In its recent Bremer Vulkan decision, the German Federal Court has substantially rewritten the rules under which subsidiaries may provide financial assistance to their parent companies. While the decision was rendered in the context of regular intra-group financing, its will have a significant impact on the rules governing a target company's ability to provide security to banks extending loans to the acquisition vehicle.

Under the previous doctrine, a subsidiary incorporated as a limited liability company (GmbH) was allowed to provide security for the benefit of its parent company if and to the extent that realization of the security would leave the registered capital unaffected. Upstream security arrangements commonly contain a clause limiting the rights under the security so as to preserve the registered capital.

The Federal Court has now stated that the preservation of registered capital may not be sufficient. In addition, the parent company has a responsibility not to deprive its subsidiary of the liquidity necessary to continue its business. Failing to comply with this obligation may render the management of both the parent company and the subsidiary liable under criminal law, and expose them to personal liability for damages.

As a result of this decision, not only will banks' rights under the security provided by a target company be subordinated to the rights of all other creditors of the target, including contingent liabilities, but banks will also in fact be prohibited from forcing the target company to go out of business as a result of enforcing the security.

For further information please contact Hendrik Haag or Oleg de Lousanoff at Hengeler Mueller by telephone (+49 69 17 09 50) or by fax (+49 69 72 57 73) or by email ([email protected] or [email protected]). The Hengeler Mueller website can be accessed at