Germany: Mergers & Acquisitions Comparative Guide

1 Deal structure

1.1 How are private and public M&A transactions typically structured in your jurisdiction?

In Germany, private M&A transactions are structured either as:

• a two-party transaction, combined with signing and/or negotiation exclusivity; or
• a limited or open auction process.

Private M&A transactions sometimes take the form of asset and share deals.

For public M&A deals, more limited and quicker processes are usually adopted. Asset deals are not common in public M&A transactions. Moreover, additional rules apply for public M&A deals, such as insider trading rules and ad hoc publication requirements.

In addition, some types of deals simply are not possible for certain companies – for example:

• a public company cannot conduct an initial public offering; and
• a private company cannot be the target of a public offering or a hostile takeover.

1.2 What are the key differences and potential advantages and disadvantages of the various structures?

The main advantage of an auction sale is the increased level of competition between the buyers. This may lead to an increased purchase price and conditions that are more favourable for the seller in the sale and purchase agreement. The seller can also prove to its stakeholders or other owners that it has received the best purchase conditions after a fair market test. It is also easier to introduce specific timelines and procedural rules for the entire M&A process in an auction. Such procedural rules may help to keep the bidders on track and may lead to a quicker, more organised process.

An auction requires detailed preparation and should be handled by people with experience of such processes. For example, the sell side may need more than one team for parallel negotiations. Moreover, the organisation of site visits, management presentations and Q&A processes with different bidders is complex. Therefore, for smaller transactions, the effort involved in an auction sale is usually too great to pay off.

It is also possible or likely that even in a limited auction sale, and despite confidentiality undertakings, it may become known in the market that the target is for sale. Therefore, if the seller would like to keep the sale process strictly confidential, a process with a limited number of bidders or even a two-party process is often the preferred choice. Moreover, the complexity of the transaction process is limited if just one other party is involved.

1.3 What factors commonly influence the choice of sale process/transaction structure?

One of the main factors that influence the choice of sales process is the parties which are involved as seller and potential buyer. An inexperienced seller (eg, the owner of a family business) will often prefer a strictly confidential, straightforward two-party process. By contrast, a private equity fund is in most cases forced to use an auction process to sell the target in order to prove to its owners/limited partners that a market test has been conducted.

Another factor is the attractiveness of the target. If the target might attract a number of potential bidders, an auction sale might be the best option. In distressed situations or in case of a fire sale, a quicker, less complex process with just one buyer is usually the preferred structure.

If the target and the potential buyer already have a relationship – for example, as supplier/customer, cooperation partners or competitors – the parties tend to leverage the benefits of that relationship and an exclusive two-party process is often chosen.

Finally, the size of the transaction is also a factor. An auction sale is usually reserved for mid-cap and larger transactions.

2 Initial steps

2.1 What documents are typically entered into during the initial preparatory stage of an M&A transaction?

As a first step, the parties to the transaction usually enter into a mutual confidentiality agreement; in some cases, the target will also be a party to the confidentiality agreement.

If just two parties are involved in the transaction, the parties (usually) draw up a document outlining the key issues of the transaction, such as the purchase price, structure, timeline and crucial signing and closing conditions. This document can take the form of:

• a letter (ie, a letter of intent);
• a short agreement (ie, a memorandum of understanding); or
• a list of terms in bullet-point form (ie, a term sheet).

One peculiarity of German law is that the sale and transfer of shares in a German limited liability company (GmbH) (the most common company form in Germany) requires a notarised agreement. This notarisation requirement also applies to any kind of pre-agreement or option. Thus, if the shares of a GmbH are affected, a letter of intent and other documents as outlined above are binding only if they have been notarised. As notarisation is rather costly, the main provisions of those initial documents dealing with the sale and transfer of the shares are usually non-binding. Only limited ancillary provisions dealing with confidentiality, exclusivity, governing law and place of jurisdiction are binding on the parties.

If the transaction is organised in the form of an auction, procedural letters structuring the auction are issued by the seller side; the M&A adviser or legal counsel usually takes care of this.

2.2 Are break fees permitted in your jurisdiction (by a buyer and/or the target)? If so, under what conditions will they generally be payable? What restrictions and other considerations should be addressed in formulating break fees?

In general, break fees are permitted under German law. These can take the form of either liquidated damages or contractual penalty. The target is usually not the addressee or recipient of the break fee, as the target is not a party to the letter of intent or similar initial agreement (although it might be subject to a contractual penalty according to a confidentiality agreement). The amount of the break fee is usually linked to the potential cost risk, but not to any benefits of a successful transaction. A break fee can be agreed if one party discontinues the transaction process or breaches an exclusivity provision.

If the amount of the break fee is unreasonably high, a court may reduce the break fee to a reasonable amount or declare the break fee inadmissible. Moreover, if the break fee is such that a party is more or less forced to finalise the transaction, this provision will be deemed to be similar to a sale or purchase option which, where the shares of a German GmbH are affected, will require notarisation in order to be valid.

2.3 What are the most commonly used methods of financing transactions in your jurisdiction (debt/equity)?

When out-financing their acquisitions, German companies prefer to use debt instruments rather than equity instruments. The most popular of these is the corporate bond. This capital market product is particularly popular for larger acquisitions. In second place is the syndicated loan. In smaller transactions, promissory bills are used as financing instruments.

In contrast to bonds, loans and the like, companies rarely use equity measures for transaction financing. However, as banks have become increasingly reluctant to finance M&A transactions, buyers are now turning to equity instruments to finance transactions.

2.4 Which advisers and stakeholders should be involved in the initial preparatory stage of a transaction?

On the buyer's side, legal counsel with experience in M&A matters and tax counsel for tax planning and structuring the transaction should be involved, in addition to the responsible owners/executives of the buyer.

On the seller's side, this will depend on the kind of transaction. In a straightforward transaction with just one buyer, experienced legal counsel and a tax adviser to assist in structuring the transaction will suffice as advisers. If the target is sold in an auction, either legal counsel with experience in auctions or an M&A adviser is recommended. In particular, an M&A adviser with knowledge of the market in which the target is active is required, in order to identify potential buyers for the target.

If specific issues have already been identified, additional experts should be introduced at an early stage to address potential deal breakers at an early stage (eg, environmental experts or experts for distressed M&A).

If competitors with significant market shares are involved as seller and buyer, antitrust counsel should:

• provide guidelines from the beginning as to which and when sensitive information can be exchanged (ie, introduction of clean teams); and
• clarify, before starting detailed due diligence, whether merger control clearance can be obtained from the competent competition authorities.

2.5 Can the target in a private M&A transaction pay adviser costs or is this limited by rules against financial assistance or similar?

The purchase agreement usually contains a guarantee that the target will not pay costs of any advisers for the M&A transaction. If the target is a German stock corporation, it is not legally possible for it to cover advisers' costs for and on behalf of the stockholders.

If the target is a German GmbH, the situation is different. It is legally possible for the target to take over the advisers' costs on the shareholder(s)' behalf, but this might have detrimental tax consequences.

3 Due diligence

3.1 Are there any jurisdiction-specific points relating to the following aspects of the target that a buyer should consider when conducting due diligence on the target? (a) Commercial/corporate, (b) Financial, (c) Litigation, (d) Tax, (e) Employment, (f) Intellectual property and IT, (g) Data protection, (h) Cybersecurity and (i) Real estate.

(a) Commercial/corporate

For German limited liability companies (GmbH), a list of shareholders is registered in the Commercial Register which facilitates and simplifies the chain of title due diligence.

(b) Financial

Under German law, the publication of financial statements is mandatory for most companies. This means that historic balance sheets can be reviewed even before the seller side starts to disclose documents.

(c) Litigation

If the target is involved in civil litigation, one should also review and take into consideration the general principle of German civil law that the unsuccessful party in a lawsuit must reimburse the legal fees of the winning party.

(d) Tax

Tax due diligence is usually conducted by a German qualified tax adviser in close cooperation with the legal counsel. It is important to check when the last tax audit took place and for which tax periods, as the tax declarations for these periods are final and binding (in general), and only the remaining tax periods are still open for the reassessment of tax statements.

