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					Doing M&A Deals in Germany –
a summary of legal and other aspects worth knowing




Robert P. Wethmar

Taylor Wessing
Hamburg, Germany
I. General Remarks

1. M&A Environment in Germany


     M&A market in Germany on the rise.
     Almost 20% increase in number of transactions in 2005. Similar
      development in 2006*.
     Overall transaction volume in 2005 US $105 billion.
     This makes Germany the 4th largest M&A-market (following USA,
      UK, Japan).

                                                                       2
      * Numbers for 2006 not yet available.
I. General Remarks

1. M&A Environment in Germany


     In terms of both numbers and volume approx. 50% of all acquisitions
      of German targets in 2005 were cross-border transactions.
     More than 15% of all cross-border transactions in Germany in 2005
      involved US-purchasers giving US investors a clear lead in Germany.




                                                                      3
I. General Remarks

2. Three most common forms of business entities

  a. Company with limited liability

       GmbH (“Gesellschaft mit beschränkter Haftung“),
        to some extent comparable with a closely held corporation in the US.




                                                                               4
I. General Remarks

2. Three most common forms of business entities

  b. Stock corporation


       AG (“Aktiengesellschaft“)
        more comparable with a corporation in the US (listed/unlisted).


  c. Limited partnership

       GmbH & Co. KG most common form
        a limited partnership with a GmbH as general partner.             5
I. General Remarks

2. Three most common forms of business entities

  d. Some Statistics:

                                       Partnerships 42%




          GmbH 56%




                                     AG 2% (0.1% listed)
                                                           6
I. General Remarks

3. German SPAs

     Basically, German SPAs contain clauses familiar to US legal M&A
      advisors.
     We have:
         Share Deals
         Asset Deals
         Signing / Closing
         Closing Conditions / Closing Actions
         Escrow Accounts

                                                                    7
I. General Remarks

3. German SPAs

     We have:
             Purchase Price Adjustment Mechanisms, e.g.
          -     Net Equity Guarantee
          -     Net Debt Guarantee
          -     Working Capital Guarantee

             Transfer Statements and Review Mechanisms
             Catalogues of Reps and Warranties
                                                           8
I. General Remarks

3. German SPAs

     We have:
             Limitations on liablility, e.g.
          -      Caps (e. g. 10%, 15%, 25%, Purchase Price)
          -      De Minimis Amounts / Basket Amounts
          -      Limitation periods (statute: 3 years; contract: often 1-1.5 years with exceptions)

             Merger Control Laws
          -      On EU Level
          -      On Domestic (German) level

             MAC Clauses
                                                                                               9
II. Specific Aspects in German M&A Deals

1. Duty to negotiate in good faith


     Generally, in Germany the parties to a transaction are free to
      conclude or not to conclude a contract.
     Pre-contractual duties exists, e.g. a duty to negotiate in good faith.
     Exists as from beginning of negotiations (Section 311 German Civil
      Code).



                                                                          10
II. Specific Aspects in German M&A Deals

1. Duty to negotiate in good faith


     A party may not abort a negotiation if it gave reasonable rise to the
      expectation of the other party that a contract will be finally concluded.
     Violation may lead to claim for damages which encompasses
      expenses incurred by the other party such as advisor„s fees and other
      disbursements.
     Thus, “pseudo-negotiations” may lead to claim for damages of the
      other party under German law.

                                                                          11
II. Specific Aspects in German M&A Deals

2. Asset Deals: “TUPE Rules“ - Employment Protection

     EU Directive (77/187, 98/50), implemented in Germany in Section
      613a German Civil Code.
     “TUPE“ refers to Transfer of Undertakings (Protection of
      Employment).
     It basically means that if a business (or a part thereof) is transferred
      by way of an asset deal the purchaser assumes - by operation of law
      - all rights and obligations attributable to the employment
      relationships belonging to the business transferred, unless employee
      objects to its transfer.
     In addition, it means certain information obligations towards
      employees.                                                          12
II. Specific Aspects in German M&A Deals

3. Corporate Finance Issues


     Germany has strict “thin cap rules“ (rule of thumb: debt/equity ratio
      may not exceed 1.5 : 1 (= safe haven), otherwise interest paid is
      treated as constructive dividend if it exceeds EUR 250,000 p.a.).
     Germany has strict capital maintenance rules which can make
      measures to increase capital difficult and may turn shareholder loans
      into equity.


                                                                         13
II. Specific Aspects in German M&A Deals

4. Form Requirements


     Some M&A transactions require notarized form.
     Violation of form requirement may result in the entire M&A transaction
      being null and void.
     A notary in Germany is a fully qualified lawyer. He must not be
      involved in the negotiation of the transaction.



                                                                        14
II. Specific Aspects in German M&A Deals

4. Form Requirements


  a. What does “notarization“ mean?


       It means that the transaction document must be completely read out aloud
        to the parties.
       In principal, this includes all exhibits, annexes and ancillary documents.




                                                                                15
II. Specific Aspects in German M&A Deals

4. Form Requirements


  b. Transactions which do not require notarization:


         SPA regarding stock corporations (AG).
         SPA regarding partnership interests (KG).
         Asset deals, though exceptions exist.




                                                       16
II. Specific Aspects in German M&A Deals

4. Form Requirements


  c. Transactions which require notarization:


       SPA regarding GmbH shares.
       Asset deals by which real estate is transferred.
       Revision of Articles of Association of an AG or a GmbH.
       Certain trust agreements regarding shares in a GmbH.

                                                                  17
II. Specific Aspects in German M&A Deals

4. Form Requirements


  d. Other agreements which require notarization:


       All ancillary agreements concluded or changed in “close connection“ with a
        notarized transaction, such as an SPA regarding GmbH shares, e.g.
          -   Employment Agreements of Officers and Directors
          -   Escrow Agreements
          -   Loan Agreements
          -   SPA regarding GmbH & Co. KG partnership interest.
                                                                             18
II. Specific Aspects in German M&A Deals

4. Form Requirements


  e. Cost of Notarization
       Codified and related to transaction value.
       May significantly increase the overall transaction costs.
       Examples (transaction value):
                US $10 million      notary fees: approx. US $25,000
                US $100 million     notary fees: approx. US $70,000
       Possible Alternative: notarization in Switzerland.
                                                                       19
III. Differences in Legal Culture

1. Germany is a Civil Law Country


     In domestic transactions the contractual documentation in Germany is
      often substantially shorter than in the US.
     Main reason: as Germany is a civil law country most legal issues are
      covered by statutory provisions.
     Therefore, a domestic German lawyer often feels that an M&A
      document only needs to address issues which are either not
      regulated by statute or should deviate from statutory provisions.

                                                                          20
III. Differences in Legal Culture

2. Internationalization of M&A Transactions

     Increased internationalization of the M&A business has led to Anglo-
      American style of documentation in cross-border transactions in
      Germany.
     To meet this international standard all top German law firms are
      increasingly hiring German associates with a post-graduate Masters
      degree (LL.M.) obtained from law schools in the US or other common
      law countries (e.g. UK, Australia, South Africa).

                                                                      21
Robert P. Wethmar
Taylor Wessing
Am Sandtorkai 41
20457 Hamburg
Germany

Tel:    +49 40 36803 0
Fax:    +49 40 36803 280
Email   r.wethmar@taylorwessing.com
Web     www.taylorwessing.com


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