Company purchase agreement under german law
Design, testing & contestation in german practice
The purchase of a company in Germany is a complex legal and economic process in which an entire company, an entrepreneurial unit or a share in a company is transferred. In addition to the purchase price, a distribution of the risks between the buyer and the seller is determined by means of complicated clauses in the company purchase agreement. However, the high complexity of the company purchase agreement repeatedly leads to errors in individual clauses in german practice. Faulty clauses can even jeopardize the entire company purchase agreement or force the seller to make financially disadvantageous adjustments to the contract. With the help of a specialized lawyer, financial risks can be avoided when selling a company in Germany.
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Our legal expertise for your company purchase agreement in Germany
We see ourselves as an M&A law firm for the medium-sized entrepreneur in Germany. Our english-speaking attorneys, certified specialists for german corporate law and tax advisors will assist you in negotiating and drafting the company purchase agreement. Our attorneys have years of expertise in post-M&A disputes related to completed business acquisition agreements. From our offices in Hamburg, Berlin, Munich, Frankfurt and Cologne we advise the buyer and seller side. Our range of advice can be summarized as follows
- Expert opinions on the validity of company purchase agreements and on the avoidance of concluded company purchase agreements
- Conducting legal proceedings regarding disputed company purchase agreements.
- Preparation of a company sale, drafting of non-disclosure agreement and letter of intent
- Conducting legal and tax due diligence (analysis of the company for sale)
- Determination of the optimal transaction structure - asset deals vs. share deals
- Negotiation and drafting of the transaction documentation, in particular the company purchase agreement (SPA - Share Purchase Agreement)
- Company valuation and purchase price determination in the form of reconciliation of enterprise value to equity value
- Review and advice on taxation of the sale of the german company
Preparation of the company sale in Germany: NDA, LoI & Due Diligence
It is advisable that the seller plans the sale of the company in Germany from the beginning and prepares it professionally. Optimal preparation will not only help in the realization of the company sale. It will also often influence the amount of the purchase price, tax burden and the assumption of risks (especially guarantee liability) in german practice. Professional preparation of the company sale and purchase agreement can also prevent, in particular, risks of nullity in connection with the company sale and purchase agreement.
In the course of the german sales process, company-relevant information is disclosed. Especially in the case of an intended sale to strategic investors, the seller should protect himself contractually. The exploitation of confidential information by competitors can be prevented by means of a staggered disclosure process and effective non-disclosure agreements (NDAs). In german practice, it is not uncommon for a Letter of Intent (LoI) to be concluded as a preparatory measure, with which both parties express their intention to enter into a company purchase agreement. On the buyer's side, the due diligence risk review is of crucial importance in order to get a picture of the object of purchase and its value.
Structure of the german company sale: GmbH, AG, GmbH & Co. KG shares vs. asset deal
Basically, in the case of a share deal, i.e. the sale of shares, it is irrelevant whether shares in an AG, GmbH, KG or GbR are sold. The company purchase agreement in german practice is always structured similarly in the case of a share sale. In contrast, the company purchase agreement differs considerably in the case of an asset deal, in which, for example, a production plant, patents, the company name and company real estate are transferred separately. In the case of an asset deal, it is important that the principle of certainty is observed and that all assets to be transferred, including liabilities, are included in the german company purchase agreement. The company purchase agreement must be implemented by the lawyer in a technically professional manner in order to avoid high financial risks for the contracting parties.
Company purchase agreement: typical clauses, guarantees and warranties under german law
The company purchase agreementin Germany assigns legal, operational and tax risks to one or the other contracting party, in addition to the transfer of the company and payment of the purchase price. Typically, the following fields are contractually agreed upon in a binding manner:
- The clear identification of the assets or business interest to be transferred belong in the business purchase agreement. If the transaction is an asset deal (for example, the sale of production facilities), the assets to be transferred must be precisely defined. In the company purchase agreement, the buyer's entry into current contracts, continuing obligations and insurance contracts must be ensured. The cut-off dates and a system of conditions must be specified with academic precision in the german company purchase agreement. Both the conclusion of the company purchase agreement (signing) and the fulfillment of the main obligations arising from the company purchase agreement (closing) are usually conditioned. The interests of the parties are protected by various contractual conditions in german practice.
- The buyer's need for protection is generally ensured by independent guarantee agreements and indemnification clauses in the company purchase agreement. In accordance with the warranties granted, the seller is liable regardless of fault for missing or incorrect information. By means of indemnification clauses, the buyer protects himself in such a way that in the event of indemnification, adverse obligations must be assumed directly by the seller. The statutory warranty right is usually excluded and replaced by a separate liability regime. The psychological and economic background to the granting of warranties and indemnities is that the seller can gain the confidence of the buyer and achieve a higher purchase price through far-reaching warranties and assurances. You can find more information on guarantee schemes here: Liability and warranty in the purchase of a company in Germany
- Since no-fault guarantee clauses can lead to excessive liability on the part of the buyer, one can help oneself with liability limitation clauses in favor of the seller in german practice. Small claims clauses, which only lead to a payment obligation if a certain amount is owed, and cap clauses, which provide for a maximum liability limit, are widespread in company purchase agreements.
- Tax clauses and tax guarantees are used to adjust tax risks in relation to specific points in time. In tax audits, hidden profit distributions are often discovered at the income tax level and the tax deductibility of operating expenses is denied. With the instruments of tax clauses, the buyer can effectively protect himself against unforeseen, adverse tax effects under german tax law.
- The use of social security clauses can address the major problem of bogus self-employment. In german practice, errors in dealing with freelance agreements are often revealed in company audits and classified as employment relationships subject to social insurance contributions. Depending on the number of pseudo self-employed persons involved, this can cause very high economic damage to the company and have a negative impact on the company's results. Appropriate social security clauses can be used to assign this financial risk to the seller.
- In almost every german company takeover, regulations regarding the workforce and the transfer of operations under german labor law are necessary. Collective bargaining agreements and works agreements can also be transferred as part of a share deal, for example in the case of a partial transfer of operations. All affected employees must be informed about the transfer of operations, including all legal, economic and social aspects. In addition, the employees may have a right of objection in the event of a transfer of business, which may prevent the transfer of the employment contract.
- Non-competition clauses are regularly agreed in the german company purchase agreement to protect investors and company purchasers. This is intended to prevent the seller from competing with the buyer after the sale and commercializing its know-how and relationships with customers, business partners and employees. If the contractual non-competition clauses are overstretched in a factual or local manner, they can lead to the invalidity of the non-competition clause. For more information on the scope of non-competition clauses in company purchase agreements, see here.
- An independent limitation provision belongs in every german company purchase agreement. In most cases, the statutory limitation period is shortened, for example to one year. However, for liability arising from tax clauses, a special provision on the statute of limitations should be agreed, which is linked to the determination of the tax liability. Since the buyer could undermine the statute of limitations in the event of payment in installments by offsetting, it makes sense to standardize a corresponding prohibition of offsetting in the german company purchase agreement.
- In the case of larger transactions involving german companies, the companies may be subject to german antitrust law (merger control under GWB) or EU antitrust law (european merger control regulation). In this case, a company acquisition must be notified to the antitrust authorities. Company acquisitions in which the turnover thresholds under the German GWB are reached must be notified to the German Federal Cartel Office. The european antitrust procedure, however, takes precedence over german merger control if, in turn, the take-up thresholds under the european merger regulation (FKVO) are reached. In the case of a company acquisition in Germany with a "community-wide significance", the EU Commission and not the Federal Cartel Office is then responsible. If the notification procedure and thus the applicable antitrust law is disregarded, the company purchase agreement may become invalid and high fines may be imposed.
- Purchase price regulations, including payment modalities. The purchase price regulations and the use of purchase price adjustments (e.g. fixed purchase price, earn out, cash free, debt free clauses) as well as hedges for the buyer in german transaction practice through locked boxes can be very complex. Information on methods of determining the purchase price for company acquisitions can be found here: Company acquisition and company valuation under german law
Rating from our expert!
