Key issues


What measures should be taken to best prepare for a corporate reorganisation?

Since an individual corporate reorganisation can have wide-ranging impacts, its implementation should be carefully considered and precisely planned. In addition to the indispensable legal analysis of the contemplated measure, tax experts, auditors or (national) authorities, if applicable (see question 6), need to be involved at an early stage in order to review the contemplated measures and provide advice thereto, where applicable. To best prepare a corporate reorganisation, it is recommended to clearly outline and determine its objective from the very beginning.

To secure the maximum support of the stakeholders affected, communication is one of the key factors for a successful corporate reorganisation. In particular, in relation to employees and a potential transfer of undertakings, resulting in the relevant employees ending up with another employing entity (see question 8), it is important to keep in mind that employees tend to react rather cautiously to structural changes due to concerns about job security. Therefore, it is often advisable to inform and involve affected employees at an early stage of the contemplated corporate reorganisation measure. The early involvement and information of business partners and other third parties may also help to avoid concerns about a potential deterioration of financial credibility or requests for provision of additional security, etc.

Employment issues

What are the main issues relating to employees and employment contracts to consider in a corporate reorganisation?

Whether a corporate reorganisation has a significant impact from an employment law perspective mainly depends on whether the relevant measure shall be conducted by way of a sale of stock or an asset deal. No material issues occur in the case of share deals, as the employing entity remains the same. However, particular rules apply if a business or its parts are transferred to another entity by way of an asset deal. In the latter case, a transfer of undertakings may simultaneously occur.

The rules on transfers of undertakings are governed by the Civil Code (BGB), which, in turn, resulted from the implementation of the former European Union Acquired Rights Directive (now the European Union Transfers of Undertakings Directive). In general, these rules apply where a business is being transferred to and continued by an acquirer. In this case, the employment relationships of respective employees are automatically transferred to the acquirer, which cannot refuse to take on transferring employees and related employee obligations. Employees who are assigned to the business will generally be entitled to transfer to the acquirer under the same terms and conditions of employment as those that previously existed with the previous employing entity. Changes to those employment conditions are legally restricted. A transfer of undertakings, furthermore, requires a notification of the employees who are entitled to object to the transfer of their employment relationship. In this case, the employment relationship of the objecting employee will not transfer to the acquirer but will continue with the previous employing entity (however, it would then likely be subject to termination for operational reasons by the previous employing entity due to the transfer of the relevant business). Although the acquirer enters into the employment relationships with all rights and duties, the previous employing entity is, together with the acquirer, generally jointly and severally liable with regard to those obligations that arise prior to the transfer date.

With regard to certain corporate reorganisations, the German Works Constitution Act (BetrVG) requires the involvement of employees by way of a co-determination process in the event a works council exists and certain operational changes, such as the closure of an entire plant or parts thereof, shall be undertaken. A works council is entitled to negotiate particular agreements like a reconciliation of interests or social plan.

What are the main issues relating to pensions and other benefits to consider in a corporate reorganisation?

Corporate reorganisations typically have no material impact on pensions or other benefits from a legal perspective. Nonetheless, any such benefits should be assessed with a view to the legal nature of the particular agreement they are based on (eg, collective bargaining agreements, works agreements or individual employment agreements, as well as the respective scope of application).

In the case of a transfer of undertakings, the employment relationships of the employees automatically transfer to the acquirer under the same terms and conditions of employment as those that previously existed (see question 8). This includes accrued benefits (eg, company pension, bonuses and anniversary bonuses). The acquirer has to establish provisions or otherwise sponsor such benefits (eg, by way of contribution to insurance contracts).

Financial assistance

Is financial assistance prohibited or restricted in your jurisdiction?

Under German law, the acquisition of own shares by a public or private company is generally restricted. Therefore, the provision of financial assistance to fund an acquisition of a company’s own shares by a third party or a group company is restricted as well and, with regard to stock corporations, generally prohibited. The categories of legal acts that fall under the term ‘financial assistance’ is wide-ranging and rather broadly interpreted by German courts. It includes, for example, cash payments, the granting of loans or advances by a company and, in particular, the granting of security interests over the company’s assets as collateral by way of, for example, share pledges over the shares of its subsidiaries and the pledging of its bank accounts or simple upstream guarantees.

German law only provides for explicit strict rules regarding financial assistance for stock corporations, whereas no explicit rules exist for GmbHs (other than in relation to capital contributions and maintenance). With regard to stock corporations, German law does not, in general, allow the provision of financial assistance to third parties for the acquisition of its own shares. However, there are certain exceptions for a limited number of purposes and circumstances (eg, in order to offer a stock corporation’s shares to employees under bonus or incentive programmes). Further, intra-group transactions in relation to corporate reorganisations can be excluded from the prohibition to provide financial assistance in the case of existing controlling or profit and loss transfer agreements. Every transaction that violates the prohibition of financial assistance by a stock corporation is void, with the relevant stock corporation being entitled to claim restitution for the benefits provided to the relevant beneficiary; the persons involved, in particular executive board members, can potentially be personally liable or even face criminal liability.

With regard to GmbHs, financial assistance in the acquisition of own shares is generally permissible, but certain restrictions apply in connection with the rules on capital contributions and maintenance, the relevant provisions of which comprise extensive limitations. Financial assistance to fund the acquisition of shares of a company other than the assisting company itself is generally permitted but also subject to the aforementioned rules on capital contributions and maintenance.

Common problems

What are the most commonly overlooked issues or frequently asked questions in a corporate reorganisation?

The scope of frequently asked questions depends, in particular, on the nature of the relevant corporate reorganisation measure, the structure and size of the affected corporate group and its companies, the geographical location of the group companies and the overall purpose of the contemplated corporate reorganisation. For example, there are typically various questions in relation to employees in case of a contemplated asset transfer (see question 8) but also in relation to tax matters (see question 13).

Another difficult subject in the context of intra-group corporate reorganisations is that the underlying transactions should generally be conducted at arm’s length. Hence, the valuation of assets or shares that are within the scope of the contemplated corporate reorganisation is a frequently asked question. If the main purpose of an intra-group transaction is the optimisation or even prevention of taxes, it is, for example, questionable whether assets or shares can be transferred within the relevant corporate group for less than their fair market value (see question 18).

Other frequently asked questions concern the involvement of national authorities and, in particular, the question of which authorities need to be involved - and if so, how such authorities should best be approached (see question 6). Also, it needs to be analysed whether relevant public permits exist and, if so, whether these automatically transfer or may need to be re-applied for. Further, it is often crucial to analyse whether a corporate reorganisation affects third-party agreements and whether third-party consent is required. It is, therefore, advisable to involve legal and other advisers at an early stage and to conduct comprehensive due diligence in relation to, for example, all relevant third-party arrangements.

Accounting and tax

Accounting and valuation

How will the corporate reorganisation be treated from an accounting perspective? How are target assets and businesses valued?

Pursuant to the Commercial Code, with regard to a corporate group’s consolidated annual accounts, the parent company and its subsidiaries are considered as one economic unit (principle of economic unity). Following this principle, corporate reorganisations can, in general, be structured as neutral from an accounting perspective.

However, under certain circumstances, an intra-group transfer of assets or shares may not be consummated at the actual net book value thereof, with the consequence that, due to a reappraisal, significant formerly hidden profits or losses could be released (acquisition cost method). In order to identify any hidden assets and choose wisely between different accounting methods, it is important to obtain accounting advice in relation to matters concerning the German Commercial Code or the International Financial Reporting Standards - which are applicable in case the parent company is listed - prior to implementing a corporate reorganisation.

Tax issues

What tax issues need to be considered? What are the tax implications of carrying out a corporate reorganisation?

Potential tax implications should be carefully analysed prior to the implementation of any corporate reorganisation. In general, corporate reorganisations bear the risk that transfer taxes are triggered or hidden reserves are disclosed. Adverse tax effects cannot only be caused at the level of the group companies directly involved in the corporate re-organisation, but also at the shareholder level or at the level of another group company.

While there is no stamp duty in Germany, transfer taxes in the form of real estate transfer tax and value added tax (VAT) can be a cost factor. Corporate reorganisations can trigger real estate transfer taxes, in a worst-case scenario even more than once in one transaction. Depending on where the real property is located in Germany, the tax rate ranges from 3.5 per cent to 6.5 per cent of the value of the real property. It should be noted that corporate reorganisations outside of Germany might have adverse real estate transfer tax effects if German real property is held by the corporate group. Inter-group exemptions might be available in case the respective requirements are met. VAT in Germany (ie, German turnover tax) is levied on all payments for goods delivered and services rendered. Where corporate reorganisations include transfers subject to VAT, it might be recoverable as input VAT in some cases but might have to be accounted for as transaction costs in other cases, where the person or entity receiving goods or services does not qualify for the VAT deduction.

Profits or capital gains tax may potentially be triggered by certain measures in the course of a corporate reorganisation in the event no exemption applies. The possibility of a tax-neutral roll-over of book values is generally available under the Reorganisations Tax Act. If the respective requirements are met, the parties of a corporate reorganisation generally have the right to opt for a tax-neutral treatment (roll-over of book values) or a step-up in basis, which is generally subject to tax, but individual exemptions (eg, loss carry forwards) might be taken into consideration when making the decision. In order to ensure the economic success of corporate reorganisations in Germany, an overall assessment of potential tax consequences (German tax and non-German tax) is indispensable.