Purchasing a GmbH – Share Deal in Germany
Enterprise value, SPA, taxes and strategy for the purchase of GmbH shares
Germany with its strong economy and reliable legal system remains a very attractive location for acquisitions.
Our specialised and English-speaking team of attorneys, corporate lawyers and tax lawyers has extensive experience with corporate transactions, in particular the acquisition of German law limited liability companies and stock corporations by investors from other jurisdictions. Our corporate law and tax team consists of experienced attorneys and tax advisors who have previously been working for large international law firms or as M&A in-house counsel. With offices located in Germany’s major cities, Hamburg, Berlin, Frankfurt and Munich, we routinely advise strategic investors, financial investors, managing directors and shareholders on all matters related to corporate law and taxation as renowned German one-stop-shop offering competent advice on all legal and tax issues relating to company acquisitions. A special focus of our work with international clients is cross-border M&A.
We render, inter alia, the following services:
- Drafting and negotiating of preparatory documents in connection with the transaction, such as Non Disclosure Agreement (NDA), Letter of Intent (LoI), or Memorandum of Understanding (MoU)
- Transaction management and strategic advise to develop and refine the buyer's transaction objectives
- Legal and tax due diligence
- Company Evaluation
- Drafting and negotiating the Share Purchase Agreement (SPA) or Asset Purchase Agreement (APA)
- Post-merger integration and restructuring measures
- Post-merger disputes and disputes related to M&A
Purchase of GmbH shares - the procedure
Each deal is different. However, there are certain typical transaction structures. While the German market-standard in M&A has incorporated many of the deal mechanism and particularities developed in common law jurisdictions. However, relevant specifics and differences between German law and common law jurisdictions remain and call for the involvement of a specialized German counsel.
Typically, at first, one or several non-disclosure agreements (NDA) are concluded between the seller and one or several potential purchasers. Soon thereafter, initial key points of the transaction are agreed upon between the interested parties and written down in a Memorandum of Understanding or Letter of Intent. With these - not yet binding - pre-contractual declarations of intent, the structure of the company acquisition and a purchase price basis are defined.
Only the seller has detailed in-depth knowledge of the target company and all the essential information regarding the operative situation, existing and potential risks and the inner workings of the company. As a rule of thumb, the purchaser is informed rather poorly in regard to the existing risks, potential risks or residual risks associated with the acquisition and operation of the target company. It has become a standard practice for the buyer to examine and evaluate the limited liability company (GmbH) to be taken over, utilizing specialised lawyers and consultants to conduct in-depth legal, tax, economic, financial and, if necessary, technical due diligence analyzing all relevant aspects of the target company to work out risks in connection with the transaction (so-called due diligence process). Under German law, the seller is obliged to disclose, even without being asked to, any and all material risks inherent to the company which could significantly impair the purchaser’s investment.
After the due diligence process, once the buyer has concluded his risk assessment (sometimes even before such point in time, e.g. with financial investors or auction processes with multiple bidders, where several versions of a share purchase agreement might be simultaneously negotiated with several potential buyers even while the due diligence is still being conducted), the parties negotiate the actual purchase contract. The purchase contract must be notarized by a German notary. However, the buyer does not become the new owner of the company until all agreed conditions have been met (closing conditions). Closing conditions may involve approval by antitrust authorities, the approval of banks, other creditors, and shareholders. A closing condition may also be that the seller eliminates risks that should not be transferred to the buyer. Once all the conditions have been met, the transaction is closed and the transfer of title to shares regarding the company shares is effected and the transaction thus closed.
The company purchase agreement defines all rights and obligations relating to the purchase of the shares in the company or the assets of the company. When buying a GmbH (limited liability company), the annual financial statements of recent years play an important role. On the basis of the balance sheet and certain key indicators in the annual financial statements, not only the purchase price amount is determined, but also a subsequent purchase price adjustment if necessary. In essence, there are two major variants to determine the purchase price of a company: a locked-box purchase price (no purchase price adjustment or true-up amounts) or a closing-accounts variant with purchase price adjustment and/or true-up payments, depending on the wording. Both variants are based on a cash-free, debt-free evaluation of the value of the target company. However, while a locked-box generally points to figures and indicators in the past, a closing-accounts (or other completion-based sub-variant) generally points to an evaluation at the time of closing and therefore, at the time of signing, in the future.
A so called earn-out is generally used if smaller companies with shareholders actively involved in the management are involved or if certain shareholder-managers shall be incentivized to remain working for the company after closing. An earn-out can also be a valid addition to a company purchase agreement if the parties cannot agree on a purchase price. An earn-out, in such a case, offers a rather simple solution to a purchase price adjustment (by way of a true-up amount payable in the future). In such case certain thresholds are defined between the parties. If the acquired GmbH achieves such performance-thresholds within a certain term after the closing (e.g. within the next 2 fiscal years), an additional amount is added to the purchase price and payable to the seller. Very often, performance-related key figures, such as EBIT or EBITDA, are agreed as target values. If the respective performance-related key indicator is met on the agreed date, the purchase price is increased by the contractually agreed amount.
Since the balance sheet ratios are so decisive for the purchase price amount, the seller usually guarantees the correctness of certain balance sheet ratios. If the balance sheet ratios later turn out to have been incorrect, the seller is liable to the buyer under a contractual warranty. By implementing representations and warranties in the company purchase contract the buyer can eliminate uncertainties and reduce risks.
The key provisions of a SPA in Germany can be outlined as follows:
- Definition of shares to be acquired
- Representations and Warranties of the Seller
- Purchase price amount and payment modalities, if necessary purchase price adjustment (e.g. Earn Out), escrow account, closing conditions
- Seller's liability, de-minimis, basket, cap
- Antitrust clauses
- Rules on the limitation of claims
- Non-compete undertakings
- Dispute resolution
Specific liability risks when purchasing shares in limited liability companies
As a rule, the purchaser of GmbH shares assumes that he only bears the legal and economic risks of the acquired company after the takeover. In doing so however, the buyer fails to recognize the statutory liability system of § 16 (2) GmbHG. According to this liability provision, the share purchaser is jointly and severally liable to the GmbH for such contribution obligations that were established before the share purchase and are still outstanding at the time of the share purchase. For this liability it is irrelevant whether the buyer was aware or not of the seller's outstanding contribution obligations.
It should be noted that the company buyer is for instance liable in the following cases:
- Outstanding, unpaid capital contributions;
- Liability claims against the seller according to § 9 GmbHG;
- Seller's liability under the balance sheet, which results from additional payment regulations pursuant to §§ 26 et seq. of the German Companies Act (GmbHG);
- Liability pursuant to §§ 22, 24, 28 and 31 para. 3 GmbHG;
- Finally, liability may exist for the violation of capital raising and capital maintenance regulations as well as for the reimbursement of prohibited repayments pursuant to §§ 30, 31 (1) GmbHG.
Under German law, there is no absolute protection of the buyer against these risks. It is important that these risks are identified and diligently assessed during the legal due diligence process. In order to protect the buyer's own assets, it may be sensitive for the buyer to acquire the GmbH via a special purpose vehicle, i.e. an investment company (usually another limited liability company under German law or the law of another European jurisdiction such as The Netherlands).
Our team of 11 corporate and M&A attorneys and tax advisors throughout our offices in Hamburg, Berlin, Frankfurt and Munich is available to advise on all M&A matters in Germany. We are frequently employed both as lead counsel as well as local German counsel in connection with small to large-cap corporate transactions or parts thereof relating to German law matters. We offer hourly billing but are also open to alternative fee arrangements, such as caps of flat fees, depending on the particularities of the deal.
For a non-binding enquiry, please contact one of our senior attorneys directly via phone or e-mail or use the contact form at the bottom of this page.