Guarantees and collateral for acquisition financings in Germany

Guarantees and collateral

Are there restrictions on the provision of related company guarantees? Are there any limitations on the ability of foreign-registered related companies to provide guarantees?

German corporate law sets out, inter alia, share capital maintenance rules and prohibits an interference which jeopardises a subsidiary’s existence. Such rules primarily apply to payments to direct shareholders. However, they also apply to guarantees provided by an entity for the benefit of its (direct or indirect) shareholder(s) (upstream guarantee) and other subsidiaries of its (direct or indirect) shareholders (which are not simultaneously shareholders of the entity providing the relevant guarantee) (cross-stream guarantees). The relevant limitations apply, inter alia, to German limited liability companies (GmbH), German stock corporations (AGs) and German limited partnerships where a German limited liability company is the sole general partner (GmbH & Co KG).

The relevant limitations do not render the relevant guarantee void, or automatically limit the relevant entities’ capacity to make payments under the guarantee. However, the granting of or the payment under an upstream or cross-stream guarantee in violation of the applicable capital maintenance rules can result in a civil (and potentially criminal) liability of the managing directors of the relevant German entity. In practice, these German entities do grant upstream and cross-stream security and guarantees by relying on heavily negotiated limitation language.

The purpose of the limitation language is primarily to protect the guarantor’s or security provider’s registered capital (based on a balance sheet test), thereby shielding the management from incurring potential personal liability.

In contrast to the above, German law generally imposes no limitations on foreign companies providing guarantees for the benefit of their German affiliates or parents (however, the laws of the relevant foreign jurisdictions usually do).

Are there specific restrictions on the target’s provision of guarantees or collateral or financial assistance in an acquisition of its shares? What steps may be taken to permit such actions?

In addition to the restrictions under the capital maintenance rules described in question 14, the provisions on providing financial assistance set out in the German Stock Corporation Act apply if the target is a German stock corporation. Pursuant to these provisions, a stock corporation must not provide any direct or indirect support to the acquisition of its shares. This prohibition also applies to subsidiaries of stock corporations. If the providing of collateral conflicts with such provisions, the relevant agreements may be void. However, there are several recognised ways to circumvent such issues. For example, if a control and profit and loss transfer agreement between the stock corporation and its parent is in force, acts of assistance provided by the stock corporation can be exempt from the aforementioned rules.

What kinds of security are available? Are floating and fixed charges permitted? Can a blanket lien be granted on all assets of a company? What are the typical exceptions to an all-assets grant?

German civil law provides for several types of collateral instruments. These include accessory security interests (ie, security interests that are legally linked to and determined by the secured claims), such as:

• pledges over shares and partnership interests;
• pledges over claims (eg, arising under bank accounts), rights (eg, intellectual property) and goods; and
• mortgages on real estate, ships and aircraft.

In addition, there are non-accessory security interests (ie, security interests that are independent of the existence of the secured claims and which can be transferred without the secured claim) such as:

• assignment of receivables (eg, against customers or intra-group debtors);
• security transfer of title to movable assets;
• guarantees, sureties and letters of comfort; and
• land charges on real estate.

German law does not provide for the possibility of an all asset type security (like a debenture in the UK or an all asset security in the US). Security needs to be granted over each asset type. However, pledges and assignments may also cover future shares, partnership interests or claims, and assignments may also cover future receivables and goods, as long as the future encumbered assets are already identifiable at the time the relevant security agreement is entered into.

Although German law does not generally provide for the concept of floating charges, in certain respects it is possible to agree to security arrangements pursuant to which collateral may float. For example, it is possible to grant blanket assignments of certain assets. Such assignments would have to comply with the principle of certainty, which means that it must be determined, or at least it must be determinable at all times, which exact assets are subject to such assignments.

Under German insolvency laws, the authority to dispose of an asset ends with the opening of insolvency proceedings, so that from that time on no future assets or receivables will become part of the security.

Are there specific bodies of law governing the perfection of certain types of collateral? What kinds of notification or other steps must be taken to perfect a security interest against collateral?

This generally depends on the specific type of security and must be assessed on a case-by-case basis.

For example, an agreement pursuant to which a pledge over the shares in a German limited liability company is created needs to be notarised. In contrast, the notarisation requirement does not apply in relation to pledges over, inter alia, the shares in a German stock corporation. The creation of a pledge over receivables requires the relevant debtor (eg, the account bank) to be notified, whereas the assignment of receivables requires no such notification. However, notifying the debtor may be advisable to ensure that payment is made to the assignee (and not the assignor).

Further, real estate security (eg, land charges) must be registered with the competent land registry.

Once a security interest is perfected, are there renewal procedures to keep the lien valid and recorded?

Under German law there are generally no requirements for renewal procedures. However, certain banks require lists itemising the assigned claims to be delivered to them periodically (eg, monthly or quarterly). Such lists are generally not required for the validity of the security, provided that the description of the assigned receivables is sufficiently specific to identify which receivables are being assigned. The lists can, however, help to accelerate a potential enforcement of the security.

Are there ‘works council’ or other similar consents required to approve the provision of guarantees or security by a company?

Generally, no explicit legal provisions exist stating that approval of a works council or other similar consent is necessary before granting a guarantee or security. However, if an economic committee within the meaning of section 106 of the German Works Constitution Act exists (which is required if the relevant entity has more than 100 full-time employees), it might be appropriate to keep that economic committee informed of any relevant borrowing and granting of security, because the company is obliged to inform the committee about economic affairs, in particular the company’s economic and financial situation.

Can security be granted to an agent for the benefit of all lenders or must collateral be granted to lenders individually and then amendments executed upon any assignment?

Security can be granted to an agent for the benefit of all lenders. However, in the case of accessory security, this requires the creation of a parallel debt obligation. This is due to the fact that accessory securities may only be granted to the holder of the secured claim and only be enforced in an amount equal to the security holders’ secured claims. A parallel debt obligation creates a claim for the security trustee equal to the aggregate amount of all claims outstanding in connection with the secured documents from time to time. This structure is widely used and generally accepted in the German market, even though there is no definitive case law confirming its validity.

As a result, assignments and transfers can be effected by lenders under a facility agreement or the holders of bonds without taking any steps to ensure that the new lender(s) or holder(s) benefit from the underlying German law security interests. However, transfers between lenders by way of novation may extinguish the secured claim under German law and arguably restart the hardening periods. Therefore, transfers by way of novation are typically avoided where German security was granted.

What protection is typically afforded to creditors before collateral can be released? Are there ways to structure around such protection?

German statutory law does not explicitly deal with creditors’ protection before the release of collateral.

Non-accessory security rights, such as a security assignment or transfer, need to be released and the assigned or transferred claims or assets need to be reassigned or re-transferred, as relevant, by way of an agreement between the security grantor and the security holder.

Accessory security, such as pledges, automatically extinguishes if all secured obligations have been discharged in full. Further, a portion of the encumbered assets may automatically be released as a result of overcollateralisation (ie, if the realisable value of the encumbered assets significantly exceeds the value of the secured claims). However, there are certain exceptions, and it is customary that accessory security interests are also explicitly released by means of a release agreement.

Describe the fraudulent transfer laws in your jurisdiction.

Depending on the circumstances of the individual case, German law provides for several provisions dealing with fraudulent transfers. For example, if a debtor has transferred assets, despite creditors of that debtor being entitled to those assets, owing to an enforceable judgment, these creditors may under certain conditions challenge that transfer in accordance with the provisions of the German Creditors’ Avoidance of Transfers Act. Further, in circumstances involving insolvency, the insolvency administrator may contest transactions which were entered into with the intention to disadvantage the debtor’s creditors if the other party was aware of such intention and the transaction was entered into during the 10 years prior to the request to open insolvency proceedings. In addition, fraudulent transfers may be deemed criminal offences.