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Documentation

Preliminary agreements
What preliminary agreements are commonly drafted?

Before due diligence and the share purchase or asset purchase agreement, the parties will normally agree to a confidentiality agreement or non-disclosure agreement concerning all of the data that will be exchanged between them and, in some cases, a process letter which contains a disclaimer to minimise liability. Following this first step, buyers and sellers commonly conclude a letter of intent or a letter of interest which can be binding or non-binding. The letter outlines the intended transaction and usually provides a timeline for the next steps. An exclusivity agreement forbidding negotiations with other potential buyers during the transaction is often requested by the bidder and granted by the seller if it is in a strong position. In addition, a term sheet is sometimes included in the letter of intent/interest which documents the key features of the later purchase agreements. The term sheet minimises the risk that the transaction will fail because of these main points before commencing potentially expensive due diligence. 

Principal documentation
What documents are required?

In general, a share purchase agreement or asset purchase agreement is required.

Which side normally prepares the first drafts?

Other than in auction processes, the first drafts are often prepared by the interested purchaser and their consultants and advisers.  

What are the substantive clauses that comprise an acquisition agreement?

The substantive clauses of an acquisition agreement concern:

  • the existing status of the target and its subsidiaries (object of purchase);
  • the purchase price, including payment conditions and possibly the agreement on an escrow;
  • the structure of the sale and transfer of the shares or assets;
  • the effective date;
  • closing conditions and closing;
  • indemnities and warranties;
  • legal remedies;
  • the statute of limitations;
  • taxes and costs;
  • arbitration or venue; and
  • the governing law.

Shares and assets to be transferred must be precisely specified. Rules concerning the transfer of the shares can be organised in different ways. First, the transfer of the shares can be executed immediately with the signing of the share purchase agreement itself. There is also the possibility to transfer the shares subject to the condition precedent related to the closing. A further option is to transfer the shares on the basis of a separate transfer agreement in direct temporal connection with the closing date.

Further, agreements and liabilities in general cannot be transferred without the consent of the third party. In contrast, employment agreements in some cases are transferable by operation of law without the consent of other parties.

What provisions are made for deal protection?

Deals are regularly protected by comprehensive non-disclosure agreements binding both sides. In addition, termination of the negotiations before conclusion of the final contract may be subject to a break-up fee which also covers the advisory costs of the parties. Termination fees are permissible under German law, but they must be justifiable in the company’s interest.

Closing documentation
What documents are normally executed at signing and closing?

The purchase agreement is executed at the date of signing. In addition, the contracts needed for the implementation of the acquisition may be in an agreed form or executed. In many cases, the closing date is defined in the aforementioned contracts. Typically, the signing of the purchase agreement does not immediately mean that the title to the relevant shares and assets has changed ownership. In accordance with the so-called ‘two-step-method’ commonly applied in Germany, the actual transfer of the rights is subject to the condition precedent of the closing date. 

The period between those two dates can be up to a few months, depending on the complexity of the transaction. For example, closing conditions can be clearance by an antitrust authority or other regulatory body. The approval by the supervisory board, the executive board or the shareholders and the availability of financing are usually not accepted as closing conditions. On the closing day, the contractual parties will usually document the fulfilment of these conditions in a closing memorandum or closing confirmation. 

Are there formalities for the execution of documents by foreign companies?

In general, the execution of documents by foreign companies is not handled differently from the execution by a resident company. However, in the case of a real estate transfer, notarisation by a German notary is obligatory; a foreign notarisation will not suffice.

Are digital signatures binding and enforceable?

Digital signatures can be binding and enforceable under Sections 126(3) and 126a of the Civil Code.