This country-specific Q&A gives an overview of mergers and acquisition law, the transaction environment and process as well as any special situations that may occur in Germany.
It also covers market sectors, regulatory authorities, due diligence, deal protection, public disclosure, governing law, director duties and key influencing factors influencing M&A activity over the next two years.
This Q&A is part of the global guide to Mergers & Acquisitions. For a full list of jurisdictional Mergers & Acquisitions Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/mergers-acquisitions/
What are the key rules/laws relevant to M&A and who are the key regulatory authorities?
1.1 Private M&A Transactions
a) Key rules/laws
In Germany, most private transactions are implemented by share deals using share purchase agreements. As the main corporate entities commonly involved in private acquisitions are limited liability companies (“GmbH”) and limited partnerships (“KG”), the key German laws governing private M&A Deals are the Limited Liability Company Act, the Commercial Code and the German Civil Code.
b) Key regulators
The German Federal Cartel Office (“FCO”) has jurisdiction to review certain transactions that meet the statutory thresholds set out in the German Act Against Restraints of Competition (“ARC”, Gesetz gegen Wettbewerbsbeschränkungen, GWB), provided that they are not subject to review by the EU Commission.
• EU Commission jurisdiction
The EU Commission has exclusive jurisdiction if a transaction results in a concentration having an EU dimension as specified by the Regulation (EC) No.139/2004 on the control of concentrations between undertakings (“EU Merger Regulation”). A transaction that is notified before the EU Commission generally precludes filings at a Member State level (so-called “one stop shop”), though exceptions may apply.
Mergers or transactions that bring about an acquisition or a change of control require merger notification with the EU Commission if the revenues of the companies involved in the transaction (i.e., “undertakings concerned”) exceed the primary or secondary statutory turnover thresholds set out in the EU Merger Regulation. Typically, transactions between companies with high revenues are subject to merger review by the EU Commission.
The primary thresholds include instances where, (a) the combined aggregate worldwide turnover of all undertakings concerned exceeds EUR 5 billion in the past financial year, and (b) each of at least two of the undertakings concerned has an EU-wide turnover exceeding EUR 250 million in the past financial year.
The secondary thresholds are more complex and require that, in respect of the past financial year (a) the combined aggregate worldwide turnover of all undertakings concerned exceeds EUR 2.5 billion; (b) each of at least two of the undertakings concerned has an EU-wide turnover exceeding EUR 100 million; (c) in each of at least three EU Member States, the combined aggregate turnover of all undertakings concerned exceeds EUR 100 million; and (d) in at least three of these same Member States, each of at least two of the undertakings concerned has turnover exceeding EUR 25 million.
There are exceptions from notifying the EU Commission if each of the undertakings concerned has more than two-thirds of its EU-wide turnover in one and the same Member State.
• Jurisdiction by the FCO
Where a transaction does not fall within the exclusive jurisdiction of the EU Commission, it may require clearance by the FCO if it constitutes a reportable concentration, and if the primary or the alternative statutory thresholds set out in the ARC are met.
In Germany, a concentration is reportable if it leads to the acquisition of the majority of the assets, 25% or 50% of the shares, or acquisition of control or of a “competitively significant influence” in another company.
A reportable concentration must be filed with the FCO if the primary thresholds are met, i.e., in the past financial year, (a) the combined worldwide turnover of the undertakings concerned exceeds EUR 500 million; (b) at least one of the undertakings concerned has turnover in Germany exceeding EUR 25 million; and (c) one other undertaking concerned has turnover in Germany exceeding EUR 5 million.
Under the alternative thresholds, if (a) and (b) above are met but neither the target nor any other undertaking concerned meets the EUR 5 million threshold then a transaction is only subject to merger notification in Germany if the value of the transaction is more than EUR 400 million, and the target company has “significant activity” in Germany. For the latter criterion, the present activity of the target company (i.e., not the last business year’s activity) is determinative.
The criteria “transaction value” and “significant activity” have recently been introduced into the ARC in June 2017 by its Ninth Amendment, and it is expected that the FCO will provide some guidance shortly. Until then, the explanatory memorandum to the Ninth Amendment provides background information.
• Transaction Value
According to the explanatory memorandum, the transaction value consists of the value of liabilities assumed by the purchaser and the purchase price-including all monetary payments, tangible and intangible assets, securities, voting rights, compensation for non-compete agreements and payments that depend on the occurrence of a certain condition typically contained in “earn out” clauses.
Transaction valuations may be more difficult in complex M&A transactions because the price may fluctuate based on performance and other factors, and the price may not be set until closing. The FCO will accept any method to calculate the purchase price as long as that method is a recognized valuation practice.
