By Jens Hörmann and Otto Haberstock

P+P Pöllath + Partners

Germany has the largest economy in Europe and is one the world's leading exporters of merchandise, with exports accounting for more than one-third of the national output. The economy in Germany is regulated by a legal framework that is highly efficient, cost-effective and predictable, with statutory law, instead of case law, providing a high-level of legal certainty. The World Economic Forum's Global Competitiveness Report 2012-2013 gave Germany a top-ranking in the category of efficiency of legal framework.

Foreign investment has peaked since the financial crisis in 2008 and 2009. This is because of Germany's businesses having shown remarkable strength, even during the Euro crisis. As the majority of large German businesses are privately-held, sometimes by founders or their families, the sale of these businesses triggers a search for the best possible successor.

In particular, Chinese investors have shown an unprecedented interest in owning German-based businesses. This is mainly in the traditional automotive and machinery industries, resulting in some quite prominent and successful takeovers. But the challenges for Asian and especially Chinese participants in auction sales can prove rather intense.

Share deal versus asset deal

When investing in German companies, investors can choose to buy shares in a certain target company or its assets. Typically, share deals are seen more often. This is because asset deals are more complicated, as any asset to be transferred must be specified in the agreement. In addition, the transfer of ongoing commercial agreements with suppliers and customers from the seller to the purchaser usually requires consent of the other contractual party. This can sometimes lead to the contractual party trying to renegotiate the terms and conditions of the concerned agreement. From a seller's perspective, a share deal is generally favourable from a tax perspective.

Situations may occur though where it is better to buy assets, for example, if the target company has filed for insolvency or if the purchaser only wants to buy a certain business unit by way of spin-off. An asset deal may also be advantageous for the purchaser from a tax perspective due to a possible step-up.

If the transaction is structured as an asset deal, the employees of the business unit concerned are automatically transferred to the purchaser by operation of law. However, each employee is allowed to object to the transfer.

Sale and purchase agreements

Commercial agreements under German law are substantially shorter than Anglo-Saxon-type agreements. This is because a large degree of the parties' legal relations can be based on existing statutory German law, by which the relevant Codes provide adequate solutions for many situations that typically occur.

For the most part, this also applies to sale and purchase agreements (SPA) in the acquisition of shares, although in recent years the influence of Anglo-Saxon legal culture has been considerable. However, comparatively short German-style documents continue to prevail in many equity-financed transactions and in transactions involving medium-sized German companies.

These short German SPAs are possible since many key areas of corporate and contract law are already covered by comprehensive statutory laws. On issues like remedies for violation of warranties and the calculation of damages caused by contributory negligence and delay, in general it is possible to rely on statutory law. Consequently, the wording of the contracts sometimes gives little guidance on practical handling issues since it is to be understood within the context of statutory law and general legal principles.

The universal structure of German law SPAs is similar to standards used elsewhere. Core elements of the SPA are, as in many other jurisdictions, the purchase price and respective adjustment procedures. Since the subprime difficulties in 2007, net financial debt and working capital adjustments as of the closing date, have again become more frequent. So-called locked box mechanisms or agreements that provide for a fixed purchase price that is determined based on past figures and not subject to adjustments are still used. A second major part of an SPA concerns representations and warranties, which are comparable to those in other jurisdictions.

A major deviation from Anglo-Saxon SPAs is the distinction between the sale and the transfer of shares (or assets), which are described as two separate transactions. The sale constitutes only the obligation to transfer the share while the transfer constitutes the actual transfer of ownership (in rem). The transfer is usually subject to the closing conditions, like antitrust clearance and payment of the purchase price.

Another German peculiarity is that any German law agreement involving the transfer of private limited liability shares or real property must be notarised. This means that the SPA itself and any ancillary agreement and all annexes (other than lists and tables to which an exception applies) must be read aloud by or in front of a notary. German notary fees are governed by a mandatory non-negotiable fee schedule and are calculated on the basis of the transaction value. They range from €10 to an approximate maximum of €55,000. The maximum usually applies to a transaction value of €60 million or more. These fees are customarily borne by the purchaser.

Types of business organisation

Private limited liability company (GmbH)

The form of a GmbH is the most frequently used corporation form in Germany. The foundation of a GmbH, as well as the transfer of shares, requires notarisation by a public notary. Provided that the nominal share capital is fully paid in after the foundation of a GmbH and is not repaid, the shareholders of a GmbH are in general not personally liable for the company's debts. The German Limited Liability Company Act provides for capital maintenance rules pursuant to which it is generally prohibited to repay the nominal share capital to shareholders.

The corporate bodies of a GmbH consist of the management and the shareholder assembly. Under German law, the managing directors may be appointed and removed relatively easily by the shareholders at any time they wish. In addition, to the two mandatory bodies, the shareholders of a GmbH can opt to implement an advisory board or a supervisory board. If a certain number of employees are exceeded (500), mandatory labour law requires setting up a supervisory board. The occupation and competences of the supervisory board depend on the number of employees (500/2000).

Stock corporation (AG)

In addition to the GmbH, the second major type of German corporate entity is the AG. The shares in an AG may be, but do not have to be, publicly listed. In fact, most of the German AGs are not listed but are privately held by a smaller number of shareholders, like a large family.

The legal regime that applies to an AG is considerably stricter than to a GmbH. As a rule of thumb, the articles of association of an AG may only contain provisions that deviate from those contained in the German Stock Corporation Act, if this is expressly permitted. In contrast, the articles of association of a GmbH may contain any provision, unless such provision is prohibited under the German Limited Liability Company Act. This means the flexibility in structuring an AG is quite limited – in particular with respect to its corporate governance.

The three mandatory corporate bodies of an AG are the management board, the supervisory board and the shareholders' meeting. A major difference to a GmbH is that the management board is not subject to instructions from the shareholders' meeting or the supervisory board. However, certain restrictions on the powers of representation (internally in relation to the company) may be imposed, for example, the rules of procedure of the management board.

The members of the supervisory board are elected by the shareholders' meeting unless employee representatives are required by mandatory law (depending on the number of employees).

The minimum stated share capital of an AG amounts to €50,000, whereby the minimum nominal amount per share is €1. In contrast to the law governing the GmbH, the sale and transfer of shares in an AG does not require a specific form, hence notarisation is also not required. However, according to the articles of association, the transfer of registered shares, as opposed to bearer shares, may be subject to the consent of the AG.

Any actions with respect to the shares in a listed AG must comply with insider law, the violation of which regularly constitutes a criminal offence.

Partnerships

Different types of partnerships can be seen in Germany, with the limited partnership most common, in particular a GmbH as general partner, so-called GmbH & Co. KG.

Regulatory framework

Foreign investment approvals

In addition to antitrust law, if applicable, the acquisition of companies with offices or places of business in Germany by investors with their seats or management outside the EU or European Free Trade Area is partly restricted.

Since 2009, each direct or indirect acquisition of at least 25% of the voting rights of a German company by an acquirer may in theory be reviewed by the German Ministry of Economics (GMoE). The Ministry will review the transaction within three months from signing, publication of the decision to make a takeover bid, or the publication that control was obtained. If the GMoE requests the delivery of documents relating to the acquisition, it has an additional two months to issue orders or prohibit the acquisition in case it endangers the public order or security of the Federal Republic of Germany.

In case of the acquisition of a German company that manufactures or develops military weapons, cryptographic systems or other defence-related goods, the transaction must be announced to the GMoE as well.

Since generally, the investment climate in Germany continues to be very friendly to foreign investment and the regulation is mainly targeted to the very few businesses relevant to national security, it has in practice never proven to be an obstacle in the vast majority of transactions which will not be subject to any review.

Public financial control

When acquiring publicly traded shares in German companies, investors are subject to various regulatory requirements under German takeover laws.

When acquiring or selling shares in companies admitted for trading on a regulated market and in so doing exceeding or falling below certain thresholds in voting rights (namely 3%, 5%, 10%, 15%, 20%, 25%, 30%, 50% or 75%) any investor must notify the company and the German financial supervisory authority (Bundesanstalt für Dienstleistungsaufsicht or BaFin) without undue delay and at the latest, within four trading days. A similar obligation also applies to warrants or financial instruments that give an unconditional right to acquire shares in such companies. Voting rights may generally not be exercised if the notification requirement has not been complied with. The suspension may last for six months if the notification was omitted due to gross negligence or wilful misconduct.

Any purchaser of listed shares up to or exceeding the threshold of 10% must disclose the objective of the purchase and the source of financing to the issuer within 20 trading days. Public tender offers are exempt from this disclosure, as well as purchases by investment companies regulated under the UCITS directive. The issuer is then required to publish such disclosed information to the public.

When acquiring shares in AGs not listed on a regulated market and which exceed a threshold of more than 25% of the registered share capital, the purchaser must notify the company and the company has to publish this notification.

No similar notification requirements apply to purchases of shares or interest in companies of other legal types like GmbHs.

Tender offer

If shares in the relevant company are admitted for trading on a regulated market, public tender offers can be made by way of two main types of offers, namely voluntary offers and mandatory offers. Voluntary offers aimed at the acquisition of control over a company are called takeover offers. As opposed to a mandatory offer which must be made to all outside shareholders upon the acquisition of control in any way, other than by a takeover bid. For example, control can be gained through an off-market purchase of shares (block sale), purchases from the stock exchange, subscription in a capital increase, or a merger.

Control is established by directly or indirectly holding 30% or more of the voting rights in the target AG. To determine whether the 30% threshold has been met, the voting rights directly held by a shareholder and certain voting rights imputed to it must be combined. For example, voting rights that are owned by a subsidiary, or by a third party for the account of the shareholder, shall be deemed as voting rights of the relevant shareholder. In particular, the voting rights of a third party with whom a shareholder coordinates its conduct with respect to the AG are imputed to the shareholder (acting in concert). Coordination between the shareholder and a third party shall be deemed to exist in cases in which they agree on the exercise of voting rights or otherwise act together with the purpose of affecting permanent and significant changes to the company's business approach.

Once the bidder has decided to make a takeover offer or once the 30% control threshold has been met, the bidder must immediately publish the decision or announce that the control threshold has been met. As a rule, the bidder then has a period of four weeks to prepare an offer document containing the full terms of the offer and to submit the document to BaFin for verification. Upon approval of the document by BaFin, the bidder must immediately publish the offer. The acceptance period that starts with the publication may not generally be less than four weeks and not more than 10 weeks. In certain cases, the acceptance period extends by operation of law.

For both voluntary and mandatory offers, the consideration to be offered to all other shareholders must at least be equal to the higher of:

• the highest consideration that the bidder (or certain persons related to or acting together with) has granted or promised to pay for the acquisition of shares, during a period of six months preceding publication of the offer document; or

• the weighted average domestic stock market prices of the shares during the three month period preceding publication of the bidder's decision to make a takeover offer or of the bidder's attainment of the 30% threshold.

The consideration may be adjusted to a higher price if the bidder (or certain persons related to or acting together with) acquires further shares. This can either be during the acceptance period or, by way of an off-market transaction, within one year after the lapse of the acceptance period and for a consideration exceeding the value of the consideration specified in the offer. An exception exists for the acquisition of shares in connection with a statutory obligation to grant compensation to shareholders of the target company.

Takeover offers and mandatory offers basically follow the same legal regime. An important deviation, however, is that a mandatory offer may not be made subject to conditions precedent, whereas for voluntary offers, conditions precedent are generally permissible. In practice, voluntary offers may sometimes be subject to the achievement of certain acceptance thresholds in order to ensure that a certain percentage of voting rights is obtained.

Based on the fact that a mandatory offer cannot be made subject to conditions precedent, an attempt is often made and it is possible, to structure the transaction in order to have a voluntary offer rather than a mandatory offer. This may be achieved by a combination of a private transaction comprising 30% or more of the voting rights together with a voluntary offer.

Private M&A procedures

The private acquisition of a company or its business is generally not subject to regulations in respect of the procedure or the conditions. Individual contractual freedom applies here, within the general limits of public policy and fair dealing.

Many businesses are being sold by way of an auction process, typically organised by one of the domestic or international investment banks or M&A advisory firms. In order to create a high level of competition and transaction security for the seller, these auction processes follow a relatively strict schedule of different stages of due diligence and initial and confirmatory offers. Time is of the essence and a bidder may be taken out of the process simply because the next mandatory offer is not delivered on time.

For bidders from countries like China, providing for a strict system of governmental approvals for foreign investment or currency exports, it has sometimes proven quite difficult to obtain the respective consents and documentation within the strict timeframe provided by the auction procedure. Since many European sellers do consider such governmental approvals a serious threat to the successful completion of a sale to a Chinese investor, it is advisable to have a comprehensive overview of all such approval requirements, a clear path on how to work through the respective requirements and to show a high level of transparency to the sellers. This helps them understand what results can reasonably be expected in a certain timeframe. Many successful Chinese investments in Germany have already helped establish an understanding for these specific items and are proof that all such governmental requirements can be dealt with in a satisfactory manner.

Author biographies

Jens Hörmann

Partner

Jens is a partner with P+P in Munich and specialises in M&A and private equity. In particular, he focuses on private equity transactions, joint ventures as well as capital markets law. Jens studied law in Konstanz, Germany.

Otto Haberstock

Partner

Otto is a partner with P+P in Munich. He focuses on M&A, private equity and venture capital transactions, as well as general corporate law and has advised private equity funds, corporations, entrepreneurs and management teams on many buy-out, investment, IPO or similar transactions. He is admitted to the bars in Munich and New York.

德国并购交易概要

Jens Hörmann 和 Otto Haberstock