Porsche Preferred?

Since the Porsche 356, the first production car that bears the Porsche name, was rolled-out from a factory housed in a repurposed sawmill1 in mid-19482, the marque has grown from strength to strength, excelling in motorsports with Niki Lauda and Alain Prost piloting their TAG McLaren Porsches to three successive FIA Formula One drivers’ titles and various sportscar racers steering their Porsches home in first place overall in the gruelling Le Mans 24-hour sportscar races on no less than 19 occasions.
Apart from proving its pedigree in motorsports, the Porsche emblem has proudly adorned many road-going vehicles coveted by motoring enthusiasts, like the various iterations of the iconic 911, the mid-engined Cayman, the Macan and Cayenne sports utility vehicles and most recently, the all-electric Taycan.
With the high intrinsic value of the Porsche operations, it was a matter of time before the parent company, Volkswagen AG (‘Volkswagen AG’), would seek to monetise its investment in Dr. Ing. h.c. F. Porsche Aktiengesellschaft (‘the Company’). The time came recently when Porsche Holding Stuttgart GmbH (‘the Selling Shareholder’) offered for sale some of its shares in the Company (‘Public Offering’) in conjunction with an application for a listing on the Frankfurt Stock Exchange.
In this article, we shall examine some of the salient steps in the Company’s journey in the listing exercise as well as the terms of issue of the shares comprised in the Public Offering.
The Restructuring
Before describing the main steps of the corporate restructuring, it is necessary to briefly outline the corporate structure of the Company and certain of its stakeholders.
The Selling Shareholder is wholly-owned by Volkswagen AG. The latter is controlled by Porsche Automobil Holding SE (‘Porsche SE’) which owns the majority of its voting shares.3 All of the ordinary shares in Porsche SE are held indirectly and exclusively by members of the founding Porsche and Piech families.4
Capital restructuring
Prior to the Public Offering, the issued share capital of the Company comprised Euro 45,500,000 Ordinary Shares. On 15 August 2022, the Company carried into effect a resolution passed by its shareholders on 1 August 2022 to increase the Company’s share capital from Euro 45,500,000 by Euro 865,500,000 to Euro 911,000,000 by capitalising a sum of Euro 865,500,000 from its capital reserve. Accordingly, the issued share capital of the Company as at 19 September 2022, the date of the issue of the prospectus for the Public Offering (‘the Prospectus’), was Euro 911,000,000 comprising 455,000,000 Ordinary Shares and 455,000,000 Preferred Shares. At this juncture, the entire issue share capital of the Company was held by the Selling Shareholder.
Profit and Loss Transfer and Domination Agreements
As the Company was at the material time a controlled-company under German law, the Company and its controlling company, the Selling Shareholder, entered into a domination agreement (Beherrschungsvertrag) (‘the Porsche DA’) and a profit and loss transfer agreement (Gewinnabfuhrungsvertrag) (‘Porsche PLTA’) on 13 November 2009.
In essence, the Porsche DA entitles the Selling Shareholder to issue instructions to the executive board of the Company on the management of the Company which the executive board must follow. Subject to prescribed legal requirements, the Porsche PLTA requires the Company to transfer its entire annual audited after tax earnings to the Selling Shareholder or, in the case of a loss, the Selling Shareholder must compensate the Company for any annual net loss that is not offset by a withdrawal against retained earnings.
Based on the Prospectus, upon completion of the Public Offering, the Porsche DA and the Porsche PLTA will terminate by operation of law with effect from 31 December 2022.
The spin-offs
Prior to the Public Offering, the Company transferred an aggregate sum of approximately Euro 11,881,000,000 in receivables due from the Selling Shareholder and Volkswagen AG to a wholly-owned subsidiary (‘the SPV’) of the Company. Subsequently, the Company transferred the entire issued share capital of the SPV to a subsidiary of the Selling Shareholder. The spin-offs, carried out under German transformation law, were completed in early July 2022 and resulted in a decrease in the capital reserve and retained earnings of the Company.
The Share Purchase Agreement and the Shareholders’ Agreement
On 18 September 2022, Volkswagen AG, the Selling Shareholder and Porsche SE entered into a share purchase agreement (‘Share Purchase Agreement’) and a shareholders’ agreement (‘the Shareholders’ Agreement’).
Under the Share Purchase Agreement, Volkswagen AG agreed to the sale by the Selling Shareholder of 25% of the Ordinary Shares plus one Ordinary Share in the Company to Porsche SE. The sale is to be completed in two tranches, the first of which is to be completed on the close of the Public Offering and the second, on a date after the closing of the Public Offering, as provided in the Share Purchase Agreement. Upon the completion of the Share Purchase Agreement, Porsche SE will hold 25% of the Ordinary Shares plus one Ordinary Share whilst the Selling Shareholder will hold 75% of the Ordinary Shares less one Ordinary Share in the Company.
The Shareholders’ Agreement will regulate certain aspects of the business and affairs of the Company as from the completion of the Public Offering. Among others, the Shareholders’ Agreement provides that: 
  1. Volkswagen AG and Porsche SE will use their influence to procure 10 of the 20 members of the Supervisory Board of the Company are representatives of the two companies; 