• Significant Activity
The Amendment’s explanatory memorandum offers little guidance in defining “significant activity”. The criterion must be assessed on a case-by-case basis. Factors to be considered include: whether customers are located in Germany; whether customers use the relevant products or services in the country; the maturity of the product or service; whether the market is fully monetized (e.g., free apps are not fully monetized); and whether there is a customer base (which can include a certain number of “monthly active users” in case of an app). Merely marginal operations in Germany do not constitute a “significant activity”.
For a “significant activity” to arise, no actual revenue needs to be generated. In other words, the target company can offer its users or customers free products and services. Furthermore, the explanatory memorandum states that R&D activities also count as “being active”. This could apply, for example, to pharmaceutical or technology start-up companies.
Federal Ministry for Economic Affairs and Energy Foreign ownership restrictions
Under the Foreign Trade Act (Außenwirtschaftsgesetz) and the Foreign Trade Ordinance (Außenwirtschaftsverordnung), the Federal Ministry for Economic Affairs and Energy (“MET”). (Bundesministerium für Wirtschaft und Energie, BMWi) has the authority to review foreign investments in order to safeguard the public order or national security of Germany.
Given the recent increasing number of non-European investors interested or successfully acquiring stakes in German hi-tech companies (such as Midea's takeover of German robot manufacturer Kuka), in July 2017, an amendment to the German Foreign Trade and Payments Ordinance was adopted to tighten control by the MET over acquisitions of domestic companies by foreign investors.
Depending on the business sector in which the target company is active, an acquisition of a direct or indirect stake of at least 25% of the voting rights in a German company by a non-German investor may be subject to sector-specific examinations (e.g., for sectors such as weaponry, armored military vehicles and certain security-related IT products).
Acquisitions of a direct or indirect stake of at least 25% of the voting rights in a German company by non-EU and non-EFTA buyers may require cross-sectorial examinations (e.g., for industries such as energy, telecommunications, water, and other critical infrastructure, including certain IT functions, databases and software).
Both sector-specific and cross-sectorial examinations may be prohibited by the MET on grounds of public order or security concerns. If the transaction involves a company active in one of the above mentioned sectors and industries, mandatory reporting obligations of the transaction apply. In case of cross-sectorial examinations, the MET may also initiate an investigation within three months from the date on which the MET became aware of the transaction, which may delay the closing of an M&A transaction.
Hence, a careful case-by-case analysis is required in order to determine whether an application should be made with the MET. This ensures swift implementation of the envisaged transaction.
1.2 Listed Company Takeovers and Tender Offers (“Public Takeovers”)
In Germany, the acquisition of a listed entity is regulated. A public takeover and related tender offer are not merely a matter of negotiations between a buyer and a seller. The regulatory regime provided by the German Securities Acquisition and Takeover Act (Wertpapiererwerbs- und Übernahmegesetz or WpÜG, the “German Takeover Act”) must be observed.
The vast majority of potential German targets for public takeovers are organized as stock corporations (Aktiengesellschaft). There are also a few listed German companies which are organized in the legal form of a “partnership limited by shares” (Kommanditgesellschaft auf Aktien) or a European public company (Societas Europea, SE).
a) Key rules/laws
Shares of a listed company can be acquired directly by a privately negotiated acquisition from certain shareholders or via the stock exchange (both subject to mandatory offer thresholds, see below) or by public takeover (or a combination).
Public tender offers targeted at a German company admitted for trading on an organized market in Germany are mainly governed by the German Takeover Act, which does not only regulate so-called takeover offers, (i.e., offers targeted at the acquisition of control), but also regulates any other publicly made offers for the acquisition of shares in listed companies. The Takeover Act is supplemented by a number of ordinances, most importantly the Takeover Act Offer Ordinance (WpÜG-Angebotsverordnung), inter alia, setting out requirements for the content of the offer document and the pricing rules.
In the takeover context, a number of other statutory rules may be of relevance, including certain provisions of the German Stock Corporation Act (Aktiengesetz), the German Securities Trading Act (Wertpapierhandelsgesetz) as well as the German Securities Prospectus Act (Wertpapierprospektgesetz). Finally, the rules and regulations of the respective Stock Exchange may generally be relevant.
b) Key regulators
The main regulatory players in the course of the tender offer process are the German Federal Financial Services Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) ("BaFin") and the respective Stock Exchange. However, their functions are mostly procedural in nature and provide regulatory oversight to ensure an orderly offer process complying with the requisite standards of disclosure. The BaFin has authority to enforce the rules by imposing instructions for specific behavior, and administrative fines of up to EUR 1 million. Furthermore, non-compliance with certain rules triggers legal consequences by operation of law. For example, failure to comply with the mandatory bid obligation results in the loss of shareholder rights (including voting rights) for the period that the violation is on-going, under the Securities Trading Act, the ban on voting rights may last even longer.
