1. Recent Trends in German M&A
The global deal-making environment remains strong, and the German M&A market continues to grow. 2016 was the strongest year since the beginning of the financial crisis, with an increase in growth of 10%, and acquisitions by foreign investors saw a record high. In 2016 more than 750 German companies were sold to investors based abroad. We still see increased activity by investors from the USA especially, followed by Swiss and French investors and privately owned Chinese companies. The Chinese companies express interest across all sectors and they seem to be driven by a desire to diversify into new markets and the search for brands and technologies that can be introduced on the Chinese market.
2. Most Common Corporate Structures
2.1 Limited Liability Company (Gesellschaft mit beschränkter Haftung, GmbH)
The limited liability company is the most common business structure in Germany. More than half of all businesses use this legal form. The GmbH has its own legal personality separate from its shareholders. Its liability is limited to its assets. The minimum share capital required by law is EUR 25,000, though significantly higher amounts can often be found in practice. Apart from the shareholders, the only other corporate body comprises the directors, who are appointed by and subject to the instructions of the shareholders.
2.2 Company Limited by Shares (Aktiengesellschaft, AG)
The company limited by shares is predominantly used by listed companies. It too has a legal personality independent of its shareholders. The statutory minimum share capital is EUR 50,000. The AG has a dualistic corporate governance structure, with management split between two boards. The managing board is responsible for the day-to-day operations of the company. The supervisory board appoints, controls and advises the management board. However, neither shareholders nor the supervisory board may instruct the members of the managing board.
2.3 Societas Europaea (SE)
For almost ten years now, EU law has provided for a company limited by shares governed by European law. The Societas Europaea (SE) also has its own legal personality and its liability is limited to its assets. The statutory minimum share capital is EUR 120,000. While take-up of the SE in Germany was initially slow, quite a number of mostly multinational undertakings have converted into SEs over the years. As of December 2016, approximately 230 SEs with operational activities were registered in Germany. However, some of them are now in the process of transforming from an SE back into a German national company form.
2.4 Limited Partnership
Leaving apart smaller businesses, the most widespread type of partnership is the limited partnership (GmbH & Co. KG), where the sole general partner is a limited liability company. This structure combines the tax advantages enjoyed by partnerships with the limited liability of the GmbH.
3. Establishing Companies
Establishing a company in Germany is an efficient process that usually takes just a few weeks to complete. In urgent cases, shelf companies can be acquired in less than 24 hours. Shelf companies are widely used and do not involve particular legal issues.
4. Selected Aspects to be Considered in German M&A Deals
4.1 Employment Protection in Asset Deals
Germany has implemented the EU Directive relating to the Transfer of Undertakings (Protection of Employment) (“TUPE”). If a business or a part thereof is transferred by means of an asset deal, the employees of the business are transferred to the purchaser with all rights and obligations (including collective and works agreements). However, employees who object to the transfer within one month will remain with the seller. The one-month objection period only starts to run once the parties provide the employees with specific detailed information. German courts have established rigid requirements regarding completeness of this information. If the one-month objection period is not triggered, employees may in principle object to the transfer and argue that they are still employed by the seller even years later. Therefore, particular attention is required when drafting the information for the employees.
4.2 Formal requirements
In some cases, German M&A deals require notarisation. Typical deals which must be notarised include share deals involving the transfer of shares in a limited liability company (GmbH) or asset deals involving the transfer of real estate. If notarisation is required, this also applies to all ancillary agreements concluded in close connection with the notarised transaction. Thus, related agreements such as side letters of any kind, employment agreements, distribution agreements and loan agreements must also be notarised. The importance of this aspect is often underestimated. If formal requirements are not satisfied, the entire deal – and not just the ancillary agreements – may be void.
Notarisation requires that a German lawyer duly admitted to practice as a notary reads the entire agreement aloud in front of the parties or their proxies. Generally, all exhibits and ancillary documents must also be read aloud, although exceptions apply. The cost of a German notary depends on the value of the transaction, and may be significant. For instance, in case of a purchase price of EUR 60 million, the notary fees may exceed EUR 50,000. German M&A deals are often notarised in Switzerland. Over the last couple of years there has been some uncertainty as to whether notarisations carried out in Switzerland are legally effective. In December 2013, however, the German Federal Supreme Court ruled that German M&A deals may be validly notarised in Switzerland. We can therefore expect to see an increasing number of German deals being notarised in Switzerland.
5. Legal Culture
Germany is a civil law country, which impacts deal-doing there. In common law countries it is best practice to set out expressly the terms governing a transaction in the sale agreement, as it is believed that express contractual arrangements provide better protection and greater legal certainty for a buyer. In contrast, documentation in Germany tends to be far less extensive. It will be based on, and incorporate without explicit reference, existing statutory rules. German shareholders wishing to sell their holdings will often find it hard to understand the necessity for express contractual provisions which cover all matters and can lengthen the sale agreement significantly. Nevertheless, an increasing number of German lawyers are familiar with common law concepts and international contractual standards. Many have obtained a postgraduate master’s degree (LL.M.) from a law school in the USA or another common law country. Managing and ultimately matching the expectations of international investors and German shareholders is often the major challenge facing advisors on a deal.
Obviously, cultural gaps between Germans and investors from the Far East may be even larger. Established negotiation patterns in Asian countries often differ from the rather streamlined processes in Germany, where milestones and deadlines are clearly defined. While countries like Japan have long years of experience with professional M&A processes, for Chinese investors these processes are rather new. Some German law firms with strong ties to China close these cultural gaps by hiring Chinese lawyers, often double-qualified both in China and in Germany.