After an already successful. M&A and Private Equity Environment in Germany Germany. General

Transcription

1 M&A and Private Equity Environment in Germany 2006 General After an already successful year in 2005, the year 2006 is on track to becoming a record year for M&A activity internationally. The M&A activity in Germany has been comparably strong in 2006, with an increase in Private Equity transactions of approximately 25% in the first half of 2006, compared with the second half of 2005, but also with a surge in activity of strategic investors, bolstered by the recovery of the German economy. Probably the two most prominent M&A transactions in Germany this year albeit for different reasons were the acquisition of the pharmaceutical company Schering AG by Bayer AG for a purchase price of approximately EUR 17 billion and the acquisition by Blackstone of a minority interest of 4.5 % in Deutsche Telekom from KfW, a state-owned bank, for a purchase price of b2.7 billion. The acquisition of Schering AG by Bayer is noteworthy apart from the size of the transaction because Bayer acted as a white knight to protect Schering AG from being acquired by Merck in a hostile takeover attempt. Hostile takeovers have been thus far very rare on the German market, but might become more frequent in the future as Germany s M&A market continues to mature. The aggressive stance of the management of the German truck maker MAN in its plan to acquire its Swedish counterpart Scania could be an indication in that direction. The acquisition of a minority interest in Deutsche Telekom AG by Blackstone represents a 2 ALM GUIDE TO GLOBAL M&A

2 novelty for PE investors, which usually strive to acquire a controlling interest in the companies they invest in rather than making minority investments in publicly listed blue-chip companies. This investment stirred the ongoing discussion on whether PE investors after having raised prodigious war chests are now struggling to find suitable investment targets. On the other hand, the professionalism and active role of PE investors as shareholders can also be expected to benefit blue-chip companies like Deutsche Telekom. As a result of its investment, Blackstone is also represented on the supervisory board of Deutsche Telekom. Although the role Blackstone played in connection with the replacement of Deutsche Telekom s CEO Kai-Uwe Ricke by Rene Obermann in November is not entirely clear, it can be assumed that PE investors will use their influence to persuade the management to keep the creation of shareholder value in mind, even in cases where they do not have a controlling interest in a company. Another positive aspect of the sale of Telekom shares by the state-owned KfW to Blackstone is the apparent willingness of the German government to attract foreign PE investors to support the German economy and its businesses something not self-evident after the description of PE investors as locusts by the federal labour minister and chairman of the Jens Hörmann Social Democratic Party, Franz Müntefering. Apart from those more prominent large transactions, investments in German mid-size companies (Mittelstand) with deal sizes between EUR 50 million and EUR one billion are also increasingly getting into the focus of PE investors. Traditionally more reluctant, German midsize companies are becoming more and more used to the concept of PE financing, be it because of the limits of traditional bank financing and strict credit requirements, or be it in context with succession in ownership of family-owned businesses. An ongoing growth in this field is widely expected by PE investors. Proposed Changes of the German Law on Limited Liability Companies Partially as a reaction to the growing popularity of the English Limited as the corporate form of choice for small JANUARY

3 Lars Schmidt businesses and start-ups in Germany in the wake of the Inspire Art decision of the European Court of Justice, the German government feels the need to amend the law on limited liability companies to remedy some of the deficits that are seen as the disadvantages of the German GmbH as compared with an English Limited. Therefore, in summer 2006 a first draft of an amendment act has been presented by the government. Given the strong majority of the grand coalition between Social Democrats and Christian Democrats in both houses of the German parliament, the proposed amendment is likely to become enacted. One of the major changes the draft proposes is that the notary public witnessing the transfer of GmbH shares shall be obliged to file a list of shareholders with the commercial register in charge of the GmbH. Thereafter, this filing obligation shall ensure that the shareholders list filed with the commercial register reflects the actual shareholdings in the GmbH, which is currently often not the case because the shareholder lists are not updated by the management after a change in the shareholder structure of the company has occurred. The proposed change will therefore lead to more transparency of the ownership situation of GmbHs. Hand in hand with this new filing obligation goes another novelty proposed by the draft: In the future, the transfer of ownership in a GmbH share shall only become effective after the new shareholders list reflecting the change in ownership has been filed with the commercial register. As a consequence of this new constitutive effect of the filing of the shareholder list with the commercial register, thereafter it will be possible to acquire a GmbH-share in good faith, if the seller of a GmbH-share has been registered with the commercial register as a shareholder at least three years prior to the date of the sale of such GmbH share. To avoid acquisition in good faith, the draft legislation contemplates the possibility of filing an objection against the ownership with the commercial register. Another overdue change contemplated by the draft legislation is a reduction of the minimal share capital of a GmbH from currently EUR 25,000 to 4 ALM GUIDE TO GLOBAL M&A

4 EUR 10,000 and a change in the denomination regime for GmbH shares. Whereas currently a GmbH share must have a minimum denomination of EUR 100 and can only be split in shares of EUR 50, the minimum denomination of a GmbH share will be changed to EUR 1. The prohibition that an acquirer may not acquire more than one GmbH-share simultaneously (sec. 17 para. 5 GmbHG) will be deleted. Albeit the draft of the amendment to the law on the limited liability company does not eliminate all perceived or real deficits under the current law, namely the highly contested provisions on the so-called concealed contribution in kind (verdeckte Sachanlage), it will certainly bring about some major improvements that are particularly important in the M&A and PE context. Announced Changes in Tax Law Private Equity Act By the end of the nineties, Private Equity funds were structured on the basis of the case law of the Federal Finance Court and the applied practise of the financial authorities. Therewith, positive and sustainable experiences were made. However, this development was defective and the PE industry was alienated by the drawn-out discussions in connection with the so-called Private Equity Decree. These concerns were remedied with the publication of the Private Equity Decree in December 2003, since the existing principles practised so far had been confirmed. In general, the Private Equity Decree governs the classification of private asset management or business enterprises based on the applicable tax law. The abolishment of the legal uncertainty led to a considerable improvement of the PE situation in Germany. The Federal Ministry of Finance, recognising the important role of and wishing to improve the PE industry in Germany, has announced a Private Equity Act. The contents of the Private Equity Act are still under speculation. Presumably, the Private Equity Act will not materially change the principles contained in the Private Equity Decree. Rather, it is expected that the Private Equity Act will generally be a positive commitment of the legislator to the principles of private asset management and the related tax principles which have been developed by the judicature and the past practise of the financial authorities. With regard to timing, it has been announced that the competent project group of the Federal Ministry of Finance may start developing the framework of a Private Equity Act by the end of A draft is intended to be submitted to the Parliament in mid-2007 and may become effective as of 1 January Tax Reform The Federal Government JANUARY

5 considers the implementation of the Private Equity Act only in conjunction with the intended tax reform. On 2 November 2006, an expert committee of the German Government released several initial aspects of the intended changes on tax laws. As stated, the reform is in general expected to take effect on 1 January The following shall briefly summarise some of the intended changes with the understanding that all these aspects are still subject to public discussion and respective modifications: Reduction of Corporate Tax Rate The corporate tax rate is intended to be reduced from today s rate of 25% to 15%. The surcharge of 5.5 % on the corporation tax will remain effective. The corporate tax together with the reduced trade tax (see below) will result in an average tax rate of around 30%, as compared to the approx 39% which applies today (depending on local level rate for trade tax). The present tax exemption for capital gains and dividend income (economically 95%) by a corporation shall remain effective. Interest Barrier Rule New rules limiting interest deduction, which shall replace the existing German thin-caprules pursuant to section 8a CTA, are being considered. Financing expenditures of corporations and partnerships shall, in principle, only be deductible for tax purposes in the amount of a certain percentage of the EBIT, provided however that according to the proposal, the deduction of interest up to EUR 1,000,000 per year shall not be restricted. If the threshold is exceeded, interest below this threshold shall also be affected. Remarkable is that the suggested rules are intended to cover all kinds of loans, not only shareholder loans or related parties loans. Consequently, annual interest exceeding EUR 1,000,000 would reduce taxable corporate income only to the extent that such interest does not exceed a certain ratio of taxable profits before interest reduction. Thereby, a rate of 30% is under discussion. If and to the extent the interest is not deductible, it may be carried forward to future financial years. Presently the implementation of an escape clause is being discussed, pursuant to which the interest barrier shall not be applicable if the debt/equity ratio is comparable to the average ratio within the whole concerned group, assuming a 25% direct or indirect holding quota. Said escape clause might also become applicable for PE funds. That would put the disadvantages for PE funds into perspective. Trade Tax The proposal comprises the reduction of the trade tax base rate to 3.5%, which would result in an average trade tax rate of 6 ALM GUIDE TO GLOBAL M&A

6 15% compared to the current base rate of 5%, leading to an average tax rate of 20%. As proposed thereby, trade tax would no longer qualify as deductible for corporate tax purposes. Today s exclusion of 50% of the interest expenses on longterm debt for trade tax purposes shall be reduced to 25%. On the other hand, all interest expenses as well as the rental and lease expenses shall qualify as nondeductible items with a rate of non-deductibility of 25%, provided however that a threshold amounting to EUR 100,000 is proposed. Income Tax Major changes which are discussed relating to income taxes include the introduction of 25% flat rate taxation (plus surcharge and church tax) on dividends, interest and capital gains, which in certain cases shall be withheld at the source. However, the flat-rate taxation will probably not apply to certain interest income such as shareholder loans and loans between related parties in order to avoid abusive structuring. In contrast, the existing half income taxation for dividends and capital gains will probably be abolished. Based on the flatrate taxation, this will result in a tax rate of around 26.4% (plus church tax) instead of the current 22.2%. On the other side the changes result in a lower taxation for interest income amounting to 26.4% instead of currently up to 44.3%. The flat-rate taxation regime shall also be applicable on capital gains from the disposition of shares in corporations and similar securities, irrespective of the expiry of a holding period or a minimum holding quota. Insofar, the existing possibility of having tax-free capital gains with respect to participations in corporations of less than 1% after the lapse of a holding period of one year will be abolished. The flat rate taxation regime will presumably be introduced on 1 January About the authors Jens Hörmann is a senior associate in the Munich office of P+P Pöllath + Partners, a leading niche firm focusing on M&A, private equity, tax and real estate. Jens specializes in corporate acquisitions, private equity, venture capital and corporate planning. He studied at the University of Constance; 2000 attorney-at-law in Munich. Lars Schmidt is an associate with P+P Pöllath + Partners, Munich, and specializes in corporate acquisitions, private equity and cross-border M&A. He studied at Humboldt-University in Berlin and New York University; 2004 admission to the bar in New York, 2004 attorney-at-law in Frankfurt a.m. P+P Pöllath + Partners Fünf Höfe Kardinal-Faulhaber-Str Munich Tel.: Fax: muc@pplaw.com JANUARY