  2. all representatives of Volkswagen AG and Porsche SE on the Supervisory Board will exercise their votes in respect of specified decisions of the Supervisory Board that have a significant impact on the return of the Company in a manner to be determined in accordance with the procedures set out in the Shareholders’ Agreement; 

  3. for a period of five years from 29 September 2022, Volkswagen AG and the Selling Shareholder are restricted from disposing or transferring their Ordinary Shares in the Company without the prior consent of Porsche SE, and conversely, Porsche SE is restricted from disposing or transferring its Ordinary Shares in the Company without the prior consent of Volkswagen AG; 

  4. Volkswagen AG shall have a right of first refusal over the Ordinary Shares in the Company held (directly or indirectly) by Porsche SE, and Porsche SE shall have a right of first refusal over the Ordinary Shares in the Company held (indirectly) by Volkswagen AG; and 

  5. at least 30% of the consolidated after tax profit of the Company and its consolidated subsidiaries is to be distributed to the Company’s shareholders in a regular manner. 
The Public Offering
After increasing its issued share capital, the Company sought a listing of all 455,500,000 Preferred Shares in the Company on the regulated market of the Frankfurt Stock Exchange.
In conjunction with the listing application, the Selling Shareholder, through a syndicate of banks, offered for sale 99,021,740 Preferred Shares (‘Base Shares’), and in the event of an over-allotment, of 14,853,260 Preferred Shares (‘Over-Allotment Shares’) in the Company. The total number of Preferred Shares offered for sale amounts to 25% of the total number of Preferred Shares in the Company.
The Public Offering and listing did not include any of the Ordinary Shares of the Company.
Terms and conditions of the Preferred Shares
The Preferred Shares are subject to the following terms and conditions:
Par Value
The Preferred Shares have no par value. Each Preferred Share represents a notional share of Euro 1.00 in the share capital of the Company.
Status and Form
The Preferred Shares are fully paid bearer shares.
The Preferred Shares are denominated in Euro.
The Preferred Shares have been admitted for trading on the regulated market segment of the Frankfurt Stock Exchange and simultaneously, on the Prime Standard5 sub-segment thereof with post admission obligations6 to enable the Company to gain access to the capital markets, and highlight its intrinsic value.
The Preferred Shares are freely transferable in accordance with the legal requirements for non-voting bearer shares.7
Each Preferred Share carries full dividend rights in Euro as of 1 January 2022. A holder of a Preferred Share on the day of the general meeting’s resolution on which the allocation of distributable profit is validly passed shall be entitled to the dividend payment.
In addition, a holder of a Preferred Share will receive an extra dividend (Mehrdividende) of Euro 0.01 per Preferred Share in addition to any dividend that the Company decides to pay to its shareholders. However, the extra dividend (Mehrdividende) does not accrue if it is not paid in one year (nicht nachzahlbar).
Voting rights
The Preferred Shares do not carry voting rights except when the extra dividend (Mehrdividende) is not paid or not fully paid in one year. In such event, each Preferred Share shall have one vote until the extra dividend is paid in full in one year.
Issue of new preferred shares ranking in priority to or equally with the Preferred Shares
The Company has reserved the right to adopt a resolution to issue additional preferred shares which take precedence over or rank equally with the Preferred Shares in the event of a distribution of profits or assets of the Company.8
In the event of an insolvency of the Company, the Preferred Shares and the Ordinary Shares shall be subordinated to all other securities and claims, but shall rank equally as between themselves.
Implementation of the Public Offering
The Public Offering commenced on 20 September 2022, a day after the issue of the Prospectus. On 28 September 2022, Volkswagen AG announced that the Base Shares and the Over-Allotment Shares would be priced at Euro 82.50 each, the highest of the placement price range set earlier. The Public Offering closed on the same day, with all of the 99,021,740 Base Shares and 11,059,0619 out of 14,853,360 of the Over-Allotment Shares purchased by investors. The total number of the Base Shares and the Over-Allotment Shares purchased by investors amounted to 24.2% of the total number of Preferred Shares in the Company.
The Preferred Shares commenced trading on the Frankfurt Stock Exchange on the following day, 29 September 2022. In a fitting tribute to the most iconic model in the Company’s range of vehicles, the Preferred Shares were assigned German Securities Code: PAG911 and Ticker Symbol: P911.
The Public Offering, reported to be the second-largest listing in Germany, is without doubt a huge financial success for Volkswagen AG who raised approximately Euro 9.1 billion from the sale of the Preferred Shares and a further Euro 10.1 billion from the sale of 25% of the Ordinary Shares plus one Ordinary Share to Porsche SE.10
What do investors get by investing in the Preferred Shares of the Company? In terms of dividend and return of assets on an insolvency, the Preferred Shares participate equally with the Ordinary Shares except that in the case of a dividend, each Preferred Share is entitled to an extra dividend (Mehrdividende) of Euro 0.01 more than an Ordinary Share. The extra dividend appears to be non-cumulative (nicht nachzahlbar). Thus, from the perspective of financial returns, the Preferred Shares are not worse off than the Ordinary Shares in the Company. However, the Preferred Shares suffer from two drawbacks. First, the Preferred Shares do not carry any voting right, except for the duration that the extra dividend is not paid or not fully paid in any year. In this situation, each Preferred Share will carry one vote at shareholders’ meetings of the Company. Second, the value of the Preferred Shares could be diminished if the Company exercises its reserved right to issue additional preferred shares ranking equally or in priority to the Preferred Shares.
The structuring of the listing by the Public Offering of Preferred Shares is not novel. It is in fact a variation of the structure adopted in the listing of Porsche SE where only non-voting cumulative preference shares11 were made available to the public. By adopting a similar strategy for the listing of the Company, the Porsche and Piech families and Volkswagen AG have, through their collective indirect holding of all the Ordinary Shares in the Company, ensured that they remain firmly in the driver’s seat of the Porsche business.
Article by Kok Chee Kheong (Partner) of the Corporate Practice of Skrine.
The writer expresses his appreciation to Tan Wei Liang (Senior Associate) of Skrine for obtaining English language versions of the Company’s Prospectus and Articles of Association from the Company’s website

1 The repurposed sawmill was located in Gmund in Austria. The Porsche business was relocated to Stuttgart in Germany at the end of 1949.
2 The first Porsche 356 was road certified on 8 June 1948 in Austria where Porsche’s factory was then located (Information on road certification date obtained from Sports Classic London’s website).
3 It is reported in Volkswagen AG’s 2021 Annual Report that Porsche SE holds 53.3% of the voting rights in Volkswagen AG.
4 Information from Porsche SE’s website (https://www.porsche-se.com).
5 The Frankfurt Stock Exchange’s website explains that the Prime Standard is a segment of the EU regulated market. Companies in the Prime Standard meet the highest transparency requirements throughout Europe and seek to position themselves vis-à-vis international investors.
6 According to the Frankfurt Stock Exchange’s website, the post admission obligations include, among others, reporting in German and English, application of international accounting standards and conducting at least one analyst conference per year.
7 Various parties have entered into contractual lock-up agreements but these arrangements are not part of the terms of issue of the Preferred Shares.
8 Section 5(2) of the Articles of Association of the Company.
9 Volkswagen gets $8.8 bln by selling preferred Porsche shares, reuters.com, 11 October 2022.
10 Ibid.
11 Article 22 of Porsche SE’s Articles of Association provides, inter alia, that each preference share is entitled to a cumulative preferential dividend of 1.3 cents, and after payment of the preferential dividend on each preference share and the payment of a dividend of 1.3 cents for each ordinary share, to thereafter participate in any additional distribution of profits to the holders of preference shares and ordinary shares in proportion to their shareholding, with each preference share being paid a dividend that is 0.6 cents higher than the dividend paid on each ordinary share.

This alert contains general information only. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such. For further information, kindly contact skrine@skrine.com.