Private mergers and acquisitions in Germany: overview

Q&A guide to private mergers and acquisitions law in Germany.

The Q&A gives a high level overview of key issues including corporate entities and acquisition methods, preliminary agreements, main documents, warranties and indemnities, acquisition financing, signing and closing, tax, employees, pensions, competition and environmental issues.

To compare answers across multiple jurisdictions, visit the Private mergers and acquisitions Country Q&A tool.

This Q&A is part of the global guide to private acquisitions law. For a full list of jurisdictional Q&As visit www.practicallaw.com/privateacquisitions-guide.

Contents

Corporate entities and acquisition methods

1. What are the main corporate entities commonly involved in private acquisitions?

Germany recognises a number of corporate entities including:

  • Stock corporations (Aktiengesellschaften) (AGs), which may be public (listed) or private (non-listed).

  • Limited liability companies (Gesellschaften mit beschränkter Haftung) (GmbHs).

  • Limited partnerships (Kommanditgesellschaften) (KGs).

The main corporate entities commonly involved in private acquisitions are limited liability companies and limited partnerships, with the former being the most commonly used both on the seller's and the purchaser's side.

If the entity acting as acquirer is a special purpose vehicle, the ultimate parent companies of the entity directly involved in the transaction may act as a guarantor in respect of the rights and obligations of their subsidiaries. Such guarantors can be stock corporations listed on a German stock exchange.

 
2. Are there any restrictions under corporate law on the transfer of shares in a private company? Are there any restrictions on acquisitions by foreign buyers?

Restrictions on share transfer

There are no statutory restrictions under German corporate law on the transfer of shares in private companies.

However, the articles of association of a limited liability company may impose certain restrictions on the transfer of shares in that company, including that:

  • The consent of shareholders of the company must be obtained (whether all shareholders, specific shareholders or shareholders representing a specific percentage of the issued shares in the company). Consent may be given either by a shareholders' resolution to that effect or outside a shareholders' meeting.

  • The consent of the management of the company must be obtained (the articles of association may require a resolution by all managers or approval by those managers entitled to represent the company).

Such consents are usually obtained before any transfer, but can also be obtained after a transfer has occurred. Any transfer carried out in breach of such requirements is invalid.

In addition, the articles of association of a limited liability company may also contain a right of first refusal (Vorkaufsrecht) for the benefit of all or some of the other shareholders of the company. Where such a right of first refusal has been granted, the relevant procedure must be observed, failing which the transfer of the shares concerned is invalid.

For (private) stock corporations a restriction as such can only be imposed if the stock corporation has name shares (Namensaktien), and not if the stock corporation has bearer shares (Inhaberaktien). In this case, the transfer can be made subject to the consent of the management, but not of the shareholders.

Similar restrictions (consent requirements and rights of first refusal) may also be agreed to between the shareholders and recorded in a shareholders' agreement entered into between the shareholders (to which the limited liability company may also be a party) without being repeated in the articles of association of the limited liability company. Such internal arrangements and agreements between the shareholders are only binding as between the shareholders themselves, and are not binding on third parties. Any such restrictions recorded only in a shareholders' agreement, and which are not adhered to before any transfer of shares, will not invalidate the transfer of shares. The transfer of shares would proceed (although the shareholder not participating in the transaction does not obtain an injunctive relief against the transferring shareholder), and the breach of the obligations contained in the shareholders' agreement would trigger claims against the transferring shareholder.

Foreign ownership restrictions

German law has only limited foreign ownership restrictions.

If a non-German entity intends to acquire (whether by way of shares or the acquisition of the business) an entity that is incorporated in Germany and which is active in a sector regarded as a "sensitive" sector, the proposed transaction requires the prior approval of the German Federal Ministry of Economy (Bundeswirtschaftsministerium). The list of sectors which are regarded as "sensitive" sectors is set out in the German Foreign Trade Regulations (Außenwirtschaftsverordnung).

In addition, if the purchaser is an entity incorporated outside of the EU/EFTA and it acquires 25% or more of the voting rights in an entity incorporated in Germany, the German Federal Ministry of Economy can review the transaction. Even if the purchaser is an entity incorporated within the EU/EFTA, the transaction can be reviewed by the German Federal Ministry of Economy if the German Federal Ministry of Economy suspects improper arrangements or a circumvention of the right to review. In such cases, there are no general notification obligations on the parties and only a right of review for the German Federal Ministry of Economy.

 
3. What are the most common ways to acquire a private company? What are the main advantages and disadvantages of a share purchase (as opposed to an asset purchase)?

Limited liability companies can be acquired in Germany by either:

  • An acquisition of the entire issued share capital of the target entity (share purchase).

  • An acquisition of the assets of the target entity (asset purchase).

The majority of acquisitions of limited liability companies are conducted as share purchases.

Share purchases: advantages/asset purchases: disadvantages

Share purchase transactions are generally preferred because of their simplicity. With the purchaser acquiring the entire issued share capital of the target entity from the seller, the parties are assured that all of the assets and liabilities of the entity are transferred to the purchaser in the same transaction, and that no assets or liabilities of the target entity remain with the seller following the sale of the shares. In addition, usually no consents need to be obtained from (private) third parties for the transaction (with the exception of, in particular, consents that must be contained from (private) third parties under change of control provisions in agreements concluded between the target entity and third parties that require the (private) third parties to consent to the proposed transaction). A share purchase is also often preferable from a tax perspective, because the sale of the assets by the relevant target entity may lead to the disclosure of hidden reserves (Aufdeckung stiller Reserven).

In asset transactions, all assets and liabilities that the purchaser wants to acquire from the seller must be specifically named and listed or appropriately described and explicitly transferred (by naming and listing them individually or as a group of assets in the purchase and transfer agreements in sufficient detail). The transfer of an asset requires the relevant consents from the seller's side. The transfer of a liability requires the consent of the creditor. The transfer of agreements to which the target is a party requires the consent of all the parties to it, unless the agreements state otherwise. Following the acquisition of assets that must be registered in public registers in Germany (such as real estate assets and intellectual property rights) the registration must be updated, which can be time consuming and costly for the purchaser. In addition, the purchaser must potentially (re-)apply for regulatory permits and licences which the seller had before the transaction.

