Foreign Stock Option Plans: German Insider Trading Law is Oftentimes Unexpectedly Applicable

 

Frequently, foreign listed companies, in particular companies from the USA, want to grant their staff abroad access to the company’s stock option plan. Some legal systems even require that companies allow all their employees, whether resident or not, to participate in their employees’ stock option programs. However, in many cases foreign companies that arranged for a listing on their domestic stock exchange only are not aware of the fact that their shares may also be included in the open market (Freiverkehr) of some stock exchange in Germany. In Germany the inclusion of a company’s shares in the open market does neither require an application, nor the approval or the consent of the respective company. Nevertheless, in these cases the German insider law applies to the full extent and, therefore, has to be complied with.

 

To complicate matters further, the German Investor Protection Improvement Act (Anlegerschutzverbesserungsgesetz) entered into force on 30th October 2004. Due to this act, the German rules on insider dealing were substantially amended and tightened. The new insider law has a strong impact on stock option plans. It has no safe haven rule for stock option programs in store. And, above all, the relevant new rules are unfortunately not as clear-cut as the former law was. Although the German Financial Services Federal Supervisory Authority (Bundesanstalt für Finanzdienstleistungen – “BaFin“) states in her Issuers’ Guide of 15th July 2005 (Emittentenleitfaden) that the new insider law is applicable to stock option plans, this guide gives practically no guidance on how to make stock option plans comply with the new rules.

 

The problem should not be underestimated: Transgressing the German Insider Law can constitute either a criminal or a regulatory offence, as the case may be. Deliberately acquiring or disposing of Insider Securities by using Insider Information is a criminal offence in Germany.

 

 

According to Sec. 14 of the German Securities Trading Act (Wertpapierhandelsgesetz – “WpHG“) it is illegal (i) to acquire or to dispose of Insider Securities by using Inside Information, (ii) to disclose or make available Inside Information to a third party without authority to do so or (iii) to recommend or to induce otherwise a third party, on the basis of an Inside Information, to acquire or to dispose of Insider Securities. 

 

Sec. 13 WpHG defines Inside Information as a precise piece of information about circumstances that are not publicly known and refer to one or more issuers of Insider Securities or to the Insider Securities themselves and which is, if it was made public, capable of having a significant impact on the Insider Securities’ stock exchange or market price. Such capability is deemed to be given if a prudent investor took into account such information when making his investment decision. Obviously, other things being equal, the smaller a listed company, the more likely it is that a not publicly known relevant piece of information could have a significant impact on the stock price and therefore qualify for Inside Information. 

 

According to Sec. 12 WpHG Insider Securities are Financial Instruments

1.   which are admitted to official trading on a German stock exchange or traded on the open market (Freiverkehr), or

2.   which are admitted to trading on an organised market in another Member State of the European Union or in another of the Contracting States to the Agreement on the European Economic Area, or

3.   whose prices are, directly or indirectly, depending on Financial Instruments according to no. 1 or 2 above.

Not only shares traded on a stock exchange or on the open market but also options on such shares rank among Financial Instruments (cf. Sec. 2 WpHG), even if these options are not publicly traded. Hence, granting or exercising stock options under a stock option program could possibly conflict with German Insider Trading Law.

 

 

A foreign stock option program should be aligned with the requirements of the German Insider Trading Law and the respective employees be duly informed about the German insider rules, before a foreign company whose shares are publicly traded grants somebody in Germany access to its stock option program. Against this background, it is highly advisable to seek competent legal advice of a lawyer who is an expert in German capital markets law and familiar with stock option plan issues in order to avoid any conflict with the German Insider Law.