Company acquisition in Germany by financial investors
Private equity companies are financial investors that acquire stakes in companies and, if possible, optimize the company's operating business in order to resell the stake at a later date at a profit. In Germany, private equity funds are particularly often founded in the form of a GmbH & Co. KG (limited partnership). Investors and capital providers participate in the funds as limited partners.
The german private equity investor is generally only involved for a limited period of time. Unlike strategic investors, a financial investor usually pursues the goal of selling his investment after a period of three to seven years with the highest possible profits (exit). Since the financing burdens are ultimately borne by the purchased target company, it also bears the risks of the private equity deal.
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Legal services in the german private equity sector
Our team of lawyers, certified specialists and tax advisors advises sellers, managing directors and investors in the context of private equity transactions. Our consulting services include in particular:
- Planning and preparation of the sale of the company
- Drafting of investment agreements and company purchase agreements (from the investor's entry to the exit)
- Advising individual managing directors or the entire management team in the case of co-investment (so-called MBO) with regard to management participation agreements, in particular contract negotiations with financial investors
- Tax advice and structuring of M&A transactions
- Disputed enforcement of shareholder rights in private equity-driven companies (out of court, in court and in arbitration proceedings)
Special features of private equity under german law
Private equity investors often finance german company acquisitions through loans, which regularly leads to a high debt financing ratio. This german practice, also known as leveraged buy-out (LBO), has increasingly come under public criticism under the heading "grasshopper debate", especially in the context of the last banking and financial crisis.
In the context of acquisition financing by private german equity companies, a new company (NewCo in the technical jargon) is usually founded. The NewCo is provided with equity, quasi-equity loans and debt. As a rule, the NewCo then acquires a stake in the target company with the funds thus acquired. What all transactions have in common is that the funds to service the debt capital are to be generated by the target company after the purchase. In contrast to a strategic investor, the commitment of a private equity investor is clearly limited in time and always linked to the goal of later profitable resale or exit via the stock exchange (IPO). During the engagement, the german target company is actively "managed" so that it can be sold with the highest possible return. In order to increase the value of the company, private equity investors almost always use the management of the target company. The managing directors taken over often become co-investors (so-called management buy-out, or MBO for short).
Both the members of the management in the german target company and minority shareholders are thus subject to "control" by the financial investor. The investor's influence is usually contractually secured by rules of procedure and participation agreements in Germany.
Securing influence through control rights, leaver clauses and drag-along rights in Germany
The influence of the financial investors on the management involved (co-investors) is usually secured in the management participation agreements by means of close-meshed control rights, clauses reserving consent, rules of conduct for the exit case and exclusion mechanisms.
In german practice, contractual provisions are common, according to which the financial investor can buy the minority shareholder out of the company for a predefined price in the event of a dispute. According to the content of these provisions, the purchase price to be paid regularly depends on the duration of the investment and the reason for the shareholder's exit (so-called good leaver vs. bad leaver - see also VC investment agreements). These contractual hedging instruments are intended to avoid potential conflicts at the managing director and shareholder level in Germany (without the need for legal or arbitration proceedings).
Furthermore, so-called drag-along provisions are also used under german law, with which the financial investor creates planning certainty for his planned sale (exit realization): If the private equity investor intends to sell his investment to a prospective buyer, he can demand that the minority shareholders sell their investment on identical terms. Accordingly, all co-shareholders covered by a drag-along clause are forced to follow suit in the event of a company sale negotiated by the investor.
By contrast, the transfer restriction clauses that are common in other german practice only work in favor of the financial investor.
Recommendations for contract negotiations with financial investors in Germany
It is important that all parties involved understand the concrete meaning and scope of co-sale obligations, shoot-out clauses, leaver agreements, liability guarantees and other essential regulatory complexes in advance of negotiations with private equity investors and even more so before concluding shareholder or participation agreements with the investors.
In german practice, aggressively drafted shareholder agreements can lead to co-shareholders losing their shares at any time, not infrequently even below a reasonable market price. According to german case law, shareholder agreements that are too restrictive and inadmissibly interfere with fundamental shareholder rights may even be invalid. This could include violations of the applicable prohibition on termination of employment, fiduciary duties under german company law or the requirements formulated by case law with regard to shareholder compensation.