Share purchases: disadvantages/asset purchases: advantages

The main disadvantage of a share purchase transaction is that all of the liabilities of the target entity are (indirectly) also acquired by the purchaser. Even when a thorough due diligence has been concluded, certain risks and liabilities may not be immediately identifiable and may materialise later. In addition, a sale and/or transfer agreement under which shares in a limited liability company are sold and/or transferred must be in notarial form (Beurkundung).

An asset transaction allows the parties to transfer only the assets and liabilities which the purchaser intends to use for its business. If the whole business of the target entity is not being transferred, the seller can split up the business and retain the assets and liabilities it wants.

Alternative mechanisms

In addition to share purchases and asset purchases, the German Transformation Act (Umwandlungsgesetz) recognises the transfer of assets and liabilities by universal succession (Universalsukzession) from one entity to another entity. This means that no consents regarding the transfer of claims and liabilities are necessary, and objective permits do not have to be re-applied for and issued in the name of the purchasing entity. Such measures may be used either as a preliminary step in preparation for a broader transaction or as the main transaction itself (transfer of assets (Vermögensübertragung)).

 
4. Are sales of companies by auction common? Briefly outline the procedure and regulations that apply.

Initiating a sale of an entity by an auction process is a commonly used procedure in Germany. Such auctions are usually structured and administered by the corporate finance advisors to the seller. Auction processes are often used by private equity sponsors, but also by corporate sellers.

An auction process usually has the following steps:

  • The corporate finance advisor approaches potential buyers (third parties that may be interested in the target and its business) with a "teaser" document containing limited information on the target (potentially anonymised) and its business and the reasons for the proposed transaction. It then formally invites the potential buyers to be part of the auction process. In some cases, the corporate finance advisor informs financial institutions and/or warranty and indemnity insurance providers of the auction process in anticipation of their potential involvement in the proposed transaction.

  • The potential buyers are then asked to indicate their interest in the proposed transaction and their willingness to participate in the auction process. Potential buyers who indicate their interest then enter into non-disclosure agreements, and thereafter receive more detailed information on the target entity and its business (especially financial information), typically in the form of an information memorandum prepared by the finance advisor and a process letter detailing the further steps of the auction.

  • On the basis of this information, the potential buyers are required to submit (non-binding) bids.

  • On the basis of these bids, the seller, together with the finance advisor, sorts out three to six bidders to be granted access to a data room (physical or virtual) to allow them to conduct a comprehensive due diligence of the target entity and its business.

  • After the end of the due diligence period, final (non-binding) bids are submitted, on which basis the seller normally selects one to two bidders for the finalisation of the transaction structure and conclusion of the transaction documentation.

There are no specific legal regulations that cover an auction process in Germany.

 

Preliminary agreements

5. What preliminary agreements are commonly made between the buyer and the seller before contract?

Non-disclosure agreements

Usually, a non-disclosure agreement (Vertraulichkeitsvereinbarung) is the first document which the seller (or one of its representatives) and the buyer enter into. In a non-disclosure agreement, the seller requires the buyer to agree to keep in strict confidence all information received by the buyer from the seller in connection with the transaction. Non-disclosure agreements usually permit disclosures to affiliated entities of the buyer and to the buyer's advisors. If the buyer (or any other entity to whom it has disclosed confidential information under the permitted disclosure provisions) breaches its obligations under the non-disclosure agreement, the seller may request injunctive relief and/or claim damages from the buyer. Non-disclosure agreements generally do not contain specific clauses on the amount of the damages that the seller may claim from the buyer, and consequently the seller can only claim such damages which are associated with the breach by the buyer of its obligations under the non-disclosure agreement. Since such causality is hard to prove, it is very rare for damages to be recovered under non-disclosure agreements.

In a private equity context, a non-disclosure agreement may not necessarily be entered into with the specific acquiring entity, but rather with the advisory entity of the respective fund.

If the target of the transaction is a publicly listed company, usual standstill agreements are typically part of the non-disclosure agreements.

Letters of intent

A letter of intent (Absichtserklärung) will:

  • Indicate the general interest of the parties in the transaction.

  • Specify the main contractual terms.

  • Agree on the further process of the transaction.

Letters of intent are usually non-binding (except for specific provisions regarding, for example, exclusivity, confidentiality and break-up fees (if any)) and may be non-binding for a sale of shares in a limited liability company because of the requirement for notarisation (Beurkundungserfordernis). A letter of intent expresses and documents the seriousness of the intentions of the parties to conclude the proposed transaction. At a later stage of a transaction, such agreements between the buyer and the seller may also be called a "memorandum of understanding".

Similarly, in a private equity context, a letter of intent may not necessarily be entered into with the specific acquiring entity but rather with the advisory entity or the general partner of the respective fund.

Exclusivity agreements

In an exclusivity agreement (Exklusivitätsvereinbarung), the seller agrees, for a certain period of time (which is usually between one and three months), not to enter into a purchase agreement with a third party or even discuss the transaction with any third parties during the agreed exclusivity period. Especially in non-competitive auction processes, an interested buyer will require an exclusivity agreement before it conducts a comprehensive due diligence. However, even if the buyer decides within the exclusivity period to acquire the asset or business concerned, the seller is still free to choose whether to proceed with the transaction. In other words, the conclusion of an exclusivity agreement does not bind the seller to conclude a transaction with the buyer. The restrictions on the seller vary and depend on the negotiations between the seller and the buyer.

A seller will closely watch the activities of the buyer during the exclusivity period to see whether the buyer is making all efforts to pursue the transaction (regarding, for example, due diligence and financing).

Exclusivity agreements are legally binding and usually provide for cost coverage which a party may incur due to a breach by the other party of the exclusivity provisions.

 

Asset sales

6. Are any assets or liabilities automatically transferred in an asset sale that cannot be excluded from the purchase?

If the transfer of assets and/or liabilities constitutes a transfer of business under section 613a of the German Civil Code (BGB), the employment relationships of all employees of the respective business automatically transfer to the purchaser. This means that the purchaser enters by law into all duties and liabilities of the seller towards the transferring employees. This includes all liabilities from the employment relationship which exist at the time of the transfer of business. The seller's pension liabilities towards active employees also transfer by law to the purchaser in a business transfer.

If the purchaser continues to use the corporate name (Firma) of the seller, the purchaser is liable for all liabilities of the seller associated to the company's business. However, this liability can be excluded by an agreement with the seller and the publication of such agreement in the commercial register (Handelsregister).

If an asset transaction is considered as a transfer of a (partial) going concern, the purchaser can be held liable for certain taxes attached to that going concern, if the taxes have been triggered in the year prior to the year of the transfer and are assessed within one year after notification of the transfer by the buyer to the tax authorities. The liability is limited to the value of the assets still available and it does not apply in an asset transaction concluded in the context of insolvency proceedings.

 
7. Do creditors have to be notified or their consent obtained to the transfer in an asset sale?

In the absence of any specific permissive provision in the relevant agreements between the seller and its creditors, each creditor must not only be notified, but must also consent to a transfer of the relevant liability to the purchaser. However, claims can, in the absence of any specific opposing provision in the relevant agreements, be transferred to the purchaser without any consent or notification from the debtor (although the debtor can, if not notified, still discharge the debt by paying the amount of the claim to the seller).

 

Share sales

8. What common conditions precedent are typically included in a share sale agreement?

The most common conditions precedent in a share sale agreement are:

  • Anti-trust/competition clearance.

  • There being no injunction or other court or administrative order in place prohibiting the execution or consummation of the transaction.

  • Neither the target entity nor its subsidiaries being insolvent.

  • The release of all security over the shares in the target entity and the assets of the target entity relating to any financing arrangements of the seller or the target entity.

Other conditions which are regularly included in the share sale agreements, but which are usually subject to in-depth discussions between the parties include:

  • Material adverse changes.

  • Financing of the purchaser.

  • Consent of third parties who have a right to terminate essential agreements for the business under change of control provisions.

 

Seller's title and liability

9. Are there any terms implied by law as to the seller's title to the shares in a share sale? Is any specific wording necessary and do buyers normally impose a higher standard than is implied by law?

A seller in a share purchase transaction must generally deliver the shares to the buyer free from any encumbrances or other rights in such shares. Usually, the wording in a share purchase agreement reflects this standard. If the ownership of the shares by the seller is doubtful, the share purchase agreement can contain specific indemnification obligations in favour of the buyer or obligations for specific acts to be performed by the seller to mitigate any risk with respect to the title to the shares. A comprehensive due diligence cannot absolutely assure that the shares are owned by the seller as shares can be freely transferred and the validity of the transfer is not subject to any filing requirement with an official registry.

Guarantees with respect to title to shares are typically not subject to the usual restrictions of the liability of the seller in share purchase agreements, such as a de minimis or a threshold, but are typically capped at the purchase price.

 
10. Can a seller and its advisers be liable for pre-contractual misrepresentation, misleading statements or similar matters?

Seller

The seller's ordinary statutory liability for pre-contractual violations of duty is usually excluded in the purchase agreement. However, the purchase agreement will not protect the seller if there has been fraudulent or intentional behaviour on the part of the seller, and the purchaser can bring a claim against the seller in such cases.

If the transaction is aborted by the seller for no cause, the requirement for the seller to have liability very high and usually only exists where there was deceit regarding the seller's actual intentions. In some cases, respective liability is explicitly excluded in agreements entered into in the earlier stages (such as letters of intent).

Advisers

Advisers to the seller do not have any contractual relationship with the purchaser and are therefore not liable to the purchaser under the purchase agreement. However, if a misrepresentation or misleading statement by the advisor (also) constitutes a breach of the contractual obligations which the advisor has to the seller, and the seller is liable to the purchaser, the seller will have recourse against the advisor for any claims brought by the purchaser against the seller. Advisors may be held liable to the purchaser under tort law (Deliktsrecht), but the standard for claims to be brought by the purchaser against the seller's advisor is very high. The purchaser would have to prove that the advisor intended to cause damage to the purchaser. However, if the advisor acted on its own and the purchaser pursues (contractual) claims against the seller, the seller will have recourse to the advisor with respect to damages paid to the purchaser.

 

Main documents

11. What are the main documents in an acquisition and who generally prepares the first draft?

In share sale transactions, the main document is the share purchase agreement. If the agreement must be notarised, all other agreements between the parties to that transaction must be notarised, or the share purchase agreement must provide for the (non-notarial) execution of such agreements. If the purchaser is a special purpose vehicle incorporated by a private equity sponsor for the transaction and is funded by the private equity sponsor, an equity commitment letter is often demanded from the private equity sponsor. Other documents would also be prepared between signing and closing of the transaction, such as security release documents, resignation declarations and a share transfer deed. In addition, the actual transfer of the shares can be provided for in the share purchase agreement and made subject to the closing of the transaction.

In an asset sale transaction, the main document is the acquisition agreement, usually referred to as the "asset purchase agreement". All assets and liabilities which the purchaser wants to acquire from the seller must be specifically named and listed and explicitly transferred (by naming and listing them individually or as a group of assets) in the asset purchase agreement.

In auction processes, the seller usually prepares the first draft of the transaction documents (on both share sale and asset sale transactions). Otherwise, it is a matter of negotiation which side prepares the first drafts. Share or asset purchase agreements in Germany are, even in cases where only German parties are concerned, predominantly drafted in English if larger law firms are involved.

 

Acquisition agreements

12. What are the main substantive clauses in an acquisition agreement?

In a share purchase agreement, the main substantive clauses are:

  • Sale of the shares being sold.

  • Purchase price (including any adjustment mechanisms if applicable).

  • Covenants given by the seller to the purchaser covering the time between signing and closing, including no-leakage covenants, to the extent applicable.

  • Closing conditions (such as merger control and other required approvals).

  • Closing actions.

  • Representations, warranties and indemnities given the seller to the purchaser.

  • Remedies for a breach of representations or other covenants by the seller.

  • Tax guarantees and indemnities given by the seller to the purchaser.

  • Representations by the purchaser to the seller.

  • Financing commitment of the purchaser (through a parent guarantee or other financing instruments).

  • Mutual confidentiality undertakings, and non-solicitation and non-compete undertakings by the seller, to the extent applicable.

  • Costs (usually notarisation costs are borne by the purchaser).

  • Choice of law and dispute resolution.

  • Standard clauses relating to notices, non-assignment, third-party rights, entire agreement and so on.

Exhibits and schedules to the share purchase agreement are typically only used where a more detailed description of information already contained in the share purchase agreement is required. Schedules are prepared for disclosures against warranties given by the seller.

In an asset purchase agreement, the main substantive clauses are:

  • The sale of the assets and liabilities, including the identification of the assets; the delineation of assets sold and assets retained is particularly important in carve-out transactions.

  • Provisions regarding the process of contacting third parties with respect to the transfer of assets and liabilities.

  • Detailed provisions regarding contractual relationships with third parties and how these are treated in the event that any rights and obligations under these arrangements cannot be transferred, or a relevant third party does not consent to the transfer.

  • Timing and form of notification to the employees for a transfer of a business under section 613a of the German Civil Code (see Question 31).

These would appear together with the relevant remaining clauses listed above in relation to a share purchase agreement.

Schedules include lists of the assets and liabilities to be transferred to the purchaser and generally also provide for notification and transfer forms regarding the assets, liabilities and employees to be transferred.

 
13. Can a share purchase agreement provide for a foreign governing law? If so, are there any provisions of national law that would still automatically apply?

Share purchase agreements can also be governed by foreign law. However, the transfer of the shares itself must be governed by German law.

If a natural person that qualifies as a consumer is to be involved, the ability to choose the governing law may be limited and certain provisions of German law for the protection of consumers may apply.

 

Warranties and indemnities

14. Are seller warranties/indemnities typically included in acquisition agreements and what main areas do they cover?

Acquisition agreements usually contain specific clauses on warranties and indemnities.

The warranties can be split into title/capacity warranties and business warranties. Title/capacity warranties can be found in almost all acquisition agreements, while the extent of business warranties may be limited (for example, dependant on price or insolvency scenarios) and in some cases no business warranties are given at all.

Title/capacity warranties usually cover ownership of the shares (target and subsidiaries) and such shares being free from any encumbrances or other rights in such shares. In an asset purchase agreement, a respective warranty would be given for the ownership in the assets. A warranty is usually given in relation to the corporate status (number of shares, subsidiaries) as stated in the agreement. In addition, a warranty is usually given that the relevant entities are not insolvent. Capacity warranties are given relating to the ability and authority of the seller to enter into the agreement.

The extent of the business warranties is usually highly disputed between the parties. However, in the last few years warranty and indemnity insurances have become more common, and discussions have become less intense since the sellers' liability can be mitigated by obtaining seller or buyer appropriate insurance cover.

Typically, warranties relating to the following issues are discussed between the parties:

  • Financial statements.

  • Intellectual property.

  • Employment.

  • Material agreements.

  • Litigation.

  • Insurance.

  • Real estate.

  • Environmental concerns.

  • Permits/public grants.

  • Legal compliance.

  • Arrangements with customers and suppliers.

Tax liability is usually covered by an indemnity given by the sellers. There is usually also the obligation for the purchaser to pass on any tax refunds to the seller. Indemnities in other areas may be given for certain items discovered in the course of the due diligence.

 
15. What are the main limitations on warranties?

Limitations on warranties

While title/capacity warranties are granted by the seller as of the signature date and the closing date, the parties usually discuss whether the business warranties or other similar warranties should be given as of the closing date in addition to as of the signing date.

A seller usually tries to make as many of its warranties as possible subject to its actual knowledge, while a purchaser will want there to be no knowledge qualification, or at least a broad definition as to what constitutes "knowledge" for purposes of the warranties. A compromise that is often reached is that knowledge is qualified by what certain of the sellers' key persons/personnel should have known after due inquiry with the management of the target group.

Qualifying warranties by disclosure

Warranties may be qualified by disclosure:

  • As set out in the share purchase agreement or its exhibits.

  • As disclosed in the (virtual) data room or otherwise to the purchaser (this is often qualified so that the disclosure in a fair manner within the meaning of what the parties have agreed will be "fair disclosure").

  • Of circumstances the purchaser had actual knowledge of.

Such limitations regarding disclosure are usually not applicable to the fundamental warranties and the tax indemnity, as well as to other material warranties regarding the specific business of the target.

It is very unusual in Germany to provide for a separate disclosure letter or a bring-down certificate as you would find it in other jurisdictions.

 
16. What are the remedies for breach of a warranty? What are the time limits for bringing claims under warranties?

Remedies

Remedies are usually phrased as to restore the position of the target to the position it would be in if the warranty would have been correct (Naturalrestitution) or to pay to the purchaser or the group companies damages. A very common discussion point is whether the seller will also be liable for indirect or consequential damages or loss of profits as a part of the remedies.

The purchaser's ability to exercise its rights with respect to remedies for breach of a warranty is usually limited by the following mechanisms:

  • The purchaser only has a claim if and to the extent the individual claim exceeds a certain amount (de minimis). Such amount is usually about 0.1% of the purchase price.

  • The purchaser only has a claim if (and to the extent) claims exceeding the de minimis amount exceed a certain amount. This amount is usually between 1% and 5% of the purchase price. The purchaser may be able to claim the full amount (threshold), or alternatively only the amount exceeding the threshold (basket).

  • The total liability of the seller to the purchaser for a breach of warranty is typically limited to a certain amount (cap). This amount is usually between 3% and 20% of the purchase price. The cap does not usually apply to the title/capacity warranties or the tax indemnity, for both of which the purchase price is typically the cap. If a (purchaser's) warranty and indemnity insurance is obtained, the cap may also be agreed as the relevant insurance deductible or even at EUR1.

Remedies are also often limited to the extent that the relevant damage may be claimed from a third party (such as under an insurance policy), or provision has already been made for such a loss in the financial statements of the target.

Time limits for claims under warranties

A purchaser must notify the seller after becoming aware of a breach of a warranty within a certain period of time (usually between two and four weeks) and may, in some cases, be prevented from bringing a claim after such time period.

Acquisition agreements usually set out a general statute of limitation for claims which is usually between one and three years. A compromise often reached providing for a date at which the purchaser has been in control of the target for a full accounting cycle following the acquisition and it can be expected that the financial statements of the target for that year have been prepared. The statute of limitation for title warranties is usually longer and often between three and five years.

A typical discussion point is the statute of limitation for the tax indemnity. Since the taxes for a company can only be regarded as final once the relevant tax audit (Betriebsprüfung) has been conducted by the tax authorities and such audit is final and binding (which may take several years from the closing of a transaction) a purchaser usually demands a statute of limitation that provides for a certain period (such as six months) after the audit becoming final and binding.

 

Consideration and acquisition financing

17. What forms of consideration are commonly offered in a share sale?

Cash is offered as consideration in almost every transaction. An exception would be where a vendor loan is granted by the seller and the seller's claim for the repayment of the vendor loan replaces the cash consideration usually paid by the purchaser to the seller on closing of the transaction. Another exception would be the re-investment of managers in, for instance, secondary private equity deals in which the managers are granted shares (or other forms of investment) in the purchasing entity as consideration for their shares sold to the purchaser. The offering of shares in the purchaser in private M&A transactions to a seller is very rare.

 
18. If a buyer listed in your jurisdiction raises cash to fund an acquisition by an issue of shares, how is the issue typically structured? What consents and regulatory approvals are likely to be required?

Structure

A listed stock corporation can raise cash by issuing new shares. The existing shareholders have, in general, pro rata subscription rights to such shares. A common procedure is that a stock corporation will establish an authorised capital (Genehmigtes Kapital) which enables the management board (Vorstand) of the stock corporation to issue new shares if it requires (equity) financing, for example, to fund an acquisition.

Consents and approvals

The shareholders' meeting must approve the capital increase with a majority of 75% of the votes present. The invitation period for a shareholders' meeting is (in practice) five to six weeks and the capital increase must be registered with the commercial register to be effective. The registration may take a considerable amount of time if the resolution is challenged in court.

Requirements for a prospectus

A prospectus must be prepared for the issuance and listing of the shares. A prospectus is not required if the newly listed shares form only up to 10% percent of the already issued shares.

 
19. Can a company give financial assistance to a potential buyer of shares in that company?

Restrictions

It is not common for a company, and possibly prohibited, to give financial assistance to a buyer of its shares before the completion of the transaction. Where the buyer intends to obtain debt financing by a public issuance of debt, the buyer will seek to disclose information regarding the company in a prospectus and require personnel of the target entity to participate in meetings with the arranging banks.

In connection with or after the completion of a transaction, the typical measures are:

  • The granting of an upstream loan by the target entity to the acquiring entity.

  • The granting of security to the financing banks of the acquiring entity.

  • The assumption by the target entity of (part of) the financing debt of the acquiring entity.

In each case these will be subject to capital maintenance restrictions. Stricter regulations apply to stock corporations.

Exemptions

A commonly used measure is, following the completion of the transaction, to merge (verschmelzen) the purchasing entity into the purchased entity and consequently amalgamate the financing of the purchaser and the assets of the purchased company. The purchasing entity and the purchased entity may also conclude a domination and profit and loss pooling agreement (Beherrschungs- und Ergebnisabführungsvertrag) under which the management of the purchasing entity can instruct the management of the purchased entity, and the purchased entity transfers its earnings (as stated in its financial statements) to the purchasing entity.

 

Signing and closing

20. What documents are commonly produced and executed at signing and closing meetings in a private company share sale?

Signing

Usually only the relevant share purchase agreement is executed at signing. The seller may resolve by way of a shareholders' resolution on an instruction to the management of the target company that it must comply with the covenants in the share purchase agreement and allow for measures to be implemented with respect to the target group.

Closing

The following documents may be produced and executed at closing:

  • A share transfer deed, in the event that the share purchase agreement does not provide for a transfer of the shares at closing.

  • Termination agreements regarding enterprise agreements (Unternehmensverträge) between the seller and the target entity, to the extent applicable.

  • A transitional services agreement between the seller and the target entity regarding services either the seller or the target entity require for a certain period after closing.

  • Resignation letters by representatives of the seller resigning from their positions with the target entity.

  • A closing confirmation that states that all closing conditions have been fulfilled (or waived), that all closing actions have been fulfilled (or waived) and that closing has occurred.

In the closing of an asset purchase agreement, the agreements relating to the transfer of the relevant assets and liabilities are executed, instead of a share transfer deed. In addition, the seller provides the purchaser with originals of the relevant documentation for the transfer of agreements with third parties, and the amendments to the registrations of transferred registrable assets such as intellectual property rights.

 
21. Do different types of document have different legal formalities? What are the formalities for the execution of documents by companies incorporated in your jurisdiction?

A sale or transfer agreement under which real estate or shares in a limited liability company are sold and/or transferred must be in notarial form. This means that the agreement and all exhibits thereto as well as all side-agreements must be read aloud to the parties by a notary public (certain exceptions may apply). This does not apply to a sale and/or transfer agreement regarding shares in a stock corporation or partnership interests in a limited partnership. In certain cases (such as applications to public registers), the signatures of the signing persons must be notarially certified (notariell beglaubigt) and, if applicable, the signature power of the person signing must be confirmed by the relevant notary public.

There are no specific formalities for the execution of documents by companies.

 
22. What are the formalities for the execution of documents by foreign companies?

In general, there are no specific formalities for the execution of documents by foreign companies (if German law applies). Documents that must be submitted to public registers (such as the commercial register (Handelsregister) or land register (Grundbuch)) in notarially certified form must contain a statement of representation power (Vertretungsnachweis) of the person signing for that company. The registers may require that that (German language) statement contains a confirmation by the notary public that he has reviewed all corporate documents of the relevant company and confirms that the person signing has effectively bound the company.

 
23. Are digital signatures binding and enforceable as evidence of execution?

Digital signatures are binding and enforceable if the agreement can be executed in written form or where there are no form requirements. However, such digital electronic documents must be provided with a qualified electronic signature in accordance with the German Electronic Signature Act (Signaturgesetz). Digital signatures cannot be used for agreements that must be executed in notarial form.

 
24. What formalities are required to transfer title to shares in a private limited company?

A transfer declaration of shares in a limited liability company must be made in notarial form. The declaration must clearly state the specific shares in the company and the transferee as well as the transferor.

The acting notary public must submit a new shareholders' list to the commercial register of the company after the transfer has become effective. This is not a requirement for the title being effectively transferred, but is a requirement for the new shareholder to be able to exercise its shareholder's rights.

 
25. What transfer taxes are payable on a share sale and an asset sale? What are the applicable rates?

Share sale

Germany does not levy any stamp duties or comparable taxes in a share sale transaction. The transfer of shares in limited liability companies, stock corporations or limited partnerships may be subject to value-added tax (VAT), from which sellers are usually exempted. However, the seller can waive the exemption.

If the entity in which shares are being transferred owns real estate located in Germany, real estate transfer tax (Grunderwerbsteuer) is triggered if (in a transfer of interest in a limited partnership) either:

  • 95% or more of the interests are transferred to new partners within a period of five years.

  • 95% or more of the shares in a limited liability company stock corporation are unified in the hands of one acquirer or a group of acquirers.

The above thresholds are currently subject to legislative discussions and an alternative concept may be introduced in the near future.

Asset sale

No German stamp duties or comparable taxes are levied in an asset sale transaction. The transfer of assets can be subject to VAT, provided the asset sale transaction cannot be structured as a transfer of a business as a going concern, which is outside of the scope of VAT. The transfer of real estate located in Germany is subject to real estate transfer tax.

 
26. What are the main transfer tax exemptions and reliefs in a share sale and an asset sale? Are there any common ways used to mitigate tax liability?

Share sale

Germany does not levy any stamp duties or comparable taxes in a share sale transaction. The indirect transfer of real estate located in Germany is subject to German real estate transfer tax, which can be mitigated by certain structures which require that an unrelated party will indefinitely hold at least 5.1% of the shares in the target company. Currently, legislative discussions are being held to eliminate such tax efficient structures.

Asset sale

No German stamp duties or comparable taxes are levied in an asset deal. The transfer of real estate located in Germany is subject to German real estate transfer tax.

While there is no structure to avoid German real estate transfer tax in an asset sale transaction, consideration should be given as to which portion of the purchase price should be allocated to immovable property, which is subject to real estate transfer tax, and which portion can be allocated to a movable asset that is not subject to real estate transfer tax.

 
27. What corporate taxes are payable on a share sale and an asset sale? What are the applicable rates?

Share sale

Capital gains stemming from the disposal of shares in a limited liability company or a stock corporation is subject to corporate income tax (CIT) at 15.825% (including solidarity surcharge) and trade tax (TT) at a locally varying tax rate (generally between 15% and 17% in larger cities). However, the capital gain may be exempt from CIT and TT, subject to certain conditions. 5% of the capital gain may be treated as a non-deductible business expense and be added back to the taxable income of the seller. Accordingly, 5% of the capital gain is effectively subject to CIT and TT, and the actual tax rate on capital gains stemming from the disposal of shares amounts to 1.58%.

The sale of an interest in a limited partnership is treated as an asset sale for CIT/TT purposes, as the assets held by the partnership are allocated to its partners and are subject to tax at level of the partners. However, where an interest in a limited partnership is disposed of by a company, the capital gain is taxable at the level of the limited partnership if the limited partnership is subject to TT. A respective indemnification should be sought for the TT exposure by the purchaser/other partners.

Asset sale

The capital gain from an asset sale is subject to CIT at 15.825% (including solidarity surcharge) and TT at a locally varying tax rate (generally between 15% and 17% in larger cities).

 
28. What are the main corporate tax exemptions and reliefs in a share sale and an asset sale? Are there any common ways used to mitigate tax liability?

Share sale

Capital gains stemming from the disposal of shares in a limited liability company or a stock corporation are generally exempt. While 5% of the capital gain from a share sale in a limited liability company or a stock corporation is added back to taxable profit, the capital gains are actually 95% tax exempted. The tax exemption does not apply to financial institutions, insurance companies and other holding companies which do hold the sold shares with the intention of sale (in the short-term).

Most of the double taxation conventions concluded by Germany do not grant Germany a right to tax capital gains from the disposal of a German corporation by a foreign shareholder. Accordingly, German tax on capital gains can be mitigated through a foreign investment structure.

For the sale of interests in a limited partnership, see below Asset sale.

Asset sale

Capital gains from an asset sale consisting of land, buildings and/or vessels may be neutralised by the booking of a specific reserve under section 6b of the German Income Tax Act (Einkommenssteuergesetz). Subject to certain requirements, the reserve can be carried forward for a period of up to four years following the sale, and for six years in the case of new buildings. If a comparable asset is then acquired, the reserve is released against the acquisition costs of the newly acquired asset. The reduced tax base of the new item is then decisive for any depreciations and future capital gains.

The same applies in a share deal involving partnership interests because the sale of an interest in a limited partnership) is considered as an asset sale for German tax purposes.

 
29. Are other taxes potentially payable on a share sale and an asset sale?

No other taxes are payable on a share sale or an asset sale.

 
30. Are companies in the same group able to surrender losses to each other for tax purposes? For example, can interest expenses incurred by a bid vehicle incorporated in your country be set off against profits of the target before tax?

It is possible to establish a tax group (Organschaft) between a holding company and its subsidiaries allowing the set-off of expenses at the level of the holding company with profits generated at the level of the subsidiaries.

Tax grouping requires that the holding company holds the majority of the voting rights, concludes (and consummates) a profit and loss pooling agreement (Ergebnisabführungsvertrag) with the subsidiary for a minimum period of five years. The holding company receives any and all profits of the subsidiary, but is also obliged to indemnify the subsidiary for all losses incurred and that the respective profit and loss pooling agreement is conducted properly during its term.

 

Employees

31. Are there obligations to inform or consult employees or their representatives or obtain employee consent to a share sale or asset sale?

Asset sale

All employees of the purchased business unit must be informed in writing about the transfer. This information must include:

  • The date of the transfer.

  • The reasons for the transfer.

  • The legal, commercial and social consequences of the transfer for the employee.

  • Any actions intended to be taken with regard to the employees.

The transferring employees have a right to object to the transfer of their employment relationship and cannot be forced to transfer to the purchaser. The employees can object in writing to the transfer of the employment relationship within one month of receipt of comprehensive and correct notification. If an employee objects to the transfer, he continues to be employed by the seller.

The rights of the works council can also be affected by a transfer. In companies with a regular workforce of more than 20 employees, the co-determination rights of the works council may be triggered if a relevant change of operations under section 111 of the Works Constitution Act (Betriebsverfassungsgestz) arises from the transfer of the business. A relevant change of operation takes place if the structure of the business is amended in a way that could trigger considerable disadvantages for the company's workforce. Where only a part of a business's operations is to be transferred to the buyer, this may result in a split of operations. Such split or other relevant changes along with the transfer of business may constitute a relevant change of operations.

In such cases, the works council must be informed before any measures being taken. The seller must inform the works council comprehensively and provide it with any information necessary to evaluate the forthcoming changes in the business structure and their detrimental effects on the employees, if any. The buyer must negotiate with the works council a "reconciliation of interests" (which describes the proposed operational changes). In addition, the buyer may have to conclude a "social plan" (Sozialplan) with the works council (which contains measures to minimise disadvantages or compensate employees for the economic detriment, for instance, by severance payments). This process can be time-consuming and may take up to several months. Until this process is finished, the works council may have the option to block the transaction.

Share sale

There are no information or consulting obligations towards the employees in a share sale.

Subject to secrecy requirements, the target company must inform the company's economic committee, if any, about the share sale before the acquisition is concluded if the share sale results in a change of control regarding the ownership. If an economic committee does not exist, the works council must be informed instead. The target company must provide information and documents, in particular on the identity of the buyer and its business plans and on the economic background of the transaction. This information and consultation process may take several weeks.

 
32. What protection do employees have against dismissal in the context of a share or asset sale? Are employees automatically transferred to the buyer in a business sale?

Business sale

Any notice of termination given to employees due to the transfer that has no justification other than the transfer itself, is null and void. The right to terminate the employment relationship for reasons other than the transfer of business remains unaffected. Headcount reduction before or after the transfer of business is therefore not excluded.

Share sale

A share sale does not give rise to any specific dismissal protection. However, the option to reduce the workforce may be limited if the employees enjoy general or special dismissal protection.

Transfer on a business sale

If the transfer of the assets and/or liabilities constitutes a transfer of business under section 613a of the German Civil Code (BGB), the employment relationships of all employees of the business transfer automatically to the purchaser. This means that the purchaser acquires by operation of law all duties and liabilities of the seller towards the transferring employees. This includes liabilities arising from the employment relationship existing before the transfer of the business.

 

Pensions

33. Do employees commonly participate in private pension schemes established by their employer? If an employee is transferred as part of a business acquisition, is the transferee obliged to honour existing pension rights or provide equivalent rights?

Private pension schemes

Many companies in Germany offer their employees participation in private pension schemes. In general, employees cannot force the employer to set up a private pension scheme unless such participation rights are provided for in a works council agreement or in a collective bargaining agreement.

Pensions on a business transfer

In a business transfer, all pension promises given by the seller to its active employees transfer by law to the seller. If the buyer is unable to continue the existing pension scheme, the buyer must provide for an equivalent pension scheme as a compensation for the transferring employees. However, the seller's liabilities to pay old age pensions to former employees who retired before the transfer of business do not transfer by law to the buyer but remain with the seller. Unlike pension promises, assets of the seller accrued to hedge pension promises to its employees and memberships, for example in a pension fund, do not transfer by law to the buyer in a business transfer. The parties should arrange for the transfer of such memberships, assets or equivalent financial compensation in the relevant asset purchase agreement.

 

Competition/anti-trust issues

34. Outline the regulatory competition law framework that can apply to private acquisitions.

German merger control

Triggering events/thresholds. A transaction is subject to German merger control if:

  • The turnover of all participating companies combined exceed EUR500 million.

  • At least two of them are located in Germany.

  • One of the company's sales exceed EUR25 million and the other company's turnover exceeds EUR5 million.

Certain exceptions apply. German merger control law only looks at the target company and the acquiring company as participating companies. If the transaction is subject to European merger control, it does not also have to be reviewed by the German Federal Cartel Office (Bundeskartellamt) (under the "one-stop-shop" provisions).

Notification and regulatory authorities. The merger control notification must be submitted to, and approved by, the German Federal Cartel Office. The notification must be made by the purchaser, the target and, most often, also by the seller.

After the notification has been made in complete form, the German Federal Cartel Office has one month to decide whether it intends to open a full proceeding (Hauptverfahren). If the German Federal Cartel Office does not respond to the notification, the transaction can be completed.

A transaction that is subject to approval that has not been granted, but that is nevertheless completed by the parties, is invalid and must be dismantled. If the German Federal Cartel Office prohibits a transaction, a special release by the German Federal Minister of Economy (Bundeswirtschaftsminister) can by applied for (Ministererlaubnis).

Substantive test. The German Federal Cartel Office will prohibit an acquisition if it is expected that the transaction will lead to or strengthen a market-dominating position. Certain exceptions apply.

EU merger control

Triggering events/thresholds. A transaction is subject to European merger control in the following two cases:

  • Where:

    • the turnover of all participating companies combined exceed EUR5 billion worldwide; and

    • the turnover of at least two of the participating companies exceed EUR250 million in the EU.

  • Where:

    • the turnover of all participating companies combined exceed EUR2.5 billion worldwide;

    • the turnover of at least two of the participating companies exceed EUR100 million in the EU;

    • all participating companies combined exceed EUR100 million in at least three member states of the EU; and

    • the turnover of at least two of the participating companies each exceed EUR25 million in all of such three member states of the EU.

In both cases, European merger control is not applicable if all participating companies each make more then two-thirds of their turnover in the same member state of the EU.

If applicable, European merger control replaces the merger control procedures of the EU member states.

Notification and regulatory authorities. The merger control notification must be made to, and approved by, the European Commission. The notification must be made by the purchaser, the target and, in some cases, also by the seller.

After the notification has been made in complete form, the European Commission has 25 business days to decide whether to either:

  • Clear the transaction.

  • Clear the transaction subject to the removal of competition concerns of the European Commission.

  • Open a phase II proceeding.

If the European Commission does not respond to the notification, the transaction can be consummated.

A transaction that is subject to an approval that has not been granted, but that is nevertheless completed by the parties, is invalid and the European Commission may order the parties to dismantle the transaction.

Substantive test. The European Commission will prohibit an acquisition if it is expected that the transaction will significantly hinder competition in the EU or substantial parts of it, especially by establishing or strengthening a market-dominating position.

 

Environment

35. Who is liable for clean-up of contaminated land? In what circumstances can a buyer inherit and a seller retain liability in an asset sale and a share sale?

Under the German Federal Soil Protection Act (Bundes-Bodenschutzgesetz, BBodSchG), the following persons are generally liable for contaminations:

  • The owner.

  • The possessor.

  • The person causing the contaminations.

  • The previous owner (in certain cases).

In a share sale (in which the target entity owns the contaminated land), typically only the target company and therefore economically the buyer, can be held liable for contamination, and the buyer will seek an indemnity provision in the respective share purchase agreement against the seller.

In an asset sale where the contaminated land is an asset which is sold and transferred, the seller may, together with the purchaser, be held liable for the clean-up of the contaminated land. However, the seller will only be liable if it was aware or should have been aware of the contamination.

 

Online resources

W www.gesetze-im-internet.de/englisch_bgb/

Description. Official translation of the German Civil Code (Bürgerliches Gesetzbuch, BGB).



Contributor profiles

Dr Jörg Stefan Neubauer, Senior Associate

Hogan Lovells International LLP

T +49 69 9623 651
F +49 69 9623 100
E joerg.neubauer@hoganlovells.com
W www.hoganlovells.com

Professional qualifications. Rechtsanwalt (attorney at law); Ph.D. from Goethe University Frankfurt, Germany; LL.M. from the UCLA School of Law, Los Angeles, USA

Areas of practice. Mergers & acquisitions; private equity; corporate law

Recent transactions

  • Leopard group and Fattal Hotels on the sale of a portfolio of 18 German hotels.

  • GENUI on the entering into a partnership with RAKO Etiketten.

  • Odewald & Compagnie on the divesture of d & b audiotechnik.

  • Odewald & Compagnie on the sale of OYSTAR group.

  • Quadriga Capital on the acquisition of LR Health & Beauty Systems (LR group) together with Bregal Capital.*

  • Doughty Hanson & Co. and Vue Entertainment on the acquisition of CinemaxX AG by its portfolio company Vue Entertainment Ltd. and the following exclusion proceedings (squeeze out under takeover law and stock corporation law) and a judicial review proceeding.*

  • Bregal Capital on the acquisition of proALPHA group including an exclusion procedure (squeeze-out under transformation law) and proALPHA group on the acquisition of ALPHA Business Solutions AG.*

*prior to joining Hogan Lovells

Languages. English, German

Professional associations/memberships. German Bar Association; German American Law Association; American Bar Association

Dr Mathias Schönhaus, Counsel

Hogan Lovells International LLP

T +49 211 136 8523
F + 49 211 136 8100
E mathias.schoenhaus@hoganlovells.com
W www.hoganlovells.com

Professional qualifications. Rechtsanwalt (attorney at law); Steuerberater (certified tax advisor)

Areas of practice. Corporate taxation; tax structuring (M&A and real estate transactions, funds); indirect tax aspects of e-commerce; European and international taxation

Recent transactions

  • KIRKBI Invest (LEGO) on the tax structuring for the EUR 627m investment into an offshore-windfarm developed and operated by DONG.

  • Repower Deutschland GmbH on the sale of its stake in Repower GuD Leverkusen GmbH & Co KG.

  • KLK Kuala Lumpur Kepong Berhad in connection with the structuring and the acquisition of the Oleochemicals business of Emery Oleochemicals GmbH.

Languages. German, English, French

Professional associations/memberships. IFA (International Fiscal Association); ZIA (Zentraler Immobilien Ausschuss) Member of tax committee); Berliner Steuergespräche eV.


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