Trends & Developments

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1 Germany Trends & Developments Contributed by P+P Pöllath + Partners P+P Pöllath + Partners is an internationally operating law firm, whose 34 partners and more than 100 lawyers and tax advisers in Berlin, Frankfurt and Munich provide high-end legal and tax advice. The firm focuses on transactional advice and asset management. P+P partners regularly advise on corporate/m&a, private equity and real estate transactions of all sizes. P+P has achieved a leading market position in the structuring of private equity and real estate funds and tax advice and enjoys an excellent reputation in corporate/m&a matters as well as in asset and succession planning for family businesses and high net worth individuals. P+P partners are regularly listed in domestic and international rankings as the leading experts in their respective areas of expertise. The authors Inga Bricker LL.M. (NYU) is a lawyer at P+P Pöllath + Partners. Having practised in Germany, New York and Israel, she specialises in cross-border M&A transactions, private equity, venture capital investments, debt financings and joint ventures with a focus on US- and Israel-related transactions. Inga is admitted as a lawyer in Germany, New York and Israel. Before joining P+P, she served as a senior counsel with a leading Israeli law firm. Inga has extensive experience in a variety of international business transactions and commercial agreements, particularly in the high-tech sector. She is fluent in German, English, Spanish and Hebrew. General Overview Germany is the world s fifth largest economy (according to gross domestic product (GDP) derived from purchasing power parity calculations) and is perceived as the largest economy in Europe. With exports accounting for more than one-third of its national output, it is the world s second leading exporter of merchandise after China. Most of the exports are generated by vehicles, textiles, chemicals, machinery, metals, manufactured goods and foodstuffs. Germany is attractive for M&A activity, since it offers a very well-developed manufacturing industry, growth rates of R&D intensive industries like automotive and information technology, well-known brands, combined with a strong business and stable political environment, and an efficient and predictable legal system. Germany is still among the top ten countries for M&A activity and ranks number five as target country. While the US, the UK and Switzerland are historically the most actively involved investors in the German M&A market, Germany has recently become the second largest investment destination for Chinese corporations after the UK in line with a growing investment activity of the BRIC countries in German targets. M&A Activity Post 2008 Crisis Following a time of booming public takeovers in Germany between 2002 and 2008 until the Lehman crisis, the years 2008 and 2009 were dominated by the financial crisis. As a result, leveraged buy-out activity in Germany as in the rest of the world came almost to a complete 337

2 Germany Trends & Developments halt. Consumer goods industries, most importantly the well-known German car manufacturing industry was hit, together with many small to mid-size automotive supply companies. Whilst Germany as an export country largely benefits from the European Monetary Union, the Eurozone crisis has left its mark on the German M&A market. However, since the beginning of 2010, the German market has slowly been picking up again. While leveraged financing remained difficult to access, the recovery started with transactions resulting from some sort of restructuring measures or insolvency scenarios. In addition, private equity sponsors needed to dispose of their investments, which led to a rise of secondary transactions. Furthermore, an increased number of corporate buyers whose business models had proven stable during the crisis and who had better financing opportunities started returning to the market with the aim of consolidating their business at reasonable valuations. Banks remained risk averse regarding the grant of substantial debt financing, such that even in the small-cap market, syndicated leveraged financing with several banks involved became the norm. In view of the limited access to bank financing, the market experienced an increased use of equity financing as acquisition means. M&A Activity in 2012 and Outlook for 2013 M&A activity in Germany has been relatively stable throughout 2012 with traditional corporate players and private equity continuing to play a large role. Nevertheless, the economic climate may still be described as volatile due to the ongoing uncertainties in connection with the European financial markets. As a result, the increase in acquisition transactions in 2012 was slower than expected since banks remained reluctant to extend leveraged financing. In addition, private business owners were not eager to sell as potential buyers often did not meet their price expectations. However, Germany has recently benefited from an increased investment interest from Asian countries (particularly China and India) and Russia looking for promising targets in Germany. Most active was the M&A market with German participation in the services and financial services sector, the energy and waste management business, and concerning pharmaceuticals and industrials (steel, metal and environmental technologies). Moreover, as Germany experiences an all-time low in interest rates on German government bonds, the real estate markets are booming and prime real estate assets and portfolios have become popular targets as safe investment objects. Due to the limited availability of bank financing, the market has also seen a few asset swaps as a way to acquire a target business. This could indicate a new interesting tendency to use own assets as acquisition means. In the private equity segment, the outlook can be described as cautiously optimistic with a predicted rise in deal volume, particularly in the pharma and healthcare industries, consumer goods and trade, energy, as well as IT and telecommunications, since such industries appear to offer stable growth. The mid-cap segment is expected to be the main growth mar- 338

3 Trends & Developments Germany ket with deal sizes remaining relatively small with up to EUR 250 million in transaction value. Mid-cap corporations view corporate acquisitions as a way to achieve growth and focus on financing acquisitions with their own capital, particularly out of their cash-flow. Furthermore, private business owners show an increased interest in selling their business as an alternative for family succession. Large-cap M&A transactions above EUR 500 million are, however, expected to be rare. To conclude, the market appears to be slowly recovering with a cautious, but positive, economic outlook for Overview of Legal Aspects of German M&A German Public M&A The German M&A market is not typically characterised by large public takeovers. However, the customary means of obtaining control in publicly listed German stock corporations is by the acquisition of shares in a public tender or takeover offer. If the acquisition is aimed at acquiring control over the public company, a public takeover offer is mandatory. Control in this respect means the acquisition of 30% of the target s voting right. This includes voting rights of subsidiaries, of third parties if acting jointly, and those resulting from financial instruments entitling their holder to acquire shares carrying voting rights, such as options or swaps. In addition, the investor needs to be aware that when reaching or surpassing a threshold of 3% or more in voting rights in a publicly listed German corporation (i.e. 3%, 5%, 10%, 15%, 20%, 25%, 30%, 50%, 75%), it must notify the company and the German financial supervisory authority (Bundesanstalt für Dienstleistungsaufsicht or BaFin ). Since the enactment of the Investor Protection and Functionality Improvement Act in the beginning of 2012, this reporting requirement has been extended to financial instruments (such as total return cash-settled equity swaps, contracts for difference or other options) with the aim of preventing secret stakebuilding strategies which previously used to be common practice in Germany. Taking Private Due to certain complex statutory requirements for publicly listed companies, Germany has seen an increase in taking private transactions. German law offers several ways of taking a public company private, such as delisting, statutory mergers with and into a non-listed entity, or squeeze-out resolutions. Since the enactment of the Act implementing the EU Shareholders Rights Directive (ARUG) in 2009, the closing of such taking private transactions is less time consuming and less prone to attacks from professional minority shareholders. Following ARUG, not every minority shareholder, but only minority shareholders owning shares with a minimum nominal value of EUR1,000 are entitled to file a blocking action against the underlying shareholders resolution. In addition, the special fast-track court release procedure (Freigabeverfahren) to overcome the blocking effect of such shareholder actions was reduced to only one instance with shorter and alleviated procedural rules for the benefit of the company. 339

4 Germany Trends & Developments German Private M&A The majority of German M&A activity occurs in the mid-cap private M&A market traditionally dominated by family owned businesses of the so called Mittelstand. Unlike in the Anglo-Saxon legal systems where stock corporations are the usual legal form of corporate entities, in Germany, the most customary corporate entity is the German limited liability company (Gesellschaft mit beschränkterhaftung, in short GmbH ), particularly in the predominant lower to mid-cap market. Around one million commercial entities in Germany are organized in the form of a GmbH, which is not subject to the considerably stricter provisions of the German Stock Corporation Act, but governed by a more liberal legal regime, except that its foundation as well as capital increases and share transfers require notarisation by a notary public. The second major type of German company is the German stock corporation (Aktiengesellschaft). Its shares may, but do not have to be, publicly listed, and in fact, most stock corporations in Germany are privately held by only a limited number of major shareholders. Acquisition Agreements German share purchase agreements in the private M&A segment are traditionally substantially shorter than the common transaction documents used in the Anglo-Saxon legal environment, even though the M&A transactional legal practice has very much been influenced by the Anglo-Saxon legal culture. The reason for the shorter agreements lies in the extensive statutory provisions which also closely regulate issues such as breach of representations and warranties, damage calculations and delay. A German peculiarity is that the transfer of GmbH shares (as well as real estate transfers) require the purchase agreement including any ancillary agreements and annexes to be notarised and read out aloud in front of a notary public. In private M&A legal practice, certain terms of the transaction documents have changed significantly as a consequence of the financial crisis as of mid Buyers have become increasingly cautious and are demanding stronger protection through buyer-friendly Material Adverse Change (MAC) provisions, broader representations and warranties clauses and higher liability undertakings of the sellers for possible violations. In addition, escrow arrangements for certain parts of the purchase price, bank guarantees, warranty insurance and similar risk coverage mechanisms have become more common. In light of the crisis, the readiness to litigate over an acquisition that had failed to live up to the buyer s expectations has grown in recent years. In view of increased disputes over purchase price adjustment clauses based on closing accounts (net financial debt and working capital adjustments as of the closing date), the locked box mechanism with a fixed purchase priced based on the most recent financial statements (with no or only limited adjustments) appears to be on the rise. Foreign Investment Restrictions and Anti-Trust Law Foreign buyers with their seat outside the EEA need to take into consideration that an acquisition of 25% of the voting rights in any German target may be subject to review by the 340

5 Trends & Developments Germany Federal Ministry of Economics and Technology, and that transactions with targets manufacturing or developing military or defence-related goods need to be announced to the ministry. With regard to anti-trust matters, Germany has a mandatory notification system with filings being required when certain turnover thresholds are exceeded (i.e. EUR500 million of the combined worldwide turnover of all companies involved, or EUR25 million of the turnover in or into Germany of at least one party involved). 341