Private Equity 2024 Comparisons

The private equity market in Germany is experiencing a notable recovery in 2024 following the challenges faced in 2023. Although high interest rates, energy prices, and inflation continue to present obstacles to market growth, the situation has stabilised. The robust recovery of the private equity market in the United States and across Europe is positively influencing the investment climate in Germany.

In light of the persistent but stabilised high costs and the reduced availability of debt funding, the focus has shifted towards smaller to mid-sized transactions with lower funding requirements recently, but we are starting to see a comeback of large cap transactions. Investors are increasingly engaging more strategically with potential assets, often participating in early auction screenings or seeking exclusive negotiation agreements. In the case of high-profile targets, investors remain cautious but are occasionally prepared to accept minority shareholdings. This approach is largely driven by the significant levels of “dry powder” held by private equity funds, which creates pressure to deploy capital effectively.

The trend of fund-to-fund deals, where ownership of a company remains within the same private equity house, continues to be strong.

In 2024, the technology, healthcare, and industrial goods sectors have emerged as key areas of focus for M&A activity in Germany. The technology sector, particularly companies involved in information technology, has seen significant interest, due, inter alia, to the rapid advancements in artificial intelligence. Further, carve-out activity is increasing to create standalone entities with specialised management teams and refined business strategies, aimed at unlocking hidden growth potential.

Higher interest rates and other macro-economic factors have significantly impacted deal-making in Germany over the past twelve months. The rise in interest rates has widened the valuation gap between sellers’ expectations and what buyers are willing to pay, complicating transactions in the current financing environment. As a result, refinancing has become an increasingly attractive option to manage the ongoing high-interest environment. However, