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State snapshot

Trends and climate

What is the current state of the M&A market in your jurisdiction?

The M&A market has been consistently agile over the past few years and hit record highs in 2017, particularly by way of foreign direct investment (FDI). Based on 923 deals, Mergermarket reported a record €115.7 billion in deal value, up 42.5% from 2016. Inbound investments saw an increase of 104%, with a record €101.2 billion in deal value from 490 deals.

A continued increase in M&A activities is predicted in 2018, thanks in part to the increasingly advantageous monetary policy of the European Central Bank (ECB). 

Have any significant economic or political developments affected the M&A market in your jurisdiction over the past 12 months?

Restrictions on FDI imposed by recent amendments to the Foreign Trade and Payments Ordinance have made foreign investment more burdensome. However, an adverse effect on M&A activities is not yet visible.

The ECB is expected to continue with its low interest rates in 2018. High liquidity levels, particularly in the private equity sector, and a limited number of acquisition targets are predicted to increase deal values. The US tax reform and recent changes in China’s economic policy are likely to affect the financial market. It has also been predicted that China will be the biggest source of FDI in 2018.

Are any sectors experiencing significant M&A activity?

In 2017 the following industries were among the most active, according to PwC (based on closed deals):

  • industrials and chemicals (approximately 24%);
  • consumer goods (approximately 18%);
  • technology (approximately 16%); and
  • health (approximately 9%).

Real estate saw a decrease of approximately 3% in 2017 as a result of high real estate prices.

An increase in 2018 is expected in transport and logistics, with high-volume deals such as Hochtief’s bid for Spanish conglomerate Abertis.

Are there any proposals for legal reform in your jurisdiction?

The recent formation of the ‘grand coalition’ by Chancellor Angela Merkel is expected to result in the continuation of past government policy, which may encourage sustained growth in FDI and overall M&A transactions.

Legal framework

Legislation

What legislation governs M&A in your jurisdiction?

Different legislation governs M&A in Germany depending on the target’s corporate form and the type of transaction.

The acquisition of securities of a company that is publicly traded on the German stock exchange is mainly governed by the Securities Acquisition and Takeover Act, while the acquisition of a private company is mainly governed by general civil law concepts regulated by the Civil Code and the Commercial Code. In addition, these codes govern the rules applicable to the respective corporate body from which the securities are to be acquired (eg, the Stock Corporation Act or the Act for Companies with Limited Liability).

Company mergers are governed by the Reorganisation Act. However, merger transactions are uncommon in Germany because the transaction process for the acquisition of a German company involves the implementation of a complex formal merger procedure. In most cases, an ordinary acquisition is preferable.

Regulation

How is the M&A market regulated?

In accordance with the Securities Acquisition and Takeover Act, the Financial Market Supervisory Authority (BaFin) supervises and controls the acquisition of company securities that are traded on a German regulated market. The respective purchaser must notify BaFin whenever an acquisition of securities results in the purchaser’s direct or indirect ownership in such German public company exceeding a certain threshold (ie, at 3%, 5%, 10%, 15%, 20%, 25%, 30%, 50% or 75%).

To ensure that an M&A transaction does not create an unhealthy competitive landscape in Germany, the Act against Restraints of Competition requires the purchaser to notify the Cartel Office where certain individual and combined revenue figures are exceeded. The Cartel Office can prohibit the transaction or approve it with certain conditions (eg, the divestiture of certain businesses before completion).

In July 2017 the German government amended the Foreign Trade and Payments Ordinance to address potential national security-related concerns raised by non-EU or non-European Free Trade Association (EFTA) investments in certain sectors of the German economy. In particular, the amended ordinance:

  • identifies specific sectors of the German economy in which foreign investments may pose a threat to German public order or security; and
  • introduces a notification obligation for transactions involving non-EU/EFTA investors. The Federal Ministry for Economic Affairs and Energy can also prohibit a transaction or impose conditions on the completion of the transaction if it determines that the transaction presents a threat to German public order or national security.

Are there specific rules for particular sectors?

Certain German business sectors are monitored and protected by their relevant supervisory authorities. For instance, specific rules apply to the acquisition of insurers or financial institutions (eg, banks). In accordance with the Banking Act, any proposed acquisition of equity interests or voting rights equalling or exceeding 10%, based on the total outstanding and issued share capital or voting rights, requires notification to BaFin. Under certain circumstances BaFin can even prohibit the proposed acquisition. Special rules can also apply to planned investments in, or the acquisition of, companies operating in the broadcasting, telecommunications, aerospace and military sectors. However, this list is not exhaustive.

Types of acquisition

What are the different ways to acquire a company in your jurisdiction?

Transactions involving a private target company (ie, a company whose securities are not traded at a German stock exchange) are typically structured as:

  • a share sale and acquisition transaction where the purchaser acquires all shares of the target from its shareholder(s);
  • an asset sale and acquisition transaction where the purchaser acquires from the target all relevant assets (and certain or all liabilities); or
  • (less commonly) a merger transaction where the target is merged with a company belonging to the purchaser’s group.

The acquisition of a publicly traded company is generally structured as a public takeover offer in accordance with the Securities Acquisition and Takeover Act.

Preparation

Due diligence requirements

What due diligence is necessary for buyers?

The scope and intensity of the due diligence exercise for a purchaser and its advisers typically depend on the nature of the target business, the investment approach of the purchaser (eg, whether it is a private equity or strategic investor) and its ‘boldness’. Due diligence is implemented to mitigate, or at least minimise, risks for the purchaser and the M&A process itself (whether structured through an auction process or not).

The due diligence process typically begins with the potential purchaser’s initial review of the target, followed by the purchaser’s decision on whether to continue with a more extensive main phase of due diligence conducted with its advisers. During the main phase of due diligence, the purchaser typically reviews legal information in relation to the following areas, with varying degrees of emphasis:

  • corporate;
  • commercial;
  • financing;
  • real estate and leases;
  • human resources and employment;
  • pensions;
  • intellectual property and information technology;
  • litigation; and
  • insurance.

In addition to the legal review, it is customary to conduct a separate financial and tax due diligence and – depending on the target’s business – environmental, technical, pensions or insurance due diligence. The respective advisers present the findings of the due diligence to the purchaser in a more or less detailed due diligence report, depending on whether the purchaser finances (part of) the purchase price (in which case a bank-suitable report is required) or representations and warranties insurance is part of the transaction (in which case the insurer is also likely to request a full report).

Information

What information is available to buyers?

The purchaser typically has limited access to company information in the first phase of the due diligence, during which information is often accessible only through public sources. These public sources include the commercial register excerpt of the target providing basic information on:

  • the target’s business purpose;
  • potential mergers in the past;
  • managing directors; and
  • accompanying documents such as financial statements, the shareholders’ list and the articles of association.

The seller often prepares a management presentation or an information memorandum, which provides a basic overview on the target and its business operations, including a business plan/forecast of future developments. In an auction process, a vendor due diligence report is customary.

In the main phase of the due diligence, the seller typically provides information on the target through a (virtual or physical) data room. Depending on the detail of the due diligence information requested by the purchaser (normally in a due diligence request list delivered to the seller after preliminary agreements have been concluded) and the scope of the due diligence, the documents available through the data room may fully cover all documents and information on the target, or be limited to the essential information on the main topics of interest for the purchaser.

In addition to its initial due diligence request list, the purchaser typically submits a Q&A list to the seller with all questions and further document requests which may have arisen when reviewing the documents in the data room.

In an auction process, but in other due diligences as well, information is typically shared through the data room in a two-step approach, with sensitive information and documents (eg, employee data) being disclosed only at a later stage (with a limited number of bidders) and often with restricted access on a strictly ‘as needed’ basis (eg, the purchaser’s employment lawyers only).

What information can and cannot be disclosed when dealing with a public company?

Under German law, the management board of a stock corporation is generally prevented from disclosing confidential or business-sensitive information. In practice, the management board can formally resolve that a potential offer would be in the best interests of the company and that the disclosure of information to a potential bidder is required to increase the chances of success for the transaction.

However, if the information disclosed to the potential bidder constitutes insider information about the target, the bidder may be prevented from proceeding with the offer unless the relevant information is made public or ceases to be considered insider information. Therefore, the management team of a public company is usually reluctant to provide commercially sensitive information to a bidder, especially if the bidder is a competitor.

Disclosure of sensitive information is a delicate issue for both the target’s management and the bidder. Careful planning of a public transaction is therefore advisable to avoid triggering public disclosure requirements based on insider trading rules or a prohibition against the bidder pursuing the offer.

Stakebuilding

How is stake building regulated?

     Stake building in a German public company is regulated by the Securities Trading Act. Any person or legal entity whose direct or indirect shareholding reaches, exceeds or falls below the thresholds of 3%, 5%, 10%, 15%, 20%, 25%, 30%, 50% or 75% is obliged to notify the Financial Supervisory Authority thereof in writing. In determining the voting rights, any shares for which the person or entity has a call option right or shares held by subsidiaries or third parties acting in concert with such person must be included.

Documentation

Preliminary agreements

What preliminary agreements are commonly drafted?

Before starting the due diligence process, the parties to an M&A transaction typically enter into a non-disclosure or confidentiality agreement with a view to protecting their respective confidential data and business secrets during the due diligence. Once the initial phase of the due diligence is completed and the potential purchaser has received an overview on the target, parties typically enter into a letter of intent and/or a term sheet (non-binding, although binding in rare instances). The letter of intent is provided by the purchaser and customarily includes an initial purchase price offer (typically as an indicative offer in a certain range, as no full financial due diligence has been concluded at this stage), setting out the proposed transaction steps and a timeline until completion of the transaction. The term sheet is typically negotiated between the parties and signed by the purchaser and seller, once in an agreed format. It includes the main terms and conditions of the definitive agreements to be entered into if parties wish to proceed with the transaction after completion of the due diligence exercise, and is designed to minimise the risk of either party abandoning negotiations at a late stage of the transaction.

Other than in early-stage auction processes, exclusivity agreements between the parties are often concluded, either as an additional agreement or included in the letter of intent or term sheet, which prevents the seller (usually for a certain limited period) from entering into negotiations with a third party with respect to the subject matter of the contemplated transaction.

Principal documentation

What documents are required?

The main document is the share purchase agreement or, if the sale is structured as an asset deal, the asset purchase agreement. Sometimes the actual transfer of the shares is governed by a separate transfer agreement.

Which side normally prepares the first drafts?

In an auction process, the seller typically prepares the first drafts, whereas in other M&A transactions, the purchaser often provides the first drafts. However, the seller also often prepares the first drafts in transactions outside of auction processes.

What are the substantive clauses that comprise an acquisition agreement?

The substantive clauses of a purchase agreement in an M&A transaction include:

  • a detailed description of the purchase object (ie, shares or assets of the target);
  • the purchase price and payment conditions, including provisions governing locked-box, earn-out and purchase price adjustments;
  • closing conditions and actions, and deviating economic effective date;
  • the seller’s (and potentially also the purchaser’s) representations and warranties;
  • indemnifications, including for taxes;
  • remedies, including the statute of limitations;
  • costs and taxes triggered by the transaction;
  • choice of law and legal venue, and arbitration provisions; and
  • if required, cartel and/or foreign trade law clauses.

What provisions are made for deal protection?

Parties typically agree on confidentiality provisions either in separate non-disclosure or confidentiality agreements or in the principal documentation. In the preliminary agreements the parties sometimes agree on a break-up fee covering the advisory costs of the respective party. In addition, provisions governing joint press releases of the parties are customary in the principal documentation.

Closing documentation

What documents are normally executed at signing and closing?

The parties normally sign the acquisition agreement (ie, the share or asset purchase and transfer agreement), pursuant to which they agree on the terms and conditions for the sale and transfer of the target company (or the assets, as the case may be). The completion of the sale and acquisition (ie, the transfer of title ownership) is often conditional on the satisfaction of the agreed conditions (eg, the approval or non-prohibition of the transaction by competent merger control authorities).

Once all closing conditions are satisfied or validly waived, the parties either must execute the respective title transfer documents, resulting in the completion of the transaction, or the acquisition documents are structured so that the completion is implemented automatically when closing conditions are satisfied or validly waived. In the latter case, the parties typically execute a closing memorandum which confirms the completion of the transaction.

In addition to the aforementioned documents, as part of the closing action the parties often execute resolutions approving the transaction, removing and/or appointing board members or terminating related party relationships.

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

Documents must be executed in notarial form with all parties in agreement being either physically present or validly represented where the documents relate to the sale and acquisition of:

  • shares in a German private limited liability company (GmbH);
  • assets including real estate; or
  • assets substantially constituting all assets of a German individual or company. 

In such cases, the notary public must verify the signing authority of the person(s) signing on behalf of the respective parties. For German parties, the notary public can usually easily verify the authority by reviewing the respective information in the competent German commercial registry. Foreign parties must present the notary public with a valid, publicly certified document proving the authority of the person who signed. Depending on its country of origin, the company may be required to provide evidence that the signature authority is certified and has an affixed apostille.

Are digital signatures binding and enforceable?

Yes, German law (Section 126 paragraph 3, 126a of the Civil Code) states that unless otherwise agreed, digital signatures can be binding and enforceable.

Foreign law and ownership

Foreign law

Can agreements provide for a foreign governing law?

From a German law perspective, the agreement governing the sale of shares to the purchaser can be subject to foreign law, although the share transfer itself is subject to German law.

Foreign ownership

What provisions and/or restrictions are there for foreign ownership?

Germany is foreign investor friendly, and there are no general restrictions against EU foreigners purchasing a company located in Germany. However, the Foreign Trade Law and some industry-specific laws impose restrictions on the investments of EU foreigners into specific industry sectors (eg, concerning the defence and security industry, certain technologies, banks, insurance providers and companies active in the media sector). Acquisitions in sectors that are deemed critical are subject to an acquisition examination on a case-by-case basis by the appropriate governing bodies, and may be prohibited. Additional restrictions may be implemented with respect to specific foreign countries or individuals subject to EU or United Nations sanctions or embargoes.

Valuation and consideration

Valuation

How are companies valued?

There is no one-size-fits-all approach when it comes to assigning a company value. The classical approaches to determining the value of a non-public company are the gross receipts valuation approach and the discounted cash-flow valuation approach. The latter has become the most common valuation approach for international transactions involving more traditional industries; it not only considers balance sheet data, but also includes projections for future revenue based on existing key performance indicator data, strategic concepts, the market landscape and the current financial position of the company.

Different valuation approaches are applied for less traditional industries (eg, technology and e-commerce).

Consideration

What types of consideration can be offered?

There are no statutory limitations on considerations that a purchaser may offer to the seller of German securities. Depending on the circumstances, a purchaser may offer cash, share-for-share swaps or a combination of both.

Strategy

General tips

What issues must be considered when preparing a company for sale?

It is never too early to start planning and preparing for the sale process. As a first step, the seller should determine the deal structure (ie, share deal or asset deal) and ensure that the target’s main assets and financials are in good shape for presentation to potential interested parties. Performing vendor due diligence can help to detect and eliminate issues that could be regarded as risks by interested purchasers.

Before initiating the sale process, the following areas should be addressed:

  • ownership in main assets (eg, intellectual property, real estate and title of shares);
  • the existence of proper compliance procedures and policies;
  • if possible, settlement of any pending litigation;
  • the existence of appropriate business protection frameworks (eg, regarding confidentiality, IP transfers, non-compete and non-solicit covenants); and
  • the review of main contractual relationships for change-in-control clauses that could be triggered by the proposed sale transaction.

What tips would you give when negotiating a deal?

The strategy and approach for negotiating a deal highly depend on the circumstances of the potential transaction. It is therefore advisable to be well prepared and to diligently investigate:

  • the background of the sale (eg, motivation for the sale);
  • whether the sale process is competitive; and
  • any potential competitors.

The better the information you have early on, the easier it is to apply the right negotiation tone and approach to win the deal under favourable terms and conditions.

For instance, in cases where the bidder is in a competitive auction process, it may be advisable to take a less aggressive approach and to focus on the major issues of concern when negotiating the deal. In competitive processes it is imperative to apply a sensitive approach, to understand and to make use of the advantages and benefits of the seller that appeal to the bidder. In competitive scenarios it is of utmost importance to win the sympathy of the target company’s management, as it may have a decisive influence on the selection of the winning bid.

When the target has a more domestic business and the sellers are not financial investors, but rather the founders or persons who built up the business, it is important that the party negotiating the deal knows the local customs and practices, and that it is convincingly the right person to take over the business. It is important that personnel do not feel as though they are being ‘left behind’.

Hostile takeovers

Are hostile takeovers permitted and what are the possible strategies for the target?

Hostile takeover offers are generally permitted in Germany. A takeover offer is branded ‘hostile’ by the management and supervisory board of the target company. An offer is usually branded as hostile where the offer price fails to meet the assumed intrinsic value of the target. Accordingly, even if the bidder launches a friendly offer and makes good-faith representations and covenants in its public offer document, unless a preliminary takeover agreement is reached with the target’s management before the decision to make a takeover offer is publicised, the bidder should be prepared for a hostile response. Before making a public takeover offer for a German target, the bidder should carefully consider:

  • the nature and timing of its acquisition approach;
  • the offer price and type of consideration (cash and/or securities);
  •  any offer conditions, such as regulatory approvals or a minimum number of shares being tendered; and
  • an analysis of the potential defences and deal frustration tactics available to the target.

The Securities Acquisition and Takeover Act, which regulates takeovers in Germany, provided the respective management and supervisory board of the target with the following options as defensive measures against unsolicited takeovers:

  • searching for a competing offer (ie, ‘white knight’);
  • sale of important assets of the target, thereby making the target less attractive; or
  • actions that are specifically approved by the supervisory board and/or are based on a shareholders’ resolution (the shareholders’ meeting can pre-approve defensive measures with an 18-month validity period for such approval).

Notably, ‘poison pills’ (which are shareholders’ rights to acquire the voting shares of the target at a discount) and ‘golden parachutes’ (which trigger the payment to the management of prohibitively high compensation packages in the event of a change in control) are prohibited as defensive measures against a hostile takeover.

Warranties and indemnities

Scope of warranties

What do warranties and indemnities typically cover and how should they be negotiated?

Representations and warranties are customarily subject to extensive negotiations due to the contrary interests of both parties. Whereas the seller is typically interested in selling the target as is (ie, by giving as few qualified warranties as possible), the purchaser wants warranties to be as comprehensive as possible.

The seller’s representations and warranties typically cover a wide range of facts in relation to the target, its business and its contractual relationships with third parties. The scope of warranties depends on the nature of the target’s business and whether the target itself is, for example, the holding entity of a group of companies or a standalone entity. If the target is sold by more than one seller, the agreement usually contains both warranties given by each seller individually and joint warranties of all sellers.

Typically, the representations and warranties of the seller include the following essential topics:

  • the corporate status of the target (group) (establishment, organisational documents and completeness of information);
  • title guarantees (issuance of and ownership in sold shares and subsidiaries);
  • commercial and other contracts of the target (valid, complete and not terminated, often with material qualifier);
  • audited financial statements and balance sheets (compliance with applicable laws, generally accepted accounting principles and past practices, presenting a true and fair view of the financial situation);
  • human resources (covering managing directors, employees, freelancers, collective agreements, works council and shop agreements, if applicable);
  • pensions, if applicable;
  • the target’s assets (sound condition and maintenance, sufficiency for the target’s business);
  • real estate (property ownership and/or leased premises, encumbrances and environmental aspects);
  • insurance (sufficient coverage);
  • intellectual property (patents, trademarks, domains, know-how owned by and licensed to or from the target);
  • information technology (hardware and software owned by and licensed to or from the target);
  • compliance, permits, licences, subsidies (completeness for the target’s business, validly issued, not in breach with conditions);
  • litigation (pending and threatening); and
  • taxes (sound tax filing status).

In addition to its representations, the seller is often requested to grant indemnifications for specific topics identified as risks by the purchaser’s due diligence. Indemnifications typically include tax risks, contaminated soil and other environmental issues, and pending litigation.

The purchaser’s representations in the sale and purchase agreement are typically limited to its corporate and financial status (duly authorised to enter into the agreement, all required consents obtained and able to pay the purchase price when due).

Limitations and remedies

Are there limitations on warranties?

Considering that the seller’s liability is typically one of the main negotiation topics between the parties to an M&A transaction, a variety of limitations on the seller’s representations and warranties may be included in the sale and purchase agreement.

Representations are typically qualified by knowledge or materiality qualifiers directly included in the wording of the representations.

A common dispute is whether an anti-sandbagging clause (no recourse if and to the extent that the purchaser had knowledge of a matter breaching the seller’s representation) should be applied. In addition, German sale and purchase agreements often contain clauses excluding purchasers’ claims in cases of contributory negligence (in accordance with Section 242 of the Civil Code).

What are the remedies for a breach of warranty?

The remedies for a warranty breach by the seller are customarily subject to contractual provisions only agreed between the parties by excluding the statutory remedies under German law, which are not specifically intended for M&A transactions. The contractual remedies typically include:

  • restitution in kind (ie, the obligation of the seller to place either the purchaser or the target in the position in which it would have been without the warranty breach); or
  • compensation in cash by payment of the amount of the losses which the purchaser and the target (group) have suffered.

Typically, restitution in kind is the first choice, with the seller being obliged to compensate the purchaser in cash only if the restitution in kind is unsuccessful (within a certain time period) or impossible.

Are there time limits or restrictions for bringing claims under warranties?

Customary limitations on the amount which a purchaser can claim for in case of a warranty breach by the seller include:

  • a de minimis amount for individual claims;
  • a deductible or threshold for the aggregate of all claims exceeding the de minimis amount; and
  • a maximum liability amount (ie, liability cap).

Liability caps are commonly agreed on as a certain percentage of the purchase price ranging from 20% to 60% for operational guarantees and 80% to 100% for fundamental guarantees (eg, title and tax guarantees).

Parties also typically agree in the sale and purchase agreement on limitation periods deviating from the statutory limitation periods, which can be up to 30 years. Claims of the purchaser against the seller under the sale and purchase agreement are often time barred after a period ranging from six months to five years from closing of the transaction, with typically longer limitation periods for essential representations (title guarantees) and specific periods for taxes, depending on the final and binding tax assessments.

Tax and fees

Considerations and rates

What are the tax considerations (including any applicable rates)?

The level and complexity of tax considerations preceding an M&A transaction depend on the individual situation of the seller, target and purchaser, as well as the timing of the potential transaction (eg, sufficient time to set up a favourable acquisition structure). Initial assessments of the situation as the basis for an advantageous tax structuring of the transaction include (for instance):

  • the legal form of the seller, target and purchaser (individual, partnership or corporation);
  • tax residency (in Germany or abroad);
  • the applicability of double tax treaties; and
  • a compiled list of the pros and cons of a share deal versus an asset deal.

The purchaser usually includes the following topics in its tax considerations:

  • the existence of fiscal unities for corporate, trade and/or value added tax purposes;
  • withholding taxes;
  • the triggering of real estate transfer taxes or value added tax through the contemplated transaction;
  • previous reorganisations of the target group;
  • complete or partial forfeiture of any tax losses carried forward;
  • risks in relation to intra-group transactions and agreements;
  • risks in relation to the Foreign Tax Act, tax laws of a foreign jurisdiction and applicable double tax treaties; and
  • the tax filing and audit status of the target.

Exemptions and mitigation

Are any tax exemptions or reliefs available?

German tax law provides for different types of tax exemption in relation to the sale of participation or assets, including:

  • a 40% tax exemption for certain capital gains pursuant to the Income Tax Act;
  • a value added tax exemption, provided that the transaction is a transfer of a going concern;
  • real estate transfer tax exemptions; and
  • corporate income tax exemptions where the participation exemption rules pursuant to the Corporate Income Tax Act or double tax treaties apply.

Whether any of these exemptions applies in an M&A transaction depends on the individual status of the transaction.

What are the common methods used to mitigate tax liability?

The purchaser commonly engages tax advisers to define an appropriate acquisition structure – using German and foreign tax laws, as well as double tax treaties – to mitigate tax risks and prevent the potential transaction from triggering (for example) real estate transfer taxes. In some cases, a proper tax structure already requires the seller to set up the tax-favourable structure of the target (group) before concluding the sale and purchase agreement.

Fees

What fees are likely to be involved?

In addition to the fees of the advisers (legal, financial and tax), costs may include notarised documents as well as commercial and land registry fees (if real estate is sold through an asset deal). The purchaser may face more bank or financing fees if it requires a loan to pay the purchase price.

Management and directors

Management buy-outs

What are the rules on management buyouts?

There are no specific rules governing management buyouts in Germany. However, a management board member who approaches investors or purchasers with the idea of teaming up to pursue a management buyout should be mindful that the management has primary fiduciary duties towards the company and its shareholders. In the first instance, the management must act in the best interests of the company. It is therefore advisable, as a member of the management, to disclose no confidential information to a potential purchaser without the shareholders’ approval, as this may constitute a criminal offence.

Directors’ duties

What duties do directors have in relation to M&A?

Directors have a duty of loyalty and a duty of care towards the target company and they must always exercise their powers in the best interests of the company.

Employees

Consultation and transfer

How are employees involved in the process?

For confidentiality reasons, the seller typically wants to involve as few individuals as possible. However, the management, other employees in managerial capacities and certain individuals responsible for human resources matters (eg, accounting and tax) are typically involved in the due diligence process.

Where a company works council has been established and the M&A transaction results in a change of operations at the target, mandatory co-determination rights of the works council pursuant to the Works Council Constitution Act may be triggered. In addition, certain information rights of the economic committee (or if there is no committee, the works council) may be triggered.

What rules govern the transfer of employees to a buyer?

A share deal does not affect the existing employment arrangement at the target. Change-of-control clauses in employment contracts are uncommon in Germany.

In an asset deal, Section 613a of the Civil Code may apply. According to this mandatory provision, existing employment relations automatically transfer to the purchaser along with the transfer of ownership in the assets agreed under the asset purchase agreement, provided that the transfer of assets results in a transfer of business (or a part thereof). Affected employees may object to the transfer of employment within one month of receiving a notification, in which case they will remain with the seller.

Pensions

What are the rules in relation to company pension rights in the event of an acquisition?

A share deal does not affect the obligations of the target under existing pension schemes. The target remains liable for all obligations pursuant to the pension promises, resulting in the purchaser ultimately bearing the costs for pension agreements if they are not considered in the determined purchase price and no sufficient accruals are made.

In an asset deal, pension obligations of the selling entity will transfer to the purchaser in accordance with Section 613a of the Civil Code, if and to the extent that such obligations relate to existing employee contracts. Pension payments to already retired employees are not subject to Section 613a, but instead remain the responsibility of the seller.

Other relevant considerations

Competition

What legislation governs competition issues relating to M&A?

The Act against Restraints of Competition governs competition issues resulting from an M&A transaction involving a German business. Where the potential combination of the purchaser’s and the target’s business meets certain revenue thresholds, the purchaser must notify the Cartel Office. The Cartel Office can prohibit the transaction or approve it with certain conditions (eg, the divestiture of certain businesses prior to completion).

Anti-bribery

Are any anti-bribery provisions in force?

The Criminal Code provides that bribery is a criminal offence and various international conventions (eg, the United Nations Convention against Corruption and the United Nations Conventions against Transnational Organised Crime) also apply in Germany.

Receivership/bankruptcy

What happens if the company being bought is in receivership or bankrupt?

In a non-distressed situation, a share deal is the most common structure for an M&A transaction in Germany. The situation changes radically when the target company is bankrupt or is dependent on financial loans. In an asset deal transaction, it is possible for the purchaser to pick and choose assets and liabilities to purchase. To ensure that assets are not left behind and that there are no unwanted or unknown liabilities, the acquisition of the business (or parts thereof) through an asset deal transaction is the most commonly used approach for distressed transactions in Germany.