The Art of the German M&A-Deal
- the haptic investor
- 2. Aug. 2024
- 7 Min. Lesezeit
Aktualisiert: 29. Sept.
Why company takeovers in Germany can be more complex than many people think and what German law has to do with it.
The peculiarities of German civil and property law make transactions much more complex in international comparison than many would expect.
The term "company" is not defined in German law. It is generally agreed that an enterprise is to be understood as a totality of objects and rights, tangible and intangible legal assets and goodwill that serve a specific business purpose. The legal entity of a company must be distinguished from the company. The rights, obligations and assets embodied in the company are assigned to an owner, i.e. the legal entity (e.g. a GmbH or AG).
Accordingly, a company acquisition can take place in two forms: Purchase of the legal entity by way of a share purchase (share deal, e.g. purchase of GmbH shares) or purchase of the assets belonging to the legal entity by way of acquisition of all or certain assets (asset deal, e.g. purchase of production facilities).
Purchase of company shares or purchase of individual assets
In a share deal, the buyer acquires the company ("target company") by purchasing the shares in the target company.
In an asset deal, the assets and business assets belonging to the company, i.e. the assets and liabilities, together with the associated employment, contractual and legal relationships, are sold and transferred to the buyer by way of singular succession. It is not the shareholder who sells his company shares or assets, but the company sells its company-related assets.
As the acquisition of the target company in a share deal is achieved by ultimately only changing the owner of the target company, but the target company remains unaffected in its composition of assets and liabilities, the share deal is generally simpler than an asset deal in terms of the transfer.
In an asset deal, on the other hand, individual assets are sold by the company. The principle of certainty (Bestimmtheitsgrundsatz) must be observed here:
All assets that are to be sold and all liabilities that are to be assumed must be recorded individually and in sufficient detail and transferred to the buyer in accordance with the relevant regulations. Determinability often causes problems when transferring intangible assets, in particular industrial property rights, goodwill and know-how, as it can be difficult to identify and describe the intangible assets specifically enough to be able to transfer them.
It should also be noted that the consent of the respective contractual partner is required for the transfer of contracts to the buyer, but this often cannot be obtained before a purchase agreement is signed for reasons of confidentiality. If the respective contractual partners do not agree, the contracts are not transferred to the buyer and remain with the company, which may no longer be able to fulfill its obligations due to a lack of employees. This does not apply to the employment relationships attributable to the business operations to be acquired. These are transferred to the buyer by law, although the employees are entitled to object in the event of an asset deal.
Differences in liability between a share deal and an asset deal
In view of the fact that in a share deal only the owner of the shares in the target company is changed, the share deal has no effect on the liabilities and obligations established in the company. A buyer acquires the company with all assets and liabilities and thus also with all contingent liabilities attributable to the company. If the acquired target company is experiencing economic difficulties or is even on the verge of insolvency, this may be an argument against a share deal.
The liability situation can be completely different in an asset deal. From a legal point of view, a buyer can in principle choose what he wants to acquire. In particular, he can refrain from taking over receivables and already established liabilities and other contingent liabilities so that they remain with the selling company. However, there are limits to this, including the fact that:
an asset deal may be subject to challenge by an insolvency administrator if the company has to file for insolvency with regard to the remaining liabilities;
the employment relationships are transferred to the acquirer by operation of law and it is therefore often problematic to leave all or part of the employment relationships with the selling company;
the acquirer is liable for tax liabilities incurred by the selling company up to the time of acquisition of the assets in accordance with § 75 AO with the acquired assets;
it must be ensured from a tax point of view, particularly on the part of the seller, that the business is sold in its entirety or at least a part of it.
Formal requirements to be observed
The transfer of shares in a limited liability company requires notarization. The sale of shares is generally form-free. However, there may be situations in which notarization may be necessary, e.g. for resolutions. The sale of shares in a partnership is also form-free, provided that in the case of a GmbH & Co. KG the shares in the general partner company are not sold at the same time.
The sale of assets is generally form-free, unless real estate is also sold. In this case, the entire asset deal agreement must be notarized. Irrespective of this, it should be remembered once again that the consent of each individual contracting party must be obtained when transferring contracts.
Tax considerations
The sale of shares in a corporation (in particular GmbH and AG) is subject to different tax rules than an asset deal, whereby the sale of shares in partnerships - with the exception of special situations - is generally treated in the same way as an asset deal for tax purposes. It should be noted that the acquisition of a company in the form of an asset deal can be more interesting for a buyer than the acquisition of shares in a corporation and vice versa. Ultimately, however, the tax issues are always a question of the individual case, which must be examined in detail and require an agreement between the parties.
When is it a share deal and when is it an asset deal?
The acquisition of a company in the form of an asset deal has certain advantages over a share deal, but also disadvantages. The principle of certainty (Bestimmtheitsgrundsatz) and, above all, the transfer of existing contracts, for which the consent of each individual contractual partner is required, can make an asset deal a complicated and time-consuming process.
In contrast, the asset deal offers the great advantage that the buyer knows exactly what he is buying and that the history and risks of a company can be cut off with an asset deal. With a share deal, the buyer purchases a company with all - even unknown - liabilities and liability risks. In an asset deal, on the other hand, the buyer acquires certain assets, certain liabilities for which the law provides for an automatic transfer, but generally not all liabilities.
Generally speaking, and subject to an examination of the individual case, an asset deal can be considered in the following cases in particular:
the company is only selling a part of the business and transformation processes are out of the question;
the company has risks from the past and the acquirer is not prepared to assume the risks, even if they are included in the purchase price;
the company is at risk of insolvency, but it must be ensured that a subsequent insolvency does not affect the asset deal and can be contested by the subsequent insolvency administrator;
acquisition from the insolvency administrator from the insolvency proceedings already opened over the company's assets;
the seller of shares cannot fully prove the chain of ownership in the shares he wishes to sell since the foundation of the target company;
for tax considerations.
Due diligence:
In corporate transactions, it is standard practice for the potential acquirer to carry out due diligence on the company to be acquired or have it carried out by external consultants. The aim of due diligence is to regularly examine the opportunities and risks associated with the acquisition of the target company and how they affect the transaction structure, the purchase agreement and the purchase price. For example, the originally planned transaction structure may be changed as a result of the findings of the due diligence and the acquisition may take the form of an asset deal rather than a share deal, or vice versa.
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This article is for informational purposes only and does not claim to be legally complete. Furthermore, this article does not constitute investment advice or a call to buy German companies or parts of companies.
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