Doing M&A Deals in Germany –

a summary of legal and other aspects worth knowing

Robert P. Wethmar

Taylor WessingHamburg, Germany

2

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).

* Numbers for 2006 not yet available.

3

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.

4

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.

5

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.

6

I. General Remarks

2. Three most common forms of business entities

d. Some Statistics:

GmbH 56%

AG 2% (0.1% listed)

Partnerships 42%

7

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

8

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

9

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

10

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).

11

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.

II. Specific Aspects in German M&A Deals

12

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.

II. Specific Aspects in German M&A Deals

13

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.

II. Specific Aspects in German M&A Deals

14

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.

II. Specific Aspects in German M&A Deals

15

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.

II. Specific Aspects in German M&A Deals

16

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.

II. Specific Aspects in German M&A Deals

17

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.

II. Specific Aspects in German M&A Deals

18

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.

II. Specific Aspects in German M&A Deals

19

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.

II. Specific Aspects in German M&A Deals

20

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.

21

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).

22

Robert P. WethmarTaylor WessingAm Sandtorkai 4120457 HamburgGermany

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