Germany: The Purchase and Sale of Companies in Germany - 4.2.4 Purchase Contract - The Pu

Last Updated: 4 December 1997
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.

You may also wish to read through related Wessing Berenberg-Gossler Zimmermann Lange. You can view the entire archive via the Internet on Business Monitor Online (http://www.businessmonitor.co.uk), or via your online provider by entering "Wessing Berenberg-Gossler Zimmermann Lange" and "Business Monitor" as a free text search.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions