It is usual for a total price to be negotiated when a company is purchased. In many cases, this purchase price is only provisional, however, as it cannot be finally and conclusively specified until the books of account have been examined in detail after the transfer date. A so-called variable purchase price of this nature requires clear and precise rulings if a dispute on the specification of the final purchase price is to be avoided at a later date.

A variable purchase price is normally agreed if the valuation is to be made by a an expert appointed by both or one of the parties or if a division of a company is sold which had previously not prepared independent financial statements. In the latter case, the purchase price can only be reliably determined to a very large extent by taking account of hidden reserves and intangible assets such as goodwill. This purchase price is then increased by the book value resulting from the closing financial statements (equity capital at book value) or less any negative book value. The final purchase price is then determined by a settlement balance sheet to be prepared as of the transfer date.

If no agreement is reached by the parties on the purchase price, it is sensible to specify in the contract that the final purchase price will be determined by the neutral third party. Such third party can be an accountant who enjoys the trust of both parties or one who is appointed by responsible Chamber of Industry and Commerce or the Institute of Public Accountants in D=FCsseldorf at the request of one of the parties. If no such agreement is made and if the parties disagree on the purchase price, the only possibility is for the purchase price to be fixed by the creditor, i.e. the seller, at his/its reasonable discretion in accordance with =A7 316 of the German Civil Code (BGB), or by a court ruling.

It should, however, always be clarified whether the third party appointed to determine the purchase price is acting as an expert, an arbitration expert or an arbitration judge. If the third party is acting for one party, his findings are not binding on the other party. If the third party is acting as an arbitration expert, however, an appeal against an apparent inequity of his finding is possible within the scope of =A7 319, para. 1, clause 1. If he makes a ruling as an arbitration judge, however, his findings can only be challenged if the arbitration proceedings were subject to material procedural errors, e.g. the lack of a legal hearing for one of the contracting parties in accordance with =A7 1041 of the German Code of Civil Procedure (ZPO).

Amount of the purchase price may also be influenced by the substance of the contract. Risks and obligations are taken into account which the buyer assumes from the seller in accordance with the contract. The current liability situation and agreements on warranty claims may also be influencing factors as far as the price is concerned. A higher purchase price is fixed if the seller has made extensive warranty promises and bears the full warranty risk; a lower price is agreed if a warranty exclusion is agreed in favour of the seller or if substantial risks remain with the buyer.

Companies in a crisis situation are often purchased for a symbolical price of one Mark if the buyer indemnifies the seller in respect of existing or pending liabilities or other losses. The purchase price may well even be negative with a certain level of liabilities and losses, i.e. the seller is obliged to pay a fixed amount to the buyer for taking the company over.

Problems may arise from a civil-law point of view on account of the warranty claims of the buyer if a breakdown of the purchase price is required for taxation purposes. The company's tangible and intangible assets in their totality and functional allocation determine its profitability on which the purchase price is based. Individual valuations of the assets with a corresponding breakdown of the purchase price are therefore not clear indicators of their functional value with regard to the profitability of the company. This can be demonstrated by the example of an industrial property right. If such a right lapses, the resulting reduction in value is normally much higher than the isolated value of the industrial property right itself. A loss may be incurred if a particular fact or circumstance makes an asset valueless for the company without reducing the market value of the asset itself. This can be the case, for example, if an industrial property rights cannot be used because scheduled production has to be discontinued or could not be commenced due to the shortage of raw materials or because of official obligations imposed.

If the buyer is entitled to a reduction in the purchase price based on the settlement balance sheet or warranty claims, the question is raised with regard to whether such a reduction should also affect those purchase price components relating to assets with a value which has not been impaired. On account of this problem area, it is recommended that a summary should be included in the contract showing the specified minimum values of the individual assets taken into account in the sale price instead of a detailed purchase price allocation.

There are several models for handling purchase price payments. The purchase price is normally paid in instalments. In other cases, life annuities or similar external pensions are agreed which are sometimes combined with consultancy agreements with the withdrawing proprietor. The parties are basically free to select the manner in which the purchase price is paid. What type of purchase price settlement is the most appropriate especially from a taxation point of view should therefore be examined in each individual case. If no agreement is made on the settlement of the purchase price something which is not advisable in actual practice =A7 271 of the German Civil Code (BGB) will apply in cases of doubt; this regulation specifies that the purchase price is payable in full when the contract is signed. The buyer is only able to refuse payment of the purchase price if the seller has failed to discharge his/its obligations and if the company is not transferred to the buyer in the agreed form.

If an agreement was reached by the parties on the settlement of the purchase price, however, and if the purchase price wholly or partially prolonged in favour of the buyer or paid instalments or in the form of pension benefits, the buyer should anticipate that the seller will require the inclusion of a stable value clause or at least an escalation clause in the contract. A stable value clause, which is only possible with a claim maturity in excess of 10 years, has to be approved by the German Bundesbank. Instead of the stable value clause requiring formal approval, an adjustment or tension clause may be agreed with claim maturities of less than 10 years. They commit both contracting parties to negotiate the instalment or pension adjustment in the event of a change in financial circumstances and to appoint an arbitration expert if no agreement can be reached on the amount. The stable value clause can also be achieved by agreeing an interest rate aligned with that of the German Bundesbank.

It is normally in the interests of the parties that the purchase price should be secured in some way. Possibilities in this case are all in rem securities such as mortgages and land charges if the company being sold is the owner of land or buildings. Ownership by way of security or the transfer of expectancy rights to the buyer are additional forms of substantive security; a guarantee or group guarantee should be considered as a contractual means of providing security if the buyer of seller forms part of a group organisation. Another form of security is a deposit of the purchase price on an escrow account. In this case, the notary is normally authorised to remit the purchase price to the seller in full or in part only when the contractual obligation of the seller have discharged to the satisfaction of the notary.

Bank guarantees are the commonest form of security in actual practice in order to secure both the purchase price instalment for the seller and, vice-versa, to secure any priced reduction, compensation or repayment claims of the buyer. If recourse is had to a bank guarantee as a form of security, it should be contractually agreed that both parties are obliged to provide reciprocal bank guarantees. The buyer will normally arrange for a bank guarantee to be provided by the seller if a high down-payment has been made or if the purchase price has not yet been finally and conclusively agreed and a possible overpayment is therefore out of the question upon a later review. Exclusions of contractual offsetting and retentions against his/its warranty or repayment claims are more acceptable for a buyer provided with security in this way. In order to avoid drawn-out preliminary proceedings, it is advisable to provide absolute guarantees which include the waiver by the guarantor of the defence of failure to pursue remedies, defence of contestation and defence of set-off.

Attention is to be paid to the following matters if the purchase price is to be paid in instalments. In view of the fact that the balance of the purchase price to the seller is reduced with each instalment payment, a reduction in the guarantee amount should be agreed from the very beginning on order to keep guarantee costs as low as possible. In this case, the liable party is entitled to demand the return of the higher guarantee amount concurrently with the submission of a lower guarantee when the next stage has been reached. If a limited guarantee is involved, it is sufficient in the event of a guarantee event if the notification by the creditor that a claim is being made on the guarantee is received by the guarantor on the last date of the time limit. Even if the main liability occurs at the end of the guarantee period, notification by the creditor within the specified time limit that he/it is intending to make claims on the absolute guarantees is basically sufficient to maintain his/its rights under the guarantee.

The statute of limitation rulings should also be observed as far as the purchase price claim is concerned. Under =A7 196, para. 1, no. 1 of the German Civil Code (BGB), purchase price claims for the delivery "of goods" are statute-barred after 2 years and after 4 years if services were rendered for the trading operations of the liable party. This reference to goods does not include land and buildings. debtors, rights and also securities. A company is also not regarded as a goods item within the meaning of this regulation. For this reason, the shorter limitation period only applies if a separate purchase price has been agreed by the parties for individual moveable assets to be transferred to the buyer. If a total purchase price was agreed for the company, or if land and buildings are to be transferred with the sale of a company, the purchase price claim in this respect is only statute-barred after 30 years in accordance with the standard limitation period of =A7 195 of the German Civil Code (BGB). The same also applies to the sale of a company in the form of a share deal.

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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