Other than regulations and approvals relating to the takeover process, dealing restrictions and disclosures, merger control filings may have to be made pursuant to the applicable merger control laws in the relevant countries.
What is the current state of the market?
According to the latest statistics from MergerMarket, German M&A is closing in on the record full year value of €94.9bn (672 deals) seen in 2005. At the time of writing, 2017 deals had reached €92.4bn across 602 deals. The surge in dealmaking was largely due to an increase in inbound activity which reached €25.9bn (90 deals) in Q3. This represents a 99.4% share of DACH’s quarterly value. In 2017, German inbound dealmaking exceeded all annual values, helped by Q2’s mega-merger between Praxair and Linde. Germany’s targeted YTD deal value also overtook that seen in France (623 deals, €76.9bn) for the first time since 2013, though France still saw the most deals.
Which market sectors have been particularly active recently?
According to statistics from MergerMarket, with Brexit discussions in full swing and despite the uncertainty caused by the German federal election, there was a healthy appetite for German assets in 2017. The industrial and chemicals sector remained robust throughout the first three quarters of the year, topping the charts with 188 deals reaching nearly EUR 60bn. Most notably are the Praxair-Linde merger, which accounted for most part of total deal value, followed by Deere & Company’s acquisition of Wirtgen.
The TMT sector maintained its runner-up position in terms of deal volume with 114 deals, exceeding a total deal value of EUR 5bn. Sector activity is supported by the state-backed Industry 4.0 initiative, aiming to establish the manufacturing sector at the forefront of automation and digital innovation. Business services remained the third most active sector in Germany with 75 deals totaling c. EUR 1bn in deal value.
What do you believe will be the three most significant factors influencing M&A activity over the next 2 years?
Apart from macro-economic factors and the overall political situation globally, which might cause concerns and uncertainties for investors and corporates alike, we mainly see the following three factors as most significant:
a) Interest rate environment: A gradual increase in interest rates appears to be the most likely scenario over the coming years. Under this scenario, due to the extremely low level of interest rates, we expect continuously favorable M&A markets. In the case of a rapid and unguided interest rate hike, the positive M&A market sentiment may be threatened.
b) Growth expectations of strategics: In the current positive global growth environment, shareholders are asking for continued revenue growth. In many cases, organic growth is limited leaving inorganic growth the only option for management teams to deliver revenue growth.
c) Dry powder of private equity: In Germany, about 20-25% of the M&A transactions are private equity related. With continuous funds poured into the sector, private equity is expected to remain a key driver of the M&A market.
What are the key means of effecting the acquisition of a publicly traded company?
The acquisition of a listed company can be effected by virtue of a public offer addressed to the shareholders of such listed company for the acquisition of their shares in exchange for cash, securities, or a combination of the two.
The German Takeover Act provides for two options with respect to the takeover procedures a mandatory tender offer and a voluntary tender offer. The acquisition of control, whether by a privately negotiated share transaction with one or several major shareholders or by purchasing target shares on the stock exchange, triggers the obligation of the purchaser to publish the acquisition of control and to launch a mandatory tender offer. “Control” is defined as the holding of at least 30% of the voting rights in the target. For purposes of calculating the percentage of the voting rights in the target, voting rights attached to target shares held by a third party may under certain circumstances be attributed to the bidder (pls. see question 25 for more details).
Statutory mergers pursuant to the German Transformation Act (including cross-border mergers) are also possible to gain control, but rare. The implementation of a merger requires, among other things, the conclusion of a merger agreement by the management board of both companies. Thus a merger is only possible in a solicited/negotiated scenario.
What information relating to a target company will be publicly available and to what extent is a target company obliged to disclose diligence related information to a potential acquirer?
A main source of information is the electronic commercial register (Handelsregister) with retrievable basic information on the company’s members of the management and supervisory board, issued power of representation, registered share capital, and the articles of association. Other public sources of information include:
- Electronic business register (Unternehmensregister) including information entered into the relevant registers, such as the commercial register, contained in mandatory filings or announcements to the relevant authorities, such as the BaFin and published in the Federal Gazette (Bundesanzeiger);
- Land register, containing information on real property, however, not freely accessible, only with a qualified interest (usually potential buyers of the property or banks creating a mortgage);
- IP register containing information on domestically registered IP rights;
- Ad-hoc-announcements on issues such as stakebuilding;
- Since December 2017 German Transparency Register (Transparenzregister) is accessible , however not publicly, but for parties demonstrating a qualified interest (not available for listed companies);
- Listed companies have to disclose takeover relevant information in their financial statement (for example golden-parachute provisions, change-of-control-clauses, etc.); or
- Website of the company which usually contains the annual report, major holdings notifications, ad-hoc announcements and corporate governance documentation.
The management of a listed target company is not obliged to disclose due diligence information, but may decide to do so. The management is the “gatekeeper” for the due diligence information. When making the decision, the management board has to act in the best interest of the company and must balance the company's interest in the potential bid and the necessity to secure confidentiality of the company's affairs as well as rules of insider information. A confidentiality agreement is a “must have” to allow the potential bidder access to confidential information.
To what level of detail is due diligence customarily undertaken?
Generally, the scope of due diligence is rather limited in public takeovers compared to private acquisitions, and in the case of a hostile offer even limited to publicly available information. In the case of a friendly bid supported by the management, the due diligence may be more extensive, although the target board will have to decide carefully how much information it is appropriate to disclose, taking into account its fiduciary duties, the interest of the company and insider regulations.
In general, a party which receives confidential price-sensitive information about a target would be subject to insider trading restrictions unless that information was made public and, with a few exceptions, the bidder may be prevented from dealing in target shares or proceeding with the offer unless the relevant information is made public or ceases to be price sensitive prior to the acceptance period. It is generally accepted that, where a party intends to make a takeover bid (or enter into a merger) from the outset, and the due diligence merely confirms this intention, acquiring shares in the target in furtherance of the initial plan will not be prohibited, even after the receipt of due diligence information.
Generally, any bidder is advised to carry out as much due diligence as possible, as the possibilities to withdraw after announcement of the bid may be very limited. If the bidder is permitted to conduct due diligence, the bidder will usually be given only limited information during a limited period of time.
In private M&A transactions, highly confidential information is typically disclosed after the indicative bid or binding offer as confirmatory due diligence, or in a special data room to which only very few experts have access.
What are the key decision-making organs of a target company and what approval rights do shareholders have?
a) German Stock Corporation
The German stock corporation has a two-tier corporate structure consisting of the management board (Vorstand) and the supervisory board (Aufsichtsrat). Fundamental corporate decisions are made by the general meeting (Hauptversammlung). The members of the management board assume responsibility for the day-to-day management and representation of the company. The supervisory board reviews and controls the work of the management board and reports to the general meeting. As opposed to the German limited liability company, the members of the management board are not bound by the instructions issued by the general meeting, but are obliged to act in the best interest of the company.
The general meeting’s rights mainly concern fundamental decisions such as changes to the articles of association, measures to reduce or increase the registered share capital and such. It may be important nevertheless, because the offer is often subject to the condition of an acceptance rate of at least 75% of the shares in order to subsequently approve a domination agreement or a profit and loss transfer agreement. Also, for any reorganization (such as statutory mergers or demergers) and the disposal of all, or nearly all, of the company’s assets’ the approval of 75% of the votes of share capital is required. Additionally, the German Federal Court (under the “Holzmüller doctrine” as amended by the “Gelatine” decision) extended the general meeting’s rights and approval rights to cases in which the most significant percentage of the company’s assets are transferred and installed the 75% threshold for such cases. Even though these rules for “unwritten competencies” of the general meeting would arguably be not applicable to an M&A situation, they still may play a role in the structuring measure taken prior to the transaction.
b) German Limited Liability Company
The corporate bodies of a GmbH consist of the managing director(s), the shareholders’ meeting, and, on a voluntary basis, the supervisory board and/or the advisory board (Beirat). The shareholders’ meeting is the highest corporate body for determining the objectives and purpose of the company. All basic decisions regarding the company are reserved for their decision. The decisions concern the constitution and existence of the company (the amendment of the articles or the liquidation of the company) as well as the operation of the company’s business (e.g., the appointment and removal of managing directors and members of the supervisory board and the binding instruction of managing directors regarding all matters affecting the company, including even day-to-day management issues). Thus, due to their power to instruct the managing directors, the ability of the shareholders of a GmbH to guide and influence the policy and management of the company is considerably stronger and much more direct than that of shareholders in a German stock corporation.
The managing directors are responsible for the day-to-day business of the company and representation of the company. Managing directors are subject to, and obliged to follow, the instructions of the shareholders’ meeting.
If a supervisory board has been created by the shareholders, it supervises the managing directors without engaging in management activities. An advisory board is usually created to provide expert knowledge and advice to the company.
What are the duties of the directors and controlling shareholders of a target company?
As a general rule, in a takeover situation, the management board and the supervisory board of the target company have to act in the best interest of the target company. The management board of the target company is subject to a so-called “neutrality obligation” pursuant to which the management board must generally not take any actions that may prevent the success of the offer from the time of publication of a decision to make a takeover offer or the acquisition of control until the publication of the takeover result. It is irrelevant whether the action has indeed prevented the offer or whether it is merely intended as a frustration mechanism.
Such prohibition on frustration does, however, not apply to:
- any actions that a diligent and conscientious manager would perform in the absence of a tender offer;
- the search for a competing offer (“white knight”);
- any actions that have been approved by the supervisory board of the target; and
- any actions that are based on an authorization by a shareholders’ resolution passed by the shareholders prior to the announcement of the acquisition of control, subject to approval of such particular defensive action by the supervisory board. Such authorization can only be granted for a maximum term of 18 months.
Moreover, pursuant to a fundamental principle of the German Stock Corporation Act, the directors of a German stock corporation must treat all shareholders equally.
Also, during the offer period the management is obviously bound to comply with capital markets regulation, particularly regarding ad-hoc-announcements.
Immediately following receipt of the offer document, the management board and the supervisory board of the target have to issue a reasoned statement on the offer. In such statement, they must set out their views on (i) the kind and amount of the offered consideration, (ii) the expected consequences for the target, its employees and their representatives, (iii) the goals pursued by the bidder and (iv) whether the board members intend to tender any shares held by them in the offer. Furthermore, the management board is obliged to forward the offer document and the statement to the works council, or to the employees if no works council exists.
During the entire takeover, the management board of the target shall seek the cooperation of its own supervisory board and ensure that the process will be as smooth as possible.
There are no transaction-related duties of the controlling shareholders in an M&A transaction. However, shareholders are subject to general fiduciary duties, such as to be loyal to the company, to actively promote its objectives and to keep it from harm. Fiduciary duties can comprise duties to act, (for example to vote in a specific way), as well as duties to forebear from acting. The violation of fiduciary duties can give rise to damage claims and also claims for performance.
Do employees/other stakeholders have any specific approval, consultation or other rights?
If the company regularly employs more than 500 people domestically, one third of the supervisory board members must be representatives of the employees; if the company has more than 2,000 employees, one half of the members of the supervisory board must be employee representatives. These German co-determination laws are mandatory for the German Stock Corporation and the SE. However, even though the formation of a supervisory board is generally not mandatory for a German limited liability company, the co-determination legislation will also apply to GmbHs with the relevant number of employees and will require the establishment of a supervisory board. Given that, employees enjoy the same rights via representation as any other stakeholder group represented in the supervisory board.
a) Public M&A Transactions
In a takeover situation, the works council must be informed by the management board. The information must include detail on the potential purchaser and its intentions with the target regarding the future business activity of the target as well as the expected impact on the employees. The works council of the target may issue a reasoned statement to the management board on the offer. The management board is obliged to publish the works council’s statement alongside its statement on the takeover offer. Other than that, the management board does not have to consult the works council with respect to the offer.
b) Private M&A Transactions
For private M&A transactions, share and asset deals need to be differentiated.
If an acquisition is structured as a share deal, the identity of the employer will remain unchanged, and consequently also the contractual obligations and rights between employer and employees. A share transaction normally only requires the management to inform the economic committee (Wirtschaftsausschuss), or the works council if no economic committee exists, within a reasonable time period during the transaction process. Failure to properly inform the economic committee (or the works council) may result in an administrative fine of up to EUR 10,000. It does not affect the validity of the acquisition agreement, however.
For an asset deal, it is important how many assets are transferred under the agreement. If an essential part of the assets which allows the purchaser to continue the business activity is transferred, this may be recognized as a “business transfer” pursuant to section 613a of the German Civil Code. A “business transfer” triggers certain legal implications, including the automatic transfer of all employment contracts relating to the transferred business to the purchaser. The employees may object to such transfer. Similarly to a share deal, the business transfer as such is not subject to co-determination rights by the works council. However, if only a part of the original company’s assets are transferred, legally this usually constitutes an “operational change” by way of a business split up, which requires the works council to not only be informed, but also consulted. If the works council raises concerns, a reconciliation of interest must be found or a social plan established.
To what degree is conditionality an accepted market feature on acquisitions?
a) Public M&A Transactions
A voluntary tender offer, as opposed to a mandatory offer, may be subject to certain conditions. Customary conditions for a voluntary tender offer are, for instance, a minimum acceptance threshold, absence of competing offers and merger control, and other regulatory clearances. The bidder may also consider including a “material adverse change” condition allowing the bidder to walk away from the offer if the financial situation of the target deteriorates during the offer procedure. However, such a MAC condition is accepted by BaFin only under strict conditions. These conditions (except for merger control clearance and other mandatory regulatory approvals) can typically be waived by the bidder during the offer period and are an important tactical instrument used to improve offer acceptance. In contrast, a mandatory tender offer may only be conditional on merger control and other mandatory regulatory approvals.
b) Private M&A Transactions
Private M&A transactions are often made subject to anti-trust clearance (always), AWG clearance (if required), financing, board approval (both infrequent at final offer stage; rather frequent at indicative offer stage) or a MAC (infrequent).
What steps can an acquirer of a target company take to secure deal exclusivity?
a) Public M&A Transactions
The bidder and the target company may enter into a business combination agreement or a standstill agreement according to which the target commits to support the offer and which also often includes an exclusivity undertaking not to negotiate with any other potential acquirer, nor to recommend a competing offer to its shareholders, in each case subject to applicable takeover regulations. There is some legal debate in Germany as to whether the target can enter into an exclusivity agreement, given the principle of equal treatment for the acquirer, and also whether it can withdraw from such an agreement if a better offer is received. Since the management of the target company is obliged to act in the best interest of the company, deal exclusivity can pose potential risks of conflict, particularly if a higher offer by a different party comes into play. To prevent this, agreements often contain “fiduciary out” clauses in case of a higher or better offer.
b) Private M&A Transactions
In private M&A transactions, the acquirer is typically interested in an exclusivity undertaking by the seller. Especially in auction processes, an interested buyer will require an exclusivity agreement before it conducts comprehensive due diligence. Exclusivity agreements are legally binding and usually provide for cost coverage which a party may incur due to a breach by the other party of the exclusivity provisions. If the seller initiates a private auction, the acquirer will in general not obtain an exclusivity undertaking before the negotiations have reached an advanced stage and definitive agreements appear within reach.
What other deal protection and costs coverage mechanisms are most frequently used by acquirers?
a) Public M&A Transactions
Management of the target company may agree to deal protection measures only if such measures are in the best interest of the company. Also, the “neutrality obligation” must be kept in mind. Based on these strict premises, some deal protection measures can be installed.
No-shop-clauses prohibit the target’s management to actively seek an alternative buyer. It may also contain restrictions on talking to third parties (“no-talk-clauses”). However, in order to not violate above mentioned premises, in these cases, certain exceptions from the no-shop-clauses are usually allowed, e.g. window-shop or go-shop clauses, granting the right to look for an alternative bidder in a certain time period. Fiduciary out clauses in case a better offer can be reached by a third party are then provided accordingly. As an answer to fiduciary out clauses or exceptions from no-shop agreements, a right of the bidder to match a potential better offer by a third party may be agreed upon.
Break-up fee arrangements are not yet common, as the legal enforceability is uncertain and such arrangements are subject to a number of limitations (for example, the target company’s management board can only enter into them if they are in the best interests of the target).
b) Private M&A Transactions
Break-up fees are increasingly demanded in cross-border transactions and sometimes seen in private acquisitions. Even without a break-up fee arrangement, there might be, subject to rather strict prerequisites, a pre-contractual liability if one party breaks off negotiations unreasonably after it has induced confidence that an agreement would be reached.
Earn-outs are increasingly demanded and protect the buyer from overpaying the future upside.
Other measures, as mentioned for public M&A, can be and are used more freely, as the takeover code-based “neutrality obligation” does not come into play.
Which forms of consideration are most commonly used?
In public M&A transactions, the bidder can make a cash offer (i.e., cash-for-share), an exchange offer (i.e., share-for-share), or a combined offer (shareholders may be offered a choice between cash or shares or a combination of cash and shares). In the case of an exchange offer, the bidder must offer liquid shares that are admitted to trading on a stock exchange in a country within the EEA. A cash offer is mandatory if the bidder has acquired more than five percent of the voting rights in the target for cash within six months prior to the announcement of the offer.
The majority of public offers involving German targets are cash offers. Share and combined offers are occasionally observed in mergers of equals such as the Linde Praxair tie-up, or in cross-border mergers.
In private M&A transactions, consideration is typically paid in cash.
At what ownership levels by an acquirer is public disclosure required (whether acquiring a target company as a whole or a minority stake)?
The Securities Trading Act (“WpHG”) provides that any person whose shareholding in a German-listed company reaches, exceeds or falls below 3%, 5%, 10%, 15%, 20%, 25%, 30%, 50% and 75% of the voting rights in such company must without undue delay notify the company and simultaneously BaFin. Voting rights include not only voting rights from a person’s own shareholdings, but also from shareholdings of subsidiaries, trustees, parties acting in concert and a few other parties as set out in the applicable anti-circumvention rules.
In addition, any person holding, directly or indirectly, financial instruments which give the holder the unconditional right to acquire, or discretion as to the right to acquire, shares to which voting rights are attached or which have a similar economic effect must without undue delay notify the company and simultaneously BaFin if the voting rights attached to such shares reach, exceed or fall below 5%, 10%, 15%, 20%, 25%, 30%, 50% and 75% of the voting rights in such company. The term “financial instruments” refers to, among other things, transferable securities, options, futures, swaps, forward rate agreements and contracts for difference.
At what stage of negotiation is public disclosure required or customary?
Under the Takeover Act, once a bidder has decided to make an offer it must publish this decision without undue delay. A mere market rumor about a possible offer will not trigger said announcement obligation or a duty to formally decide on an offer. However, specific market rumors may require the target to make an ad hoc announcement on the potential offer.
In its announcement, the bidder must disclose its decision to make an offer for the target shares and whether the bid is a full or a partial offer. Before announcing its decision to launch an offer, the bidder must notify BaFin and all relevant German stock exchanges. However, the bidder is not obligated to announce the details of the bid, such as the price and conditions, at this stage.
Suspicious facts, for example, those caused by speculations by the press, do not imply an announcement obligation for the bidder.
Is there any maximum time period for negotiations or due diligence?
The public takeover procedure is subject to a strict timetable that needs to be complied with by the bidder and the target. In general, a public offer process under the German Takeover Act takes a minimum of nine weeks and a maximum of 24 weeks from the announcement of the acquisition of control (mandatory offer) or the decision to launch a voluntary tender offer to completion of the offer procedure. Once the bidder has acquired control of the target or published its decision to launch a voluntary tender offer, the bidder is required to submit the offer document to BaFin for approval within four weeks. The four-week period may be extended by BaFin up to a total of eight weeks under certain circumstances (e.g., in cross-border transactions).
In private transactions, there is no maximum period for negotiations or due diligence. Typically, the due diligence phase is between six and 12 weeks (depending on the deal size and complexity) and the negotiation phase is typically two to four weeks.
Are there any circumstances where a minimum price may be set for the shares in a target company?
For public offers, German law provides for a minimum consideration that the bidder has to offer to the shareholders of the target of a listed corporation. The consideration, whether offered in a mandatory or a voluntary tender offer, must be at least equivalent to the higher of:
- the weighted average stock exchange price of the shares in the target during the three-month period leading up to the announcement of the offer (or of the acquisition of control in the case of a mandatory offer); and
- the highest consideration paid or agreed to be paid by the bidder or any party attributed to it within the six-month period prior to publication of the offer document.
Should the bidder purchase shares in the target during the acceptance period of the offer or through off-market transactions, within one year upon expiry of the offer period at a higher price, the bidder must increase the consideration to be paid to the shareholders who accepted the offer accordingly. As the Takeover Act requires that all shareholders shall be treated equally, the shareholders holding the same class of shares must receive the same consideration. If there are different classes of shares, the best price is to be determined separately for each class of shares.
If the offer is neither a voluntary nor a mandatory offer (i.e., aiming at a shareholding below 30% of the voting rights post-offer, or where the bidder holds a shareholding of more than 30% pre-offer) there are no rules governing the consideration, except for the equal treatment principle.
Is it possible for target companies to provide financial assistance?
For a German stock corporation, it is generally not possible to provide financial assistance because of the strict financial assistance rules under the German Stock Corporation Act. However, a few post-closing mechanisms can have a similar effect, including profit-pooling and loss-pooling agreements or debt-push-down mechanisms.
For a German limited liability company less restrictive capital maintenance rules apply. Under certain circumstances, the German limited liability company may provide security and guarantees, in particular if limitation language is in place.
Which governing law is customarily used on acquisitions?
For national deals, i.e., in cases where a German GmbH or German Stock Corporation is acquired, German law is customarily used. If requested by the seller or buyer, it is also possible to have a share purchase agreement governed by foreign law (e.g., the governing law of the seller or the buyer). The transfer in rem of the shares must, however, be governed by German law and local requirements and formalities must be met to validly effect the transfer of the shares or other assets.
What public-facing documentation must a buyer produce in connection with the acquisition of a listed company?
The key transaction document in a public tender offer is the offer document, which must be submitted in the German language. In order to comply with the requirements set out in the Takeover Act, the offer document must contain the information necessary to enable the target shareholders to make an informed decision on the offer, including information regarding price, financing and other terms and conditions of the offer and information on the target and the bidder, as well as information on future plans and governance post closing. Other than the offer document, there will also be various press releases, announcements and notifications required to be made to BaFin and the respective Stock Exchange.
A fairness opinion by an investment bank confirming the adequacy of the offered consideration is not mandatory, but is customary.
What formalities are required in order to document a transfer of shares, including any local transfer taxes or duties?
For a valid transfer of GmbH shares, German law calls for a notarization of the transaction. For the purchase of shares of a stock corporation no specific formalities are required. However, a statutory merger agreement must be notarized.
Are hostile acquisitions a common feature?
Hostile takeovers are still rare in Germany. Due to the fact that public M&A transactions are only a small fraction of the German M&A market, hostile takeovers represent an even smaller share. Typically, there is a single-digit number of hostile takeovers per year in Germany, which often start as an unsolicited approach and turn into friendly takeovers after a certain period of time and negotiations.
