Definition and legal framework of overallotments
Definition of overallotment
In capital markets law, and especially during initial public offerings (IPOs), an overallotment describes the allocation of securities by banks or syndicates beyond the originally intended issuance amount. This technique is used to stabilize the issue price and is regularly combined with the so-called greenshoe option to regulate oversubscription during placement.
Legal basis and regulatory classification
Overallotment is not an independent concept under the Securities Trading Act (WpHG); however, associated practices such as price stabilization measures and related disclosure obligations are regulated by law. The essential requirements arise in particular from the provisions of the European Market Abuse Regulation (MAR, Regulation (EU) No. 596/2014), as well as supplementarily from the German Securities Prospectus Act (WpPG) and relevant guidelines of the Federal Financial Supervisory Authority (BaFin).
Purpose and function
The goal of the overallotment is to increase market liquidity, ensure price stability following the issuance, and prevent the price from falling below the issue price immediately after the IPO (going public). Overallotment usually occurs in parallel with the placement with the support of the greenshoe option, a repurchase option that secures the coverage of the overallotment.
Legal structuring of the overallotment
The legal structure of issuance syndicates
As part of the overallotment, issuing banks commit to placing a greater number of shares on the market than are actually issued by the issuer. Legally, this is established either by an additional allocation from existing shareholders (secondary allocation) or through a fundamental agreement for a stock loan (stock lending agreement). Legal protection is provided primarily through syndicate agreements and placement agreements with the issuer.
Greenshoe option as a safeguarding instrument
The greenshoe option typically accompanies the overallotment. Here, the issuer grants the banking syndicate a purchase option for a certain percentage of the total issue, so that the syndicate has the opportunity to meet demand that exceeds the original issue volume. The legal basis is a separately negotiated option agreement, the exercise of which customarily occurs within a specified period following admission to trading.
Transparency requirements and prospectus obligations
The legal admissibility of overallotments is subject to strict transparency requirements. According to Article 5 EU Market Abuse Regulation, stabilization measures, including overallotments, must be disclosed promptly and in an appropriate manner. The essential terms of the overallotment – in particular, scope, purpose, and the conditions of the greenshoe option – must be clearly and unambiguously disclosed in the securities prospectus. BaFin and other supervisory authorities monitor compliance with these provisions.
Investor protection and market integrity
Safeguard mechanisms and limits of permissibility
Although overallotments contribute to the introduction of securities to the market, they are subject to strict regulatory restrictions to protect market integrity. Firstly, they may be used solely for the purpose of stabilizing the issue. Any further use for market-manipulative purposes is prohibited and constitutes a regulatory offense under the market abuse regulation.
Disclosed stabilization period and reporting obligations
The execution of overallotments and related repurchases (stabilization measures) may only take place within a legally defined timeframe, typically within 30 calendar days after the start of trading. For all measures carried out, the issuing consortium must report regularly to the public and the competent supervisory authority.
Legal consequences of violations
Violations of disclosure and transparency obligations in connection with overallotments may result in significant regulatory sanctions. In addition to substantial fines, the reversal of the respective transaction and civil claims for damages by affected market participants are also possible.
International context and special provisions
European legal influences
The regulation of overallotments is harmonized across Europe by the provisions of the Market Abuse Regulation (MAR), and is therefore subject to uniform requirements throughout the European Economic Area. National particularities may arise from different implementation practices and supplementary regulations at the level of the respective supervisory authorities.
Particularities in other legal systems
In other legal systems, especially in the USA or the Anglo-Saxon legal sphere, there are specific provisions regarding the legal nature and admissibility of overallotments. There, the Securities and Exchange Commission (SEC) is responsible for regulation, with considerable emphasis also placed on transparency and investor protection.
Summary
Overallotment is a significant instrument in capital markets law and is used during IPOs to stabilize securities prices. Its legal structuring involves comprehensive contractual, regulatory, and capital market law provisions. Transparency, disclosure, and prevention of market manipulation are central regulatory priorities. Compliance with these provisions is monitored by national and European supervisory authorities, with violations potentially resulting in severe sanctions. Overallotments thus enable a stable stock market debut, with their statutory and regulatory limits serving to protect market integrity and investor interests.
Frequently asked questions
What liability risks exist for the parties involved in an overallotment option?
In the context of a capital market transaction, especially during an initial public offering (IPO), various parties such as issuers, syndicate banks, and existing shareholders can be involved in an overallotment option (also known as the ‘greenshoe option’). The primary liability risks stem from prospectus liability (e.g., under Section 9 WpPG), potential civil damages claims, and specific statutory liability provisions. It is essential to ensure the proper publication of all facts relevant to the issuance, particularly in the securities prospectus. If, for example, market-abusive practices (such as misrepresentation of actual placement volume) are engaged in or mandatory disclosure duties are violated, liability for damages may arise for issuers and syndicate leaders. Liability can also arise under capital markets law, especially if the actual execution and unwinding of overallotment transactions are not adequately communicated. This is particularly relevant in the event of breaches of the market abuse regime (MAR).
What notification and publication obligations arise from carrying out an overallotment in German capital market law?
Under German capital market law and corresponding applicable EU law (particularly the Market Abuse Regulation, MAR), extensive transparency and publication obligations exist. This notably includes the publication of planning and transaction details relating to the overallotment option in the securities prospectus (according to the Prospectus Regulation), as well as ad hoc disclosure obligations, should the exercise of the option or an unexpected placement decision have a market-moving effect. In addition, the Securities Trading Act (WpHG) requires disclosure of all relevant order book transactions and market stabilization measures. Depending on the structure of the transaction and the role of the banks, corresponding disclosures must subsequently be made to BaFin and the stock exchange company. A failure to comply can result in both administrative sanctions and civil claims.
What regulatory approval or notification is required to implement an overallotment option?
The implementation of an overallotment option generally does not require separate regulatory approval, provided it is carried out within the framework of applicable capital market law and is adequately described in the securities prospectus. However, it is strictly necessary that the option and the intended stabilization measures are explicitly and transparently disclosed in the issue prospectus to ensure regulatory compliance. Furthermore, under Article 5 of the Market Abuse Regulation (MAR) and delegated regulations, stabilization transactions must be reported in advance and regularly to the competent national authority—in Germany, the Federal Financial Supervisory Authority (BaFin). Failure to provide such notifications may result in substantial fines and, where applicable, consequences under prospectus law.
To what extent is price formation subject to regulatory restrictions when using an overallotment option?
Price formation in transactions with overallotment options is regulated in particular by European market abuse law. Any market participation within the framework of greenshoe transactions must comply with the anti-manipulation provisions of the MAR, meaning that no artificial price levels may be established or other market participants misled about the actual value, supply, or demand for the financial instrument. Only so-called price support within the permissible range of stabilization measures is allowed, which must be strictly documented and disclosed. Competition authorities scrutinize any deviations or non-transparent transaction prices. A breach of the regulations can have significant administrative and criminal consequences.
What role do corporate resolutions play in the arrangement and exercise of an overallotment option?
Since the overallotment option is usually associated with a capital increase excluding subscription rights (authorized or conditional capital), corresponding resolutions of the general meeting under the Stock Corporation Act (particularly Section 203 AktG in conjunction with Section 186(3)(4) AktG) are required. These resolutions must sufficiently specify the type, scope, and purpose of the measure and authorize the management board to issue new shares accordingly. Without proper resolution and documentation, there is a risk of legal challenge and possible reversal of the transaction. For the placement of existing shares from current holdings, corporate law provisions may also apply, for example, requirements for approval by shareholders or the supervisory board.
How are the civil contractual relationships between issuer, syndicate bank, and investors structured in an overallotment option?
Civil law contractual relationships are of central importance in an overallotment structure. In principle, complex syndicate agreements (underwriting agreements) are concluded, defining in detail the terms for the exercise of the option, obligations, and allocation of liability among the banks and in relation to the issuer. Special clauses relate to, among other things, settlement and unwind mechanisms, in the event the option is exercised by the syndicate banks. Investors are in principle entitled to allocation of the oversubscribed shares, provided the option is actually exercised, and must be informed in the transparency document (prospectus) about any particularities regarding allocation and price support. In case of dispute, general contract law (e.g. Sections 280 ff. BGB) as well as securities law will apply.
What antitrust aspects must be considered when conducting overallotment options?
The conduct becomes relevant under antitrust law when several credit institutions or issuing banks work together in an issuance syndicate. The competition law rules of the GWB (particularly Sections 1 and 2 GWB, Art. 101 TFEU) prohibit any agreements that restrict competition. The syndicate must not, in fact or law, enter into agreements regarding price setting, market behavior, or other restrictions beyond processing the transaction. Any de facto coordination, for instance through agreed quantities or minimum prices for the allocation of shares, may be fined both nationally (Federal Cartel Office) and at the European level (European Commission). The antitrust authorities therefore require a clear distinction between necessary syndicate coordination for the transaction and prohibited market dominance or coordination.