(e) Employment

Some targets are member of an employers' association, which means that sector-specific wage agreements and their conditions apply on top of the provisions in individual employment contracts.

(f) Intellectual property

A review of the relevant IP registers is mandatory (eg, trademark, design rights, patents), as is usual for transactions in other jurisdictions.

(g) Data protection

Compliance with the data protection rules has become increasingly important, as the government authorities have stepped up their investigations and more and higher fines are now imposed on infringing companies.

(h) Cybersecurity and IT

There is a trend to engage IT specialists to conduct IT and cybersecurity due diligence. The scope of this due diligence ranges from checks as to whether the IT systems of the target are free of any viruses to review of compliance with open source licences.

(i) Real estate

Ownership of real estate and encumbrances of real estate are registered in the land charge registers. Therefore, a review of excerpts from the relevant land charge registers is mandatory if the target owns real estate.

3.2 What public searches are commonly conducted as part of due diligence in your jurisdiction?

For corporate due diligence, a review of the Commercial Register files of the target is mandatory. Each lawyer in Germany has electronic access to such files. If the target owns real estate, a review of the competent land charge register (which is also electronic) is obligatory.

If the target has intellectual property, a review of the registers of the German Patent and Trademark Office (and comparable registers of foreign IP authorities) for patents, utility models, designs and trademarks should be conducted. Copyright is not registered in Germany. Public review of the ownership of domains both in Germany (www.denic.de) and internationally (www.whois.com) is now restricted, and a specific legal interest is required in order to request certain information.

With regard to competition law aspects, a search of the case database of the German Federal Cartel Office is recommended.

3.3 Is pre-sale vendor legal due diligence common in your jurisdiction? If so, do the relevant forms typically give reliance and with what liability cap?

Fully fledged pre-sale vendor legal diligence is not common in Germany. Pre-sale vendor legal due diligence and the provision of the vendor due diligence report to the bidder is more common in auction sales in Germany. However, even in auction sales, most transactions are conducted without pre-sale vendor due diligence.

If a pre-sale vendor due diligence report is prepared for an auction sale, this report will usually contain a reliance provision that allows the report to be made available to the bidders in a virtual data room. Whether the reliance letter includes an exclusion of liability or a liability cap will be subject to individual negotiations.

4 Regulatory framework

4.1 What kinds of (sector-specific and non-sector specific) regulatory approvals must be obtained before a transaction can close in your jurisdiction?

If the applicable turnover thresholds of the participating entities (ie, the combined turnover of all participating entities is more than €500 million worldwide; the turnover in Germany of one participating entity is more than €50 million; and the turnover in Germany of another participating entity is more than €17.5 million) are exceeded, a merger control proceeding with the Federal Cartel Office is mandatory. The transaction must not be closed prior to the expiry of the statutory waiting period (in most cases, one month) or the issue of an explicit clearance notification of the German Federal Cartel Office. The merger control clearance requirement applies to all sectors. If the turnovers of the participating entities exceed the higher EU thresholds, the European Commission will be responsible for merger control.

Direct and indirect investments of foreign investors above a threshold of 10% of the shares or voting rights in the target in specific industries are subject to mandatory foreign investment control by the Federal Ministry for Economic Affairs and Energy. Affected industries include:

• military goods;
• IT security;
• critical infrastructure such as energy, water, gas and telecommunications; and
• health.

Transactions in such industries must not be closed prior to the expiry of a two-month waiting period or the issue of an explicit clearance notification by the ministry. The legal rules covering foreign investments have recently (May 2021) significantly tightened and the list of affected industries has been expanded.

Investments in real estate companies may trigger pre-emptive rights of local municipalities.

4.2 Which bodies are responsible for supervising M&A activity in your jurisdiction? What powers do they have?

The Federal Cartel Office is responsible for reviewing compliance with the merger control rules. The Federal Cartel Office has the power to issue significant fines (up to 10% of the turnover of the infringing party), and may order the demerger of transactions that have already been executed. The Federal Cartel Office may conduct formal investigations, including formal questioning, dawn raids and seizure of documents. The European Commission will monitor transactions to which the EU merger control rules apply. The European Commission has similar powers to the Federal Cartel Office.

The Ministry for Economic Affairs and Energy monitors compliance with foreign investment control.

The Federal Financial Supervisory Authority (BaFin) is responsible for supervising transactions involving shares of public listed corporations – that is, ensuring compliance with rules such as:

• insider trading rules;
• ad hoc publication requirements;
• the rules on public takeovers.

BaFin has strong investigation powers and may act in concert with local prosecutors to:

• investigate companies;
• question witnesses;
• seize documents; and
• open formal investigations that may lead to the imposition of fines on infringing companies and criminal charges of involved persons.

BaFin is also responsible for reviewing whether certain private equity or venture capital funds are organised appropriately and observe the applicable statutory rules.

4.3 What transfer taxes apply and who typically bears them?

Real estate transfer tax applies to:

• the sale and transfer of real estate; and
• the sale and transfer of more than 95% of the shares of a company that directly or indirectly owns real estate.

In most cases the buyer bears the real estate transfer tax. The real estate tax rate is calculated as a percentage of the purchase price of or allocated to the real estate, and varies depending on the federal state in which the real estate is located (currently between 3.5% and 6.5%).

5 Treatment of seller liability

5.1 What are customary representations and warranties? What are the consequences of breaching them?

Customary representations and warranties of a seller issued in a transaction governed by German law include, in particular:

• title guarantee;
• good standing of the target;
• no insolvency;
• (hard) balance-sheet guarantee;
• IP rights (if applicable to the target business);
• material contracts;
• employment matters;
• absence of litigation;
• compliance with statutory rules (including competition and anti-bribery rules);
• compliance with data protection rules; and
• IT-related guarantees.

In case of breach, the seller has the right to put the target or the buyer in the position it would have been in without the breach (natural restitution). If this fails within a certain period (eg, one month), the buyer may claim for damages. The kinds of damages which are excluded are typically subject to intense negotiations. The sell side usually tries to exclude indirect or consequential damages, lost profits and internal expenses. There is no common practice in Germany regarding these topics, which are rather subject to individual negotiations. However, it is common that the buyer cannot claim that:

• the purchase price was calculated based on incorrect assumptions; or
• any claims for damages were calculated on a basis of multiples.

In the event of a breach of a balance-sheet guarantee, it is advisable for the seller to include a provision that the seller is obliged to compensate only the difference between the incorrect or missing balance-sheet item and the applicable balance-sheet rules (euro for euro) (balance-sheet replenishment).

5.2 Limitations to liabilities under transaction documents (including for representations, warranties and specific indemnities) which typically apply to M&A transactions in your jurisdiction?

The buyer's right to claim for damages for breach of representations and warranties is typically excluded if the underlying facts were known to the buyer – for example, because they were disclosed in the data room. If the buyer seeks protection for a (potential) case which was disclosed during the due diligence, a specific indemnity (irrespective of the knowledge) can be agreed between the parties. Typically, such indemnifications do not fall within the overall liability cap and either they are uncapped or a specific liability cap applies.

De minimis and basket provisions can be found in (nearly) every M&A transaction, which means that claims of the buyer resulting from breach of the seller's guarantees will be excluded unless:

• each individual claim exceeds a certain amount (de minimis); and
• the total amount of all individual claims exceeding the de minimis exceeds a basket amount.

For breach of the seller's representations and warranties, or for any claims that the buyer may have against the seller, a liability cap is agreed in most transactions. The liability cap lies in a range between 5% (extremely seller friendly) and 50% of the purchase price. The liability cap usually does not apply to fundamental guarantees, such as title to the shares, taxes, specific indemnities and other fundamental guarantees relevant to the target (eg, intellectual property or environmental); these are capped either at a different and higher cap or at the purchase price. The liability cap does by mandatory law not apply in case of fraud or wilful misconduct.

5.3 What are the trends observed in respect of buyers seeking to obtain warranty and indemnity insurance in your jurisdiction?

In Germany, most M&A transactions are conducted without warranty and indemnity (W&I) insurance. However, in large cap and mid-cap transactions, the use of W&I insurance is becoming increasingly common, especially where private equity funds are acting on the sell side.

5.4 What is the usual approach taken in your jurisdiction to ensure that a seller has sufficient substance to meet any claims by a buyer?

In German M&A transactions, there are typically three ways to ensure that the seller has sufficient funds after the transaction to compensate the buyer for any claims arising from the transaction. First, the buyer may withhold a certain portion of the purchase price and release it to the seller after claims for breach of the representations and warranties become time barred or gradually release it during the limitation period. The benefit of this solution is that no additional costs apply and it is rather easy to administer. As alternative solution, the parties may put part of the purchase price into an escrow account. In addition to financial institutions acting as escrow agent, the parties often use notaries public as escrow agents. The fees of notaries public are calculated pursuant to a mandatory fee scheme; and notaries public who are experienced with escrow accounts are usually more flexible than professional escrow agents. The third solution is that the seller hands over a bank guarantee over a certain amount of the purchase price to the buyer concurrently with paying the purchase price. The bank guarantee must be returned to the seller once the agreed period has elapsed without any claims of the buyer.

5.5 Do sellers in your jurisdiction often give restrictive covenants in sale and purchase agreements? What timeframes are generally thought to be enforceable?

It is very common for (non-private equity) sellers to give non-compete and non-solicitation covenants. Such restrictive covenants must be limited in scope, time and geographical reach to be enforceable under German law. The scope and geographical reach should be equal to the scope and territory within which the target is active at closing. The time limitation must not exceed three years, according to German case law.

5.6 Where there is a gap between signing and closing, is it common to have conditions to closing, such as no material adverse change (MAC) and bring-down of warranties?

If merger control or foreign investment control is applicable, the timeframe between signing and closing is one to two months. MAC clauses and/or bring-down of warranties are not found in all German transactions; in fact, a bring-down of warranties is rare. Usually in German transactions, the seller's representation and warranties are given both as of the signing date and as of the closing date (at least for some material representations or warranties). In addition, a MAC clause is found in only approximately half of all German transactions.

6 Deal process in a public M&A transaction

6.1 What is the typical timetable for an offer? What are the key milestones in this timetable?

The typical timetable for a public offer ranges from roughly 12 weeks to 20 weeks (without the prior internal process to prepare the public offer). Once the announcement to issue a public offer has been made, the statutory timetable kicks off. The statutory timetable sets specific deadlines for certain preparation and publication requirements, with the aim of ensuring a strictly regulated and limited transaction process.

The key milestones of a public offer in Germany are as follows:

• Step 1: Announcement of decision to issue a public offer.
• Step 2: Preparation and drafting of the offer document.
• Step 3:
• • Submission of offer document to the Federal Financial Supervisory Authority (BaFin);
    Review of the offer document by BaFin;
  • Approval by BaFin and publication of offer document; and
  • Submission of offer to target.
• Step 4: Acceptance period, including submission of reasoned opinion by management board and supervisory board of target.
• Step 5: Publication of preliminary offer result, followed (in some cases) by an extended acceptance period.
• Step 6: Publication of final offer result and closing.

6.2 Can a buyer build up a stake in the target before and/or during the transaction process? What disclosure obligations apply in this regard?

In general, stake building in the context of a public offer is possible under German law. The following topics must be considered during the stake-building process.

If the shares of the target are acquired via the stock exchange in the run-up to a public offer, the statutory notification requirements must be complied with. According to these requirements, in case of the acquisition of voting rights or financial instruments, public notifications must be made if certain thresholds are exceeded (eg, 3%, 5%, 10%, 15%, 20%, 25%, 30%, 50% and 75%). This takes into account the information needs of market participants. In addition, the decision of an offeror to make a public offer must be published without undue delay.

As a shareholding in the target of 30% or more will trigger a mandatory offer for all of the remaining shares of the target, the bidder must keep a close eye on the 30% threshold.

