In addition to =A7 25 of the German Civil Code referred to above, there are other regulations in German law which cause obligations to be transferred to the buyer by force of law in the event of a company sale and purchase. Reference is made to =A7 613a of the German Civil Code with regard to industrial law. Under =A7 613a of the German Civil Code, employment contracts connected with a company or part of a company are transferred to the buyer in the event of sale. In view of the fact that it can be difficult to determine exactly what is meant by a company or part of a company within the meaning of =A7 613a of the German Civil Code in certain cases, this is to be determined in accordance with the protective purpose of =A7 613a of the German Civil Code. For example, the transfer of a company or part of a company may apply even if all the assets concerned are not transferred to the buyer but, on the other hand, it does not automatically have to apply if only individual assets are transferred. Based on the jurisdiction of the Federal Labour Court, the supreme instance in Germany in industrial law matters, the major definition criterion is whether the factual and intangible basis for the use of the labour of the employees concerned are transferred to the buyer. These bases may well be transferred to the buyer with technical and commercial know-how, the market position of the company, current delivery agreements or customer orders, etc.

For the application of =A7 613a of the German Civil Code, it is irrelevant whether the company's previous identity is maintained or not after the date of transfer. Consequently, the purchase of a company or part of a company for the purpose of closure does not exempt the buyer from the obligation arising from =A7 613a of the German Civil Code. This is not the case with a company sale after its closure, however. =A7 613a of the German Civil Code does not apply in this case if the seller had discontinued the business for an indefinite or not insignificant period of time prior to the sale.

With the transfer of employment contracts in accordance with =A7 613a of the German Civil Code, all the related rights and obligations of the employer are basically transferred to the buyer. However, this does not apply in the case of rights and obligations arising from employment contracts which have already been terminated in the transition period. Obligations and commitments for lapsed pension expectancies or for existing pension entitlements of employees who had already left the company on the transfer date remain exclusively with the seller therefore. The previous owner and the new owner are, however, liable as joint and several debtors for obligations and commitments established before the transfer date and not later than one year after the transfer date. Those obligations and commitments arising from pension promises made by the seller to employees working in the company on the transfer date pass exclusively to the buyer.

Despite the ruling included under =A7 613a of the German Civil Code, the transfer of employment contracts does not apply if employees reject the transfer in question.

=A7 613a of the German Civil Code also plays a critical part as far as the termination of employment contracts are concerned after the transfer of the company. Terminations of employment contracts by the previous or new employer based on the company transfer are invalid. Such terminations are only valid if they are justified for another factual reason with the result that the transfer of the company was only the outward reason but not the main reason for the employment contract terminations. Based on the aforesaid, terminations by virtue of a transfer of the company may be justified as operationally essential if the financial or structural situation of the company prior to the date of sale would have necessitated rationalisation measures in the form of discarding manpower or reducing personnel costs.

In addition to the aforesaid employment law regulation, the above-mentioned =A7 419 of the German Civil Code also constitutes special commitments for the seller and/or the buyer by force of law. According to this law, a statutory transfer of liability passes to the buyer regardless of any agreement which may have been made between the buyer and seller if the company which has been sold represents the total assets of the seller, or a significant part thereof. This only involves assets which are subject to enforcement. Consequently, =A7 419 of the German Civil Code does not apply if the owner of a company which represents his/its total estate only transfers the name, goodwill and customers of the company but retains its fixed assets and inventories. Jurisdiction has not yet conclusively specified what percentage of the seller's total estate has to be sold for =A7 419 of the German Civil Code to apply. An asset transfer within the meaning of =A7 419 of the German Civil Code should be excluded if approximately 15 20 % of the assets are retained. The application of this regulation is not invalidated by the fact that the seller receives the purchase price and that the position of his/its estate is re-established to this extent.

=A7 75 of the German Tax Code ("AO") can be extremely important from a taxation point of view. Under =A7 75 of the German Tax Code, the buyer of a company is liable for all corporate taxes and tax deductions arising since the beginning of the calendar year preceding the transfer. =A7 75 of the German Tax Code is based on the philosophy that the party who acquires the economic benefit as a result of the take-over of the company should also take over taxation liabilities which would not be settled otherwise.

For further information please contact Dr Erich Michel, Wessing Berenberg-Gossler Zimmermann Lange, Freiherr-Vom-Stein-Strasse 24-26, Frankfurt am Maim 60323, Frankfurt, Germany- Tel: +496 997 1300, Fax: +496 997 130100.

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