Asset deal or share deal in the acquisition of a company in Germany
Interests in the acquisition of a german company, tax aspects, complexity
One question that is discussed sooner or later in every company acquisition in Germany concerns the transaction structure. In principle, a company in german practice can be acquired by way of a so-called "share deal" or by way of a so-called "asset deal".
These terms, which originate from the english language, are derived from the respective object of purchase - shares or assets - and have also become established in the german practice of company acquisitions. From an economic point of view, the buyer receives the target company in both cases. From a legal point of view, however, there are serious differences between these two forms. Sellers and buyers are therefore well advised to weigh up the advantages and disadvantages in each specific case.
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Legal expertise in structuring the acquisition of a company in Germany
In the case of a company acquisition, the parties involved are assisted in particular by certified specialists for german corporate law and tax law as well as tax advisors. The advice provided by an appropriate german business law firm covers the following strategic, german legal and tax law issues:
- Drafting and review of the offer documents, transaction planning
- Execution of risk analysis concerning the target company by legal and tax due diligence for the buyer
- Conducting legal and tax due diligence for the seller to prepare and optimize the sales process (vendor due diligence)
- Support in company valuation and share valuation as well as purchase price determination by reconciliation of enterprise value to equity value
- Management of liability risks
- Support during the company purchase negotiations
- Drafting and revision of the company purchase agreement
- Tax advice regarding the transaction structure and the tax position of the buyer or seller of the company
Business shares or assets - differences in the object of purchase in german practice
Even though the colloquial term "company purchase" or "company acquisition" is used in german practice, it should be noted that "the company" as the object of purchase does not actually exist. Rather, the colloquially used term "company" refers to the totality of innumerable economic assets (assets and liabilities), which in interaction - comparable to clockwork - enable the operation of a business activity and are used to generate a certain income in Germany.
The prospective buyer of a company is regularly interested in receiving the income generated by the interaction of the assets in the future. For this purpose, he is willing to pay a certain purchase price.
Difference in german practice: Share or Asset Deal
If these assets, which generate the income, now belong to a german company (e.g. a limited partnership, GmbH or AG), in the sense of a shell around all assets, the person who wants to take over the income to be generated can either take over the company by acquiring the shares from the previous shareholders (share deal) or acquire the assets, which in their entirety generate the income, from the company (asset deal).
In terms of the distribution of roles in german practice, this means that in a share deal the shareholders act as sellers; in an asset deal, the company usually sells its assets.
In Germany, in the case of a sole proprietorship, the choice between share deal and asset deal does not exist because there is no company and therefore neither company shares nor shareholders. Only the assets of the sole proprietor exist, which he can sell and transfer by way of an asset deal. A share deal would only come into consideration if the sole proprietor converted his business into a company before the sale, which would considerably increase the structuring effort and the time required in advance.
Share Deal: Advantages and disadvantages in german practice
In a share deal, the buyer acquires the shares in a company and thus the target company as it stands. The purchaser thereby receives the living company operating on the german market as a functioning unit with all asset and liability items on the balance sheet as well as all off-balance sheet asset items. The company's contractual relationships with third parties (e.g. rental agreements, supplier agreements, customer agreements) also remain in place after a share deal, as the contractual partner in german practice is the unchanged existing company.
This has the advantage that, in contrast to an asset deal, it is not necessary to determine in detail which assets are to be transferred to the purchaser. The company is acquired with the business activities known on the german market. In the german business world, a share deal is therefore often not even noticed.
However, this seemingly simple company purchase can also be a disadvantage. This is because it is not certain that the target company will actually function as intact as it is portrayed to the german public. In particular, it is difficult to identify individual risks arising from the company's business activities from the outside, since it is seldom possible to look into all the details of a living company - the individual cogs - can be seen.
Due diligence necessary in Germany!
In order to be able to assess potential risks and, at best, reduce them, the prospective buyer is therefore well advised to identify existing risks as far as possible within the framework of a so-called due diligence and to secure them by means of a corresponding catalog of guarantees in the german company purchase agreement.
Particular attention should be paid to the contractual relationships. Even if these continue unchanged in principle, it is not uncommon for contracts in Germany to contain so-called "change-of-control clauses" which grant the contractual partner of the company an extraordinary right of termination if the group of shareholders of the company changes.
The possibility of a share deal is of particular importance in german commercial real estate transactions. This is because real estate is often held by companies rather than private individuals. By acquiring the shares of real estate companies, the real estate itself can be acquired indirectly. Among the main reasons for such a real estate share deal are the possibilities of avoiding real estate transfer tax and tax-privileged treatment of the capital gain (see, for example, Section 8b KStG).
Asset Deal: Advantages and Disadvantages in Germany
In the case of an asset deal, the purchaser does not acquire a shell with countless assets as its contents (= company), but the individual assets themselves. If the purchaser wishes to maintain the company operating on the german market as a functioning unit, he must - depending on the size of the company - acquire countless assets.
Due to the requirement of certainty under german property law, each individual asset must be specifically designated in the company purchase agreement. At first glance, this seems simple and fair; moreover, the buyer usually knows exactly what he is getting. However, in view of the large number of assets in a large company, this compilation of the individual assets quickly becomes confusing. In german practice, this compilation is regularly carried out by attaching various appendices and lists to the company purchase agreement in which the assets to be transferred are listed. Care must be taken to ensure that every single asset that is to be transferred is actually transferred.
All assets that are not mentioned in the german company purchase agreement remain with the seller in the case of an asset deal. If assets are forgotten, it usually becomes expensive. If in german practice the purchaser absolutely needs the forgotten asset to continue the business operations of the purchased company, the seller often demands payment of an additional (excessive) consideration. This is because the object was not included in the contractually agreed purchase price.
One of the biggest disadvantages of an asset deal are the contractual relationships between the seller and third parties, as these are not automatically transferred to the acquirer and cannot be transferred by the seller to the acquirer without the consent of the third party. Rather, each contractual partner (e.g. customer, supplier or landlord) in Germany must consent to the transfer of its contractual relationship to the acquirer. For the contractual partners this offers the possibility to make the consent dependent on an improvement of the conditions.
Special case: german labor law
The "small gaulish village" of german labor law is an exception to this rule. In the case of a so-called transfer of business, Section 613a of the German Civil Code (BGB) ensures that all employment relationships are transferred to the buyer even in the case of an asset deal. It is particularly interesting that no contractual provision is required for the transfer of employment relationships in Germany; in the event of a transfer of an undertaking, these are automatically transferred to the purchaser without the purchaser noticing.
Determining whether such a transfer of an undertaking has taken place can be difficult in individual cases. If a transfer of business is to be affirmed, the employees must be informed of this. Doing this in a legally secure manner is an art in itself. The employees are then entitled to object to the transfer of the business within a certain period of time, with the consequence that, in german practice, their employment relationships are not transferred to the purchaser. If the employees are not properly informed, the consequence is that the period for objecting does not begin to run. The employees could then still object to the transfer of the business at a much later date. The same applies to some other liability and contractual relationships (such as tax debts, liability for continuation of the company, etc.). These can also be automatically transferred to the acquirer.
And in the end, it is the german tax advisor who decides
The decision as to whether a company should be acquired by way of an asset deal or a share deal is a complex one in Germany. There is (unfortunately) no secret tip as to which structure should be used to acquire a company. Rather, the respective advantages and disadvantages must be weighed up in each individual case, taking into account the actual needs of the parties to the german purchase agreement.
An exception to this is the purchase of a company from insolvency (distressed M&A). In this case, the share deal is usually ruled out because the existing liabilities of the company (whose shares could be acquired) significantly exceed the existing assets. In the context of an asset deal, only the assets of value are then bought out of the insolvent german company and the purchase price paid is used to satisfy the insolvency creditors.
Outside of this special situation, the share deal is likely to be more common in german practice; probably also because it is easier to implement. However, this should not be the decisive argument when deciding on a transaction structure in Germany. Since a company acquisition can have very significant tax consequences for both the buyer and the seller, it is not uncommon for tax advisors to influence the decision for or against a particular transaction structure.