Initiator support and controlling: products, such as profit participation certificates, sometimes prove to be a placement fiasco

*by Johannes Fiala, lawyer (Munich), MBA Financial Services (Univ.Wales), MM (Univ.), certified financial and investment advisor (A.F.A.), banker (
Ad-hoc release of 02.01.2006 – Allgemeine HypothekenBank Rheinboden AG (AHBR): “AHBR expects negative net result for 2005, Frankfurt am Main, 2 January 2006 Allgemeine HypothekenBank Rheinboden AG (AHBR) expects a negative net result for the 2005 financial year. According to the Bank’s preliminary estimates, this will be in the range of EUR 1.1 to 1.3 billion. The background to this is the final realisation of losses from charged interest positions and the revaluation of the loan portfolio in the course of a comprehensive restructuring and repositioning of the Bank following the now completed takeover by the American financial investor Lone Star.
In view of the expected balance sheet loss, the liable capital provided by participation certificate creditors and silent partners will be used to a significant extent. Creditors of subordinated registered and bearer bonds are not affected by the measure. To support the repositioning of the Bank, Lone Star will inject an appropriate amount of new equity into AHBR from the start of the 2006 financial year.” Billions in profits had turned into billions in losses ? meanwhile so-called investor-protection lawyers, labour or interest groups and ‘victims’ associations are preparing to collect the poorer investors.
The story usually arises in the middle market’s search for equity: Talking to the banks’ credit department sobers up many SMEs. The equity ratio has fallen from below 20% 25 years ago to less than 8% on average. The creditworthiness comes more easily to its borders ? thus the middle class needs liable own capital funds. Already a windy folder advisor is found, who changes the Mittelstndler into an initiator for the placement of investments: In essence, the freshly baked initiator is offered a bundle of contracts (legal services, shelf company, advertising agency, software programming, trade fair appearance, sales services) ?from a single source? ? unfortunately all too often with the ?wrong product? as the solution approach.
Those initiators, which presented themselves first on fairs ?for the sales of their benefit rights ?, form potentially later informal communities of interests because of wrong selling and folder consultation. Many initiators from the middle class determine that the profit participation certificate capital can be accommodated only with difficulty with the investor. And this is not only a consequence of ?scandals? in such a way specified, like for instance the cases ?AHBR?, ?fortune Garant AG? or ?Securenta/Göttinger group? (BGH judgements of 21 March 2005 ? II ZR 124/03 , II ZR 140/03, II ZR 149/03, II ZR 180/03 and II ZR 310/03 ), ?SüdwestRentaPlus-Gruppe?, etc.
Profit participation rights and profit participation certificates: Originally, the profit participation certificate was an instrument for the restructuring, merger and liquidation of companies ? the share capital was paid off and only a profit (profit participation !) could follow. Today a multiplicity of Gestaltungen is offered as ?benefit capital? or ?Mezzanine capital? on the market ? in the core this means today for the investor first of all a fiscal and factual participation in the (total ?-) loss.
The term “profit participation certificate” is used when the profit participation right has been securitised in a deed as a security. The profit participation certificate came into fashion in the mid-80s ? mainly because an amendment to the German Banking Act (KWG) allowed banks to expand their liable equity capital ? and issue a multiple of credit.
Anything is possible: there are no statutory regulations on the form of the profit participation certificate, nor on the type and content of profit participation rights. Rights of co-determination, as they have a shareholder, are not regularly provided for. There are numerous contract variants ? this makes the product already very consultation-intensive and offers numerous traps with the folder organization: Here investment consultants and initiators can easily because of ?incorrect consultation and folder adhesion? into a adhesion come.
Nothing is audited: A widespread misconception in the practice of investment brokering exists with regard to BaFin approval or ?prospectus review. It concerns only a formality examination, not however factual, contentwise and economic controls. It is crucial therefore that some investment consultants praise such products to their customer as allegedly ?safe investment? This means that liability on the part of the intermediary or investment advisor is pre-programmed.
Nothing is insurable: One reason why profit participation rights are so difficult to sell is the fact that the investment intermediary does not find this product in the usual insurance policies to cover his professional risk. The asset liability special insurance broker Ralf W. Barth points out that the VSH insurers are systematically withdrawing from this market segment. Nevertheless there are initiators, who let themselves be ?made wise? by your folder advisors, such Private Placements are spielend over distributions to investors sellable. Medium-size entrepreneurs fall gladly on such folder advisors, who pull for years the (nearly) always same folder texts from the drawer ? connected with the announcement that with these folders the own capital funds would stand as good as surely ready.
Criminal brochure advisors ? For the Mittelständler it is difficult to see through the folder advisor market. Numerous investment scandals are based on brochures and concepts of the same brochure consultants. On the market developed plant bankruptcies (e.g. FALK, three-country funds, Goettinger group) lead potentially straight for those folder advisors to countless process follow-up orders, which possibly originally ?the soup by their negligent organization the initiator stirred ?
Practically, every initiator needs controlling, i.e. ?control, planning, steering and steering of legal and economic processes? in the implementation phase. Here then lawyer and management consultant co-operate, in order to repel incorrect and if necessary criminal folder consultation. So far, only selected law firms offer this range of services.
A particularly blatant approach of some prospectus consultants is to recommend a ?small money action? to the initiator: Often with the tip, ?with it you can fetch already times the first costs again in? Ouriös is this besides, because without folder permission of the Federal Supervisory Office for financial services (BaFin) the initiator may not begin mostly yet to collect any plant funds. This is particularly harsh for these first investors if the project does not find a distributor in the aftermath to ensure the placement.
Another popular variant is the preparation of a prospectus by an inadequately insured tax firm without the authority to give legal advice: the only thing that a look at the commercial register and a creditworthiness inquiry will show is that the company is insufficiently capitalized. For the middle-class person who pays his five- or six-figure consulting fee, there is no financially credit-worthy protection of the law firm’s liability through such constellations. By the way, at the latest the liability insurer of the tax consultancy GmbH would reject the liability to pay, because of violation of the legal advice law.
Such concept errors are not rare ? for the Mittelständler can lead a contract with the ?wrong? Prospectus advisor in the safe own (!) Insolvency lead. For the company of such a concept a Kanzlei should be assigned for controlling additionally by the Mittelständler and/or initiator, because the costs for the monitoring stand in no relation to the conceivable possible damage. It is also advisable for financial service providers and distributors to concentrate in future only on concepts that have been reviewed once again.

Our office in Munich

You will find our office at Fasolt-Strasse 7 in Munich, very close to Schloss Nymphenburg. Our team consists of highly motivated attorneys who are available for all the needs of our clients. In special cases, our law firm cooperates with selected experts to represent your interests in the best possible way.

About the author

Dr. Johannes Fiala Dr. Johannes Fiala

Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
»More about Dr. Johannes Fiala

On these pages, Dr. Fiala provides information on current legal and economic topics as well as on current political changes that are of social and/or corporate relevance.

Arrange your personal appointment with us.

Make an appointment / call back service

You are already receiving legal advice and would like a second opinion? In this case please contact Dr. Fiala directly via the following link.

Obtain a second legal opinion

The first telephone call about your request is free of charge.