In practice, stake building prior to a public offer is limited by German merger control rules, as the acquisition of 25% of the shares or the acquisition of a significant competitive relevant influence on the target will trigger a merger control proceeding with the Federal Cartel Office and the merger control proceeding is published on the webpage of the Federal Cartel Office.

Stake building prior to a public offer also has an influence on the minimum consideration payable for the public offer. The minimum consideration offered in the public offer by the bidder must be at least equal to the highest price paid by the bidder for the purchase of any shares in the target within the six months prior to the publication date of the public offer.

During the stake-building process prior to a public offer, increased diligence is required to comply with statutory insider dealing obligations. Infringement of insider dealing provisions may have severe consequences (including criminal sanctions for the relevant individuals).

An alternative approach to stake building through the acquisition of shares is through agreements with existing shareholders to irrevocable undertakings (see question 6.9 below).

6.3 Are there provisions for the squeeze-out of any remaining minority shareholders (and the ability for minority shareholders to ‘sell out')? What kind of minority shareholders rights are typical in your jurisdiction?

German law provides three options for the squeeze-out of minority shareholders. The first is set out in the Securities Acquisition and Takeover Act: if one shareholder owns 95% or more of the voting rights of a public listed company after a public or a mandatory offer, it is entitled to request that the remaining shareholders transfer their shares to it. As consideration, the majority shareholder must offer the same consideration as for the public or mandatory offer. Even if the consideration paid for the public offer was not in cash (eg, exchange of other shares), the majority shareholder must offer to the minority shareholders consideration in cash as an alternative. If the provisions for a squeeze-out as described above are fulfilled, the minority shareholders have a put option to sell their shares to the majority shareholder within three months of the period for acceptance of the public or mandatory offer elapsing.

The second option for a squeeze-out under the Stock Corporation Law follows similar rules. The majority shareholder must hold at least 95% of the shares of the target. The adequate cash consideration to be offered to the minority shareholders is usually determined by an independent expert. The consideration is based on the value of the target and must not be less than the stock exchange price. In practice, lengthy proceedings regarding the correct cash consideration often take place.

A third squeeze-out option is available under the Transformation Act: in this case, the majority shareholder need own (just) 90% of the shares, but the squeeze-out is possible only combined with an up-stream merger of the target into the majority shareholder.

6.4 How does a bidder demonstrate that it has committed financing for the transaction?

According to mandatory German law, the bidder must ensure that it has sufficient available funds for complete performance of the public offer. If the consideration offered in the public offer consists of cash, an independent investment services provider licensed to do business in Germany (usually a bank) must confirm in writing that the bidder has undertaken sufficient measures to ensure that enough cash is available when the consideration is due. The investment services provider is liable for damages of a party that has accepted the public offer if the bidder is unable to pay the offered consideration in cash.

6.5 What threshold/level of acceptances is required to delist a company?

The reasons for delisting could include:

• a going-private after a (successful) takeover; or
• a desire to avoid the publication requirements of a public listed company.

German law provides for two ways to delist a company. The first is the automatic delisting of the company by the competent admission board of the stock exchange. The admission board will delist a company due to:

• the permanent discontinuation of stock exchange trading (this can be a consequence of a successful squeeze-out procedure if all shares are owned by one shareholder);
• the infringement of mandatory stock exchange rules; or
• the loss of the ability to trade on the stock exchange (eg, after a merger into another non-listed company or a change of company form).

The second is an application for delisting by the management board. If the shares of the company are not owned by a single shareholder and the majority shareholder acquired its shares by virtue of a public offer, the majority shareholder must issue and publish a delisting offer to the minority shareholders. The delisting offer can also be offered by a non-majority shareholder, provided that the delisting offer covers all shares of the company. For such delisting offer, the same statutory rules apply as for an ordinary public offer and the delisting offer must be without any conditions and in cash. As a rule, the consideration or settlement payment must correspond to at least the weighted average domestic stock market price over the last six months.

Only the management of a stock corporation can apply for a delisting. A resolution of the general meeting is generally not required. However, stock exchange rules can require a resolution of the general meeting to this effect. Therefore, the majority shareholder or sole shareholder cannot legally instruct the management to delist unless there is a domination agreement in place. Upon request of the management, the admission board of the stock exchange will delist the company. The Federal Financial Supervisory Authority will review whether the statutory requirements of a delisting process are fulfilled.

6.6 Is ‘bumpitrage' a common feature in public takeovers in your jurisdiction?

It is difficult to say whether bumpitrage is a common feature in public takeover procedures in Germany today. However, on occasion, opportunistic investors do avail of bumpitrage strategies with the aim of creating squeeze-out minorities, so that the investors can leverage their position to achieve better deal terms.

One way to deal with such strategies is through a transparent public takeover process which enables the bidder, the target and the other involved parties to recognise such strategies at an early stage and to develop adequate countermeasures.

6.7 Is there any minimum level of consideration that a buyer must pay on a takeover bid (eg, by reference to shares acquired in the market or to a volume-weighted average over a period of time)?

The consideration offered in the public offer must be at least equal to the price paid by the bidder (or persons acting in concert with the bidder) for the acquisition of shares in the target within the last six months prior to the date of publication of the public offer.

In addition to (or in combination with) the cash consideration, the bidder may offer shares admitted to trading on an organised market within the European Economic Area. If the shares offered in such an exchange offer do not meet this requirement, the bidder may nevertheless offer such shares, but only as an alternative to the cash consideration.

6.8 In public takeovers, to what extent are bidders permitted to invoke MAC conditions (whether target or market-related)?

In general, a public offer can be made subject to certain conditions. In case of a mandatory public offer, such conditions are restricted to regulatory approvals (eg, merger control or foreign investment control clearance). In case of voluntary takeover offers, it is admissible (and common) to have a minimum acceptance condition (eg, 50% or 75% of the voting rights). Moreover, a condition that a specific defined material adverse change has not occurred is legally possible, provided that such condition is not only at the discretion of the bidder and can be objectively ascertained.

6.9 Are shareholder irrevocable undertakings (to accept the takeover offer) customary in your jurisdiction?

An irrevocable undertaking by a shareholder to accept a formal takeover bid pursuant to the Securities Acquisition and Takeover Act for the shares it holds in a listed target is admissible. Such undertakings – known as ‘irrevocable undertakings' or ‘irrevocables' in Anglo-Saxon law – by which shareholders of the target commit to the bidder in advance of a takeover bid to accept it frequently play an important role in Germany in the preparation and implementation of public takeovers.

7 Hostile bids

7.1 Are hostile bids permitted in your jurisdiction in public M&A transactions? If so, how are they typically implemented?

Yes, hostile bids are permitted under German law. Depending on whether the management board and/or supervisory board of the target agrees to the public takeover by a bidder, one speaks of a ‘friendly' takeover or an ‘unfriendly' or ‘hostile' takeover. This becomes known at the latest after publication of an offer, because the management board and supervisory board of the target are obliged to issue a reasoned statement on the offer. Such reasoned statement also contains an assessment of whether the management board and the supervisory board agree to the public takeover or are more reserved about this attempt.

7.2 Must hostile bids be publicised?

For hostile bids, the same publication requirements apply as for friendly public offers. In both cases the decision to issue a public offer and the public offer itself must be published – irrespective of whether it is a friendly or hostile public offer. The publication requirements also apply if the investor acquires shares in the target exceeding the publication thresholds (eg, 3%, 5%, 10%, 15%, 20%, 25%, 30%, 50% and 75%).

Whether a public offer is qualified as hostile or friendly will depends on whether the supervisory board and the management board of the target approve or reject the offer. The statement of the supervisory board and the management board of the target must be published once the public offer has been published.

One difference between ‘publication' of a hostile offer and a friendly offer is that the management of the target may publish the hostile takeover attempt as part of a defence strategy at an early stage, to make the public takeover more difficult and potentially more expensive.

7.3 What defences are available to a target board against a hostile bid?

The management board and the supervisory board of a target approached by a public offer must issue an opinion on the offer and may express in such opinion that acceptance of the offer would not be in the best interests of the target.

As a rule, according to German law, once the (hostile) public offer has been announced, any actions of the management board that could frustrate the success of the offer are prohibited. Despite this general legal rule, and in compliance with statutory German stock corporation law, a few defence measures are typically used in practice – in particular

• searching for a ‘white knight' (competing bidder);
• increasing the voting rights of ‘friendly' shareholders through the acquisition of free float shares or treasury stock;
• making the public offer more expensive by increasing the share capital using authorised capital;
• making the target less attractive by selling valuable assets; and
• engaging in ‘soft' tactics, such as refusing talks with the bidder, refusing to provide information and limiting due diligence.

However, the management board of the target must always act in the best interests of target. This obligation cuts both ways: if the hostile bid is deemed to be in the best interests of the target, the management board of the target should support (or at least not hinder) the offer. If the hostile bid is not in the best interests of the target, the management board of the target can (and must) use all measures available by law to prevent the hostile takeover.

8 Trends and predictions

8.1 How would you describe the current M&A landscape and prevailing trends in your jurisdiction? What significant deals took place in the last 12 months?

The COVID-19 pandemic has led to delays and in some cases to the renegotiation of key terms. Although some transactions remained on hold or were aborted, many deals successfully closed – albeit some with revised purchase prices or modifications to key deal terms. We saw more buyer-friendly negotiations as a result, although liability caps increased, for example. However, it remains to be seen whether these are general or just short-term trends, and it will be interesting to see whether they endure in the coming months.

Another new trend is the increased use of IT tools in transactions – in particular, for due diligence. However, such use is still limited to larger law firms and deals in certain sectors (eg, real estate).

8.2 Are any new developments anticipated in the next 12 months, including any proposed legislative reforms? In particular, are you anticipating greater levels of foreign direct investment scrutiny?

Due to the COVID-19 pandemic, it is hard to predict what will happen to the German M&A landscape in the next 12 months. It is common understanding that more distressed M&A will take place, in particular in sectors that are have been shaken by the COVID-19 restrictions. On the other hand, it is expected that foreign investors – particularly from countries that have or will overcome the negative impacts of COVID-19 quicker than others – will enter the German market and approach German targets. In this context, the German government has recently (May 2021) tightened foreign investment control. Additional industries are now subject to mandatory foreign investment control (eg, artificial intelligence, robotics, cyber intelligence, autonomous vehicles).

It is also foreseeable that valuation processes might become more complicated as a result of the COVID-19 pandemic as the financials of the targets might be influenced by the pandemic on a short term persepctive; it is difficult to predict the outlook, as no one knows when a ‘normal' level of business activities will resume. Due to travel and meeting restrictions, M&A processes are taking longer as – in our experience, and particularly where the parties are unfamiliar with the M&A process – personal meetings are required to a certain extent to resolve material issues, conduct site visits and organise and hold management meetings. However, there is still a lot of money for investment in the market and – at least in sectors which have not been hit badly by COVID-19 – it remains a rather seller-friendly market.

9 Tips and traps

9.1 What are your top tips for smooth closing of M&A transactions and what potential sticking points would you highlight?

Our recommendation is to involve experienced counsel to structure the process right from the beginning. Counsel to be chosen should match to the size and complexity of the matter. Consider any deal breakers which might require the additional expertise or involvement of a third party, such as merger control or foreign investment control.

Once a non-disclosure agreement has been entered into, we recommend that the parties agree in a specific document the key commercial and legal issues of the contemplated transaction (it does not matter if you call this document a ‘letter of intent', a ‘memorandum of understanding', a ‘term sheet', a ‘transaction letter' or similar). The content is decisive. Of course, the most important point for the parties will be the purchase price; but we would advise that other issues which at first glance might appear to be merely legal points are often ultimately commercially relevant, such as securities for guaranty claims or the liability cap.

Bear in mind also that transactions involving the shares of a German limited liability company or real estate are subject to mandatory notarisation.

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.