2017 featured a more prominent case with Finnish company Fortum attempting to acquire Uniper, which was regarded as a hostile takeover by the Uniper management. With Fortum failing to acquire a majority though, intentions and further developments in this case remain to be seen. The pump maker Busch’s attempt to acquire a majority of rival Pfeiffer Vacuum is a recent example for an unsolicited approach with a consensual end to the undertaking as Busch fell short of a majority but gained more influence on the board.
What protections do directors of a target company have against a hostile approach?
In Germany, the ability of directors to receive a golden parachute arrangement is restricted. As the acquirer may be in a position to remove the directors under certain circumstances the main protection of the directors is their service agreement. A service agreement continues to be in effect upon removal of the director and needs to be fulfilled or compensated by the company.
Are there circumstances where a buyer may have to make a mandatory or compulsory offer for a target company?
The acquisition of control (i.e., at least 30% of the voting rights in the target), whether by a privately negotiated share transaction with one or several major shareholders or by purchasing target shares on the stock exchange, triggers the obligation of the purchaser to publish the acquisition of control and to launch a mandatory tender offer.
The following voting rights attached to the target’s shares are attributable to the bidder:
- held by a direct or indirect subsidiary;
- which belong to a third party and are held “for the account” of the bidder;
- which the bidder has assigned as security to a third party, unless such third party is authorized to exercise the voting rights arising from such shares and states its intention of exercising the relevant voting rights at his own discretion;
- in which the bidder has a usufruct;
- in respect of which the bidder can demand transfer of title;
- which are entrusted to the bidder if it may exercise the voting rights at its own discretion in the absence of specific instructions from the shareholder;
- from which the bidder may exercise the voting rights by agreement, which temporarily transfers the voting rights without the underlying shares for consideration;
- which are held by the bidder as collateral, provided the bidder holds the voting rights and declares its intention to exercise such voting rights; and
- held by a person that is acting in concert with the bidder or one of its subsidiaries, where shareholders, by written agreement or informally, agree on the exercise of voting rights in shareholder meetings of the target or where shareholders cooperate in another manner with the objective of influencing the business strategy of the target.
If an acquirer does not obtain full control of a target company, what rights do minority shareholders enjoy?
Minority shareholders of a German stock corporation enjoy a number of protective rights, depending on the acutual shareholding. The most significant threshold for minority rights is 25% of the votes cast, giving the shareholder a blocking minority for resolutions for which a majority of 75% is required by law or the articles of association. This includes the amendment of articles of association, conclusion of domination or profit and loss transfer agreements, and capital measures. Minority shareholders representing at least 1% of the share capital may require the appointment of a special auditor to examine management actions. Finally, the minority shareholders remain entitled to general information rights, voting rights and dividend rights.
Is a mechanism available to compulsorily acquire minority stakes?
Squeeze-out mechanisms are available under German law following a successful acquisitions of shares in a company.
27.1 Takeover-related Squeeze-out
The takeover related squeeze-out option allows a bidder who acquires at least 95% of the target’s voting share capital to purchase the remaining voting shares within three months following the expiry of the acceptance period by filing an application to Frankfurt am Main District Court.
In this case, the consideration offered under the tender offer is deemed to constitute an appropriate cash compensation under the squeeze-out procedure, provided that the bidder has acquired shares constituting 90% or more of the registered share capital of the target as result of the tender offer. No formal shareholders’ meeting is required.
Corresponding to the takeover-related squeeze-out, the minority shareholders of the target have a put right if the above described conditions for a takeover-related squeeze-out are met. Practically, this results in an extension of the acceptance period by additional three months if the bidder acquired shares with a total value of at least 95% of the registered share capital of the target. Such procedure is uncommon as bidders usually fail to reach a shareholding of 95% after the offer.
27.2 Merger-related Squeeze-out
Under the German Reorganization Act (Umwandlungsgesetz), holders of shares equating to 90% of the share capital of the target may squeeze out the remaining minority shareholders in connection with an upstream merger (Verschmelzung) of the target into the controlling shareholder. The main requirements for such merger-related squeeze-out are that
- each of the companies, i.e., the target and the parent company, is either a German stock corporation, a partnership limited by shares (Kommanditgesellschaft auf Aktien) or a European public company (Societas Europea, SE); and
- the required squeeze-out resolution is made within three months following the signing of the merger agreement.
The squeeze-out compensation is based on the current value of the target pursuant to a formal fair market valuation of the target.
The resolution and the valuation may be challenged by minority shareholders.
27.3 Corporate Squeeze-out
The bidder may also utilize the traditional corporate squeeze-out procedure at any time following the bid if it owns at least 95% of the registered share capital of the target (including non-voting shares). However, this procedure requires a shareholders’ resolution.
The squeeze-out compensation is based on the current value of the company pursuant to a formal fair market valuation of the target and must be paid as cash compensation. The resolution and the valuation may be both challenged by minority shareholders and are subject to a lengthy judicial review, which usually delays the implementation of the squeeze-out.