German legal issues for Indian technology companies

German legal issues for Indian technology companies

Ulrich Bäumer

Delhi, 13. November 2009

Agenda

1. Co-operation between Indian and German companies

2. Common Law and Civil Law

3. European Legal System

4. Law of Associations

5. IT outsourcing Contractual Issues / The Market in Europe

6. Employment Law

7. German Tax Law

8. German Court System

… but first

a quick introduction to Osborne Clarke

About Osborne Clarke Alliance

• 600 lawyers in Europe

• Offices in 16 European cities + in Palo Alto, USA + in Shanghai, China

• Specialists in assisting international businesses in Europe

• Awards/recognitionBanking Law Firm of the year 2009 (by Acquisition Finance)

Law Firm of the year at M&A Awards (2009)

Law Firm of the year in Germany (West)– JUVE AWARD

Voted European Technology Law Firm of the Year by The European Technology Forum) in 4 of the past 7 years

UK Law Firm of the Year 2006

Recognizedby both Chambers Europe and Legal 500 directories as a leading European law firm

Where are we?

Country Cities

UK Bristol, London, Reading

Germany Cologne, Munich

USA Palo Alto

Osborne Clarke Alliance Offices

Belgium Brussels De Wolf & Partners

France Paris Stehlin & Associés

Italy Brescia, Milan, Padua, Rome

Studio Legale Associato

Luxembourg Luxembourg De Wolf & Partners

Netherlands Rotterdam Ploum Lodder Princen

Spain Barcelona, Madrid Osborne Clarke

Sweden Stockholm Hellström Law

Our Key Pratice Areas:

• Corporate/M & A

• Financial services/Banking

• Technology & Telecommunications

• IT outsourcing

• Taxation

• Employment

• Visa, staff benefits &related services

• Commercial law

• Intellectual property

• Competition law

• Construction and real estate

• Life Sciences

• Litigation/Arbitration

Examples of Advice Provided to Indian Companies• Infosys Technologies

• TCS

• Mahindra Satyam Services

• Wipro

• HCL

• Tata Motors

• Aricent

• MindTree

• Reliance Industries Ltd.

• Patni

• MPHASIS

• Hinduja Group

• ITC Infotech

• Larsen & Toubro

Recent Quotes

Another extraordinary success is based on the Indian Group led by IT partner Ulrich Bäumer

JUVE, November 2009

Information Technology

Particular strengths: Strong India expertise.

Often recommended solicitors: Ulrich Bäumer,

JUVE, November 2009

Osborne Clarke's Clients

1. Co-operation between German and Indian companies

Adapted Models for Co-operation

• Mergers

• Acquisitions

• Joint Venture

• Partnership

• Built- Operate- Transfer- IT Outsourcing

• Indo- German Strategic Alliance

Adapted Models for Co-operation

• Mergers: The combining of two or more entities into one, through a purchase or a pooling of interests.

• Acquisitions: An act of obtaining ownership of an asset through purchase, trade, or gift.

• Joint Venture: Joining together of two or more business entities or persons in order to undertake a specific business venture.

• Partnership: Form of business organization created by an agreement between two or more persons who contribute capital and/or their services to the organization.

• Strategic Alliance: An agreement between two or more individuals or entities stating that the involved parties will act in a certain way in order to achieve a common goal.

Strategic Alliance

• Meaning:

Strategic Alliance is the arrangement between firms to fulfill any number of corporate goals, including gaining scale, reducing costs, accessing new skirls, products, or markets, and sharing risk.

The term strategic alliance is term for describing some form of relationship but is not, in itself, a legal relationship.

Strategic Alliance

• Strategic Alliances are:

Contractual arrangements (such as license agreements, marketing agreements, and development agreements)

Minority equity investments

Joint ventures (such as corporations, limited liability companies, or partnerships)

Parties to define the legalities of their relationship by contract as there is no defined law for strategic alliance.

Parties to define their respective rights and obligations of their strategic alliance agreement.

Other issues to consider are variety of accounting, tax, antitrust, and intellectual property issues when structuring a strategic alliance.

Strategic Alliance

• Key Point:

The strategic alliance agreement must include a "Mutual Non-disclosure" provision that defines "Confidential Information" and expressly states the respective parties' rights and obligations.

Strategic Alliance

Examples of Strategic Alliances:

1. Cognizant and T-Systems of Germany

2. Cisco and Wipro Ltd., to jointly develop and deliver information technology (IT) service solutions.

Acquisition History

Dr. Reddy’s Laboratories- 10 Acquisitions

Timeline: 1 in 1998, 5 in 1998, 1 in 2000, 1 in 2002, 1 in 2004, 1 in 2006

Target Industries: Pharmaceuticals & Healthcare

Target Countries: Germany, India, UK, US

Average Size of Acquisitions: US$87.78 million

Acquisition History

HCL Technologies- 14 Acquisitions

Timeline:1 in 1998, 4 in 2001, 2 in 2002, 2 in 2003, 2 in 2004, 1 in 2005, 1 in 2008

Target Industries: Capital Markets, Consumer Goods & Services, Insurance, IT Services, Telecommunications

Target Countries: India, Thailand, UK, US


Acquisition History

Ranbaxy Laboratories- 16 Acquisitions

Timeline:1 in 1998, 1 in 1999, 1 in 2000, 1 in 2001, 2 in 2002, 1 in 2003, 1 in 2005, 5 in 2006, 3 in 2007

Target Industries: Pharmaceuticals & Healthcare

Target Countries: Belgium, France, Germany, India, Romania, South Africa, Spain, US


Acquisition History

Tata Consultancy Services- 11 Acquisitions

Timeline:2 in 2002, 3 in 2004, 3 in 2005, 2 in 2006, 1 in 2007

Target Industries: Capital Markets, Consumer Goods & Services, IT Services

Target Countries: Australia, Brazil, Chile, India, Philippines, Switzerland


Acquisition History

Wipro- 14 Acquisitions

Timeline:1 in 2000, 2 in 2001, 4 in 2002, 3 in 2003, 3 in 2006, 1 in 2007

Target Industries: Consumer Goods & Services, Energy, IT Services, Pharmaceuticals & Healthcare,Telecommunications

Target Countries: Finland, India, Singapore, US


Acquisition History

• Tata Steel's $12.1 billion acquisition of the Anglo-Dutch firm Corus on January 2007, essaying the largest takeover by an Indian company.

• Vodafone's purchase of India's second biggest privately-owned mobile phone service provider Hutchinson-Essar.

• Daiichi Sankyo Co. of Japan acquiring 34.8 per cent stake in Ranbaxy Laboratories Ltd. for $2.40 billion in 2008.

An Overview on Cross-Border Deals

Hailing Cross Border Trade-Highlights in Indian Press• Indian companies becoming active globally- Low-cost

operating environments in India and strong balance sheets with potential for leveraging, make Indian firms ideal acquirers even in international markets.

“The Economic Times, Jun 13, 2008”

• Indian firms are mature to handle M&A’s now- Indian companies looking to tap opportunities offshore and seen as a lucrative asset by foreign companies.

“The Economic Times, Jun 29, 2008”

Hailing Cross Border Trade-Highlights in Indian Press• India's acquisition appetite intact despite credit crunch-

Bullish Indian companies are continuing to lead the charge for acquisitions within developed economies despite the current turmoil in global financial markets.

“The Economic Times, Jul 9, 2008”

• Indian firm buys Jaguar and Land Rover- Creating history, Tata Motors buys luxury auto brands Jaguar and Land Rover for $2.3 billion from Ford Motor Company.

“Hindustan Times, March 26, 2008”

2. Common Law and Civil Law

Common Law and Civil Law

Common Law (inductive)Problem à Judgment à Ratio decidendi

Civil Law (deductive)Statute à Problem à Application

3. European Legal System

European Legal System

• 27 Member States

• European DirectivesHorizontal and direct effect

• National Law

• The European Courts and National Courts

• Dispute ResolutionCommonly used venues, choice of law

Arbitration - pros & cons

4. Law of AssociationsBranch office or subsidiary

Types of associations

Reasons for the Establishment of a Branch Office in Germany• Legal requirements: Registration with company register

• Presence treated as branch office, if"own" business activities

Some degree of independence

Establishment of a Branch Office

• Notification of the trade office (Gewerbeamt)

• Registration with commercial register (Handelsregister)notarial form

local management

signing authorities

procedure, timing, costs

Establishment of a Subsidiary –German Types of Associations

Capital Company Partnership

GmbH -> limited liability company(Gesellschaft mit beschränkter Haftung)

GbR -> BGB company(Gesellschaft bürgerlichen Rechts)

AG -> stock corporation(Aktiengesellschaft)

OHG -> general commercial

partnership(Ordentliche Handelsgesellschaft)

e.V. -> registered association(eingetragener Verein)

KG -> limited partnership(Kommanditgesellschaft)

Differences in the Law of Associations

Capital Company Partnership

• Limited liability

• Not dependent on members

• One man association possible

• Legal capacity

• Mainly unlimited liability

• Depended on members

• No one-man association

• Partial legal capacity

GmbH – Private Limited Liability Company• The GmbH is a trading partnership with a corporation structure and

its own legal personality

• Most commonly used in Germany for small and medium size firms

• The structure is straightforward and flexible

organisation with at least two independent bodies

the managing director(s)

the meeting of shareholders

the appointment of a supervisory board is admissible

• Reformation of the GmbHG by the implementation of the MoMiG in 1.11.2008

MoMiG: Law for the Modernization of the GmbH and to combat its Abuse

GmbH - Formation

• Formation by the execution of the articles of association and its by-laws before a German notary

• Registration in commercial register

• Filing of documents

• Formation possible by one shareholderUnlimited number of shareholders possible

German and foreign natural persons and corporations may become shareholders

GmbH - Formation

• Mandatory by-law provisions:

Purpose of the company

Name of the company

Registered domicile

Amount of nominal capital

Amount of original capital contributions

GmbH – Share Capital

• Minimum share capital of EUR 25,000

• Possibility to form an entrepreneur company (limited liability) with a minimum share capital of EUR 1.00

• The formation requirements for an entrepreneur company are

Full share payment in cash before registration

No contributions in kind

Name must include entrepreneur company (limited liability)

Requirement to save 25% of its annual profits for accumulation

GmbH – Board and Directors

• The management board consists of one or more managing directors (Geschäftsführer)

• The managing director has to be a natural person, not necessarily a shareholder or a German citizen/ resident

• The power of appointment lies with the shareholders

• By law the director's duties are:Not to disclose the GmbH's trade secrets

To file for bankruptcy if the company is over indebted

To call a shareholders' meeting if more than half of the GmbH's share capital is lost

To ensure that the GmbH keeps proper books

AG - Formation

• The AG formation procedure is similar to the GmbH

• One shareholder can form an AG

• The founders of an AG can be individuals and legal entities, including foreign ones, and commercial partnerships

• The formation (simple formation) takes place in the following stages:Determination of Articles (Memorandum & Articles)

Contribution of share capital

Appointment of organs

Part-payment of capital

Provision of formation report

Formation scrutiny

Notification and entry in the commercial register

AG – Share Capital

• The minimum share capital must be EUR 50,000

• Share certificates are issuedpar value shares (Nennbetragsaktie)

non par value shares (Stückaktie)

• The par value shares must be EUR 1.00

• The non par value shares have an equal share in the share capital, which must not fall below EUR 1.00

• Different classes of shares with different rights can be issued

AG – Structure, Organs and Liability• The AG is organized on corporate lines

no dependency on any membership

has autonomous organs

• The law (AktG) prescribes three organs:

Supervisory board

Board of management

Shareholder meetings

• The liability of an AG is limited to the value of its assets

AG – Supervisory Board

• The members are appointed by vote of the shareholders for not longer then 5 years

• The members themselves elect the chairman

• The main functions are:appointment/ dismissal of the board of management and their employment contracts

supervision of the board of management

representing the AG in litigation involving the validity of shareholders resolutions

consenting to the business decisions of the board of management if required by the articles or the supervisory board itself

taking part in the production of the annual statement

AG – Board of Management

• AGs with more than EUR 3 million capital must have at least two people on the board of management

• Bears the sole responsibility for managing the AG

• A term cannot exceed five years

• An appointment can be revoked by resolution of the supervisory board and only if an important cause exists

• The representation manner must be specified e.g. singly, jointly, restricted

GmbH in Comparison with an AG

• The main advantages of a GmbH over an AG are:

It is simpler to set up a GmbH

The articles of association of a GmbH can more flexibly reflect the requirements of the shareholders

A GmbH is not subject to as many legislative regulations as an AG

The rational for this is that the public can invest in AGs and should receive a greater protection

Partnerships

• Several types are available

General commercial partnership (OHG)

Limited partnership (KG)

• By a partnership agreement, the partners mutually put themselves under a duty to promote the achievement of a common purpose

• Under a general commercial partnership there is no liability limitation

• Under a limited partnership the liability of at least one of the partners is unlimited

• The most common type is the GmbH & Co. KGThe GmbH & Co. KG is a limited partnership with a limited liability company as general partner

5. IT Outsourcing Contractual Issues / The market in Europe

The market in Germany

German legal issues to beware

IT Outsourcing:An Update from Germany

Outsourcing in Germany

in billion Euro

10 11 1420

25

60

2002 2003 2004 2005 2006 2010

Quo Vadis Indian IT Service Providers in Germany?• trend No. 1:

The Indian IT service provider have discovered Europe as an attractive market

The reasons are the strong Europe and a saturated US market:

US market for outsourcing in 2006: 148 transactions (2005: 163)

EU market for outsourcing in 2006: 157 transactions (2005: 142)

(Source: Technology Partners International, TPI Index 2007)

Quo Vadis Indian IT Service Providers in Europe?• trend No. 2:

Indian IT service provider climb the value chain:

2000: Y2K problems

2004: larger outsourcing projects (IT-, Application Management-, Infrastructure-, Business Process Outsourcing)

2006: takeover of smaller companies in Europe (Wipro –NewLogic)/ Business Consulting

2007: Collaboration / takeover of business units

2009: takeover of larger companies in Europe

India, China, Eastern Europa: What Is The Next Trend?India: Offshoring services are popular

• Almost 75 % of the companies interviewed are Offshoring or are planing to do so in the near future.

• Forrester Research: 67% of German companies are using Indian IT service providers for Offshore Outsouring

Source: Forrester Research, 2005

2

26

1710

18

27

Larger projects live

Smaller projects live

Started pilot projects

Activities planned in next 12 months

No activities planned in next 12 month

Do not know

in %

India, China, Eastern Europa: What Is The Next Trend?China:

• According to the Global Delivery Index from IDC the Chinese cities Bejing, Shanghai and Dalian will overtake the Indian IT hubs (Bangalore, Neu Delhi, Mumbai) in 2010

India, China, Eastern Europa: What Is The Next Trend?• Eastern Europe:

Bulgaria, Estonia, Latvia and Lithuania have already overtaken the old centers in the Czech Republic and Hungary

Eastern Europe is an outsourcing destination because of the European law (e.g. data protection) and because of the language skills of the staff (German, French, etc)

Nevertheless, Eastern Europe is trailing compared to the outsourcing hubs in India, China, Malaysia, Brazil and Mexico

(Quelle: Jahresbericht AT-Kearney 2006)

Outsourcing Contracts –8 Key Issues

1. statute

2. EVB-IT (in Germany)

3. industry standards

governed by1. Warranty

2. Liability

3. Acceptance

4. Delay

5. Change requests

6. IP-rights

7. Contractual penalty

8. Data Protection

1. Warranty

• Statutory period for warranty, Sec 634 a BGB

As of 1st January 2002: 24 months

It is possible for two enterprises to agreecontractually to less than 24 months of warranty

Industry standard in Germany: 12 to 18 months

1. Warranty

… billable… free of charge

Warranty is … Maintenance is …

1. Warranty

"Garantie"

Guaranty

"Gewährleistung"

Warranty is …

2. Liability

Damages are given for

• Delay

• Non performance of a contract

• Bad performance

2. Liability

Scales of liability

• Simple negligence:Breach of duty of care(running a red light in bad weather conditions)

• Gross negligence:

Significant breach of duty of care(knowingly driving in the Alps in Decemberwithout snow tires)

• Intent

2. Liability

Different types of damages

• Direct damage:Loss suffered as the immediate result of defects

• Indirect damage:Other loss suffered as result of the defect(e.g. financial loss, loss of use)

• Consequential damage caused by a defect:Loss from a peril that is not the immediate cause of loss (provider is responsible for a system failure and customer cannot sell goods; the goods rot)

2. Liability

Simple negligence Gross negligence IntentConsequential damage caused by a defect &

Indirect damage

Unlimited Liability

Limited Liability

ExcludedLiability

û û û ûû û

ûû

ûû

= Contract rsp. industry ? standard Limit: 1 to 3 times contract value

= Statutory ? predictable damage

8. Data Protection

• An array of DP law implemented across the EU since 1984

But many local nuances (not least level of fines)

• "processing" of "personal data" regulated

ie info that directly or indirectly identifies living individuals

• Consequences of failure to comply – fines, criminal liability

• Relevance to Indian companies

Beware what you agree to

Data protection officer

Data transfers of HR and customer data

Have you executed model contracts re your HR data?

Binding Corporate Rules – worth considering?

6. Employment Law

What is it?

Anti Discrimination Law

Sending Indian Employees to GermanyWorking in Germany for more than 3 months:

• residence permit which also grants access to the labour market is needed

• Indians may apply for the necessary permit even after their arrival in Germany but before starting to work

Payment of Social Contribution

• Agreement on social security (only pension insurance) ratified 8.11.2008

The agreement applies, when

employee is sent to Germany for not more than 48 months (with an option of another 12 months extension)

employee performs services for his/ her Indian employer within the context of his Indian employment

• According to the German law (§ 5 SGB IV – Einstrahlung) Indian social security legislation will apply when the employee

is sent to Germany by his/her Indian employer

performs services within the context of his/her Indian employment-contract

is sent to Germany for a (predictable) limited period of time

Height of the social contributions, which have to be paid by the employer in addition to the salary

Insurance % total % paid by Employer

Social contribution assessment

ceiling

Employers' max. costs

Pension 19,9 % 9,95 %EUR 64,800 p.a.

(EUR 5,400 p.m.)

EUR 537,30 p.m.

Unemployment 2,8 % 1,4 % EUR 75,60 p.m.

Health Insurance 15,5 % 7,3 %EUR 44,100

p.a. (EUR 3,675

p.m.)

EUR 268,28 p.m.

Nursing Care 1,95 %(plus 0,25 %

for childless

employees)

0,975 % EUR 35,83 p.m.

Flexible Variation of the Size of the Work Force• Contract of employment for a limited period

up to 4 years for entrepreneurs; any number of extensions

up to 2 years without a reason for the limitation; max. 2 extensions

• Use of temporary workers

Application of the German Unfair Dismissal Act• In establishments in Germany with more than 10 employees

part-time employees are counted partially

• After 6 months of employment (waiting period)

Ø unfair dismissals are invalid, employee will be reinstated

Ø valid dismissals terminate employment without severance payment / compensation

Protection against Dismissals

• Reasons for dismissal

conduct (usually warning notice first)

reasons relating to the employees person (e. g. illness)

redundancy

• Notice period

depending on the period of employment

starting with 2 weeks during the probation period

standard period is 4 weeks to the 15th or end of a calendar month

• No claim for compensation

Employees Rights of Participating

• Works Constitution Act applies for establishments in Germany with at least 5 employees

• Works Council's (elected by all employees) rights:information and consultation, e. g. before giving a notice

codetermination in social matters (e. g. working hours, payroll principals)

collective in house agreements (but not on wages)

works council has no trade union rights (i.e. strikes)

establishments with more than 20 employees: consultation before any proposed alteration (e. g. transfer a of department), agreement to reconcile employees interests, social compensation plan

Application of Collective Agreements (with Unions)• Collective agreements (with unions) only apply:

both parties of the employment contract are organized or

employee member of trade union

employer member of employers' federation

or

declaration of a collective agreement as generally applicable or

employment contract refers to the stipulations of the collective agreement

Anti Discrimination Law (AGG)

• Employers are prohibited from discriminating against job applicants or employees

• on the basis of gender, race or ethnic origin

religion or belief

age, disability, or

sexual orientation

• Damage claims are possible within two months from becoming aware of such discrimination

• Direct and indirect discrimination can potentially be justified

7. German Tax Law

The most important Taxes when doing Business in Germany• Corporate Tax

corporations

tax rate 25 %

• Income Tax

individuals

tax rate up to 42 % (progressive system)

The most important Taxes when doing Business in Germany• Trade Tax

tax rate fixed by local municipalities, based on the profit

• Solidarity Surcharge5.5 % of Corporate Tax or Income Tax

• Value Added Tax (VAT)

tax rate 19 % (7 % for some goods, in particular foods, books and newspapers)

The Tax Regime of a German Subsidiary• Separate legal entity

• German entity, subject to taxation in Germanyunless otherwise provided in tax treaty

• Corporations

corporate tax

solidarity surcharge

trade tax

• Partnerships

tax transparent

taxation on shareholders' level

trade tax (if trading activity)

The Tax Regime of a German Branch• Permanent establishment

• Profits attributable to the German branch will be taxed in Germany

The VAT System

• Harmonized within EU

• Importation VAT when importing goods into EU

• Supply of goods and services by an entrepreneur

• Several exemptions

• Input VAT

reclaim of VAT paid to another entrepreneur

• Tax rate 19 % (reduced rate 7 %)

Formal Requirements

• Bookkeeping

• Tax returnscorporate Tax, Income Tax, Trade Tax, VAT: yearly

• Preliminary returnsVAT: monthly

• Tax prepayments

• Wage Tax

• Social security contributions

• Tax advisor

8. German Court System

The Court System –Federal Constitutional CourtFederal Labour Court

Higher Labour Court

Labour Court

Labour Law

Patent/Trademark Law

Federal Patents Court

Federal Court of Justice

Higher Regional Court

Regional Court

Local Court

Civil Law

Criminal Law

Administrative Law

Administrative Court

Higher Administrative

Court

Federal Administrative

Court

Tax Law

Finance Court

Federal Finance Court

Social Security Law

Social Court

Higher Social Court

Federal Social Court

Civil and Criminal Court

Local Courts: 663

Regional Courts: 116

Higher Regional Courts: 24

Total Number of Courts(not restricted to civil and criminal courts)

1131

Duration of Civil Matters

• Local court: 4,6 month

• Regional court (1st instance): 6,7 month

• Regional court (2nd instance): 5,4 month

• Higher Regional Court (2nd instance): 8,5 month

Questions?

Contacts

Ulrich Bäumer

Partner

IT / Commercial - Germany

t +49 (221) 5108 4168

f +49 (221) 5108 4169

[email protected]

German legal issues for Indian technology companies

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