned.

If the legal requirements are fulfilled, the management of the stock exchange will exercise its discretion and usually revoke the listing in the previous segment on the desired date. The company is then "delisted" and exempt from certain regulatory requirements. If admission to another, lower stock exchange segment of the OTC market is applied for and implemented at the same time, this constitutes a downlisting. The downlisting ensures that the company retains access to the capital market.

After the downlisting?

It should be noted that a downlisting does not mean that all capital market regulations no longer apply. In particular, the provisions of the Market Abuse Regulation (MAR), especially the obligation to publish ad hoc announcements and the ban on insider dealing continue to apply.

Conclusion

In light of the increasing regulation of the regulated market, a downlisting of the company represents an opportunity to save costs, provided that the advantages of the regulated market are no longer needed and the company has one or more major shareholders who can finance the delisting acquisition offer. At the same time, admission to the OTC market maintains access to the capital markets, albeit at a reduced extent.