In our team, our tax advisor Martin Stürmer will be pleased to take over the valuation of your company for the determination of the purchase price. As a specialized expert in business valuations, he works hand in hand with our lawyers in german corporate law. You can also engage him independently of a legal mandate.
Ask for a quote for a business valuation or a cost-effective indicative business valuation:
Contestation of the company purchase agreement in Germany
In german practice, very often, a contentious situation arises when the seller continues to remain in the company as a managing director or executive employee after the sale (for example, in the case of an MBO - Management Buy Out) and "his" company has to be integrated into a foreign group of companies. But also in the case of a classic company sale in Germany, in which the buyer and seller are no longer connected after the company takeover, the question arises as to whether one party - usually the buyer - can contest the company purchase agreement and withdraw from it, for example because he feels he has been deceived by the seller.
The german statutory law of obligations recognizes various possibilities of rescission that can retroactively dissolve a concluded contract. An effective rescission of the company purchase agreement would therefore lead to a repayment of the purchase price. It should be noted that the contractual exclusion of the statutory warranty right in the company purchase agreement does not lead to the exclusion of the entire right of rescission. In particular, the avoidance of the company purchase agreement due to fraudulent misrepresentation by the seller cannot be prevented by an exclusion of warranty. In the event of fraudulent misrepresentation, the purchaser will therefore be able to destroy the concluded company purchase agreement by way of rescission or in rem restitution (damages).
Risk: void clauses in the german company purchase agreement
The buyer side of a company purchase agreement does not always seek an "all or nothing" situation, which prevails when the company purchase agreement is contested under german law. It is not uncommon for a situation to arise after the conclusion of the contract where one party seeks to amend the company purchase agreement. In particular, the purchaser gains a strong position if it can assert the invalidity of individual clauses. Often in german practice, a dispute after the company purchase (post M&A dispute) is then pre-programmed.
As a rule, the buyer tries to enforce a reduction of the purchase price by threatening the overall invalidity of the company purchase agreement. From a german legal point of view, a post-contractual purchase price reduction can be implemented by means of a confirmation or clarification agreement amending the contract and confirming the validity of the company purchase agreement including the price reduction. In the following, you will find individual areas of regulation that often give rise to disputes and create an increased risk of invalidity of individual clauses or even the entire company purchase agreement in Germany:
- In connection with purchase price adjustment clauses, disputes often arise about economic changes relevant to the purchase price in the period between signing and closing. Closing accounts and earn-out clauses, for example, where only a provisional purchase price is initially fixed and the purchase price is subsequently adjusted, also offer great potential for dispute in german practice.
- Vagueness in warranty declarations or general formulations in MAC clauses (material adverse chance) often lead to disputes after the closing, which are often settled in court in Germany.
- Indemnification clauses, which are supposed to protect the buyer from environmental burdens and tax liabilities, for example, are fought by the seller.
- Contractually agreed non-competition and customer protection clauses carry the risk of nullity, as there is strict german case law on the scope of these clauses.
- Misrepresentation of facts, deception about the economic circumstances of a sold company and other acts of fraud can lead to nullity and damages under german law.
- One possibility to get out of a concluded company purchase agreement is always the form defect (§ 125 BGB). Defects in form very often arise in connection with company takeovers. They can be found again and again in transfers of company real estate, in foreign notarizations, errors in connection with transfer restriction clauses, in the assignment of GmbH business shares, division and denomination of GmbH business shares and german family law restraints on disposal.
In the german legal practice of corporate transactions, the invalidity of a single clause of the company purchase agreement always raises the question of whether the entire company purchase agreement is void. According to the german law, the invalidity of a legal transaction can be transferred to another legal transaction via Section 139 of the German Civil Code (BGB) - or in other words: the invalidity of an individual clause can lead to the invalidity of the entire company purchase agreement.
If you have any questions regarding the company purchase agreement or need advice from a german corporate and tax law expert, please contact our offices in Hamburg, Berlin, Cologne, Frankfurt or Munich. Feel free to contact us without obligation by phone or e-mail or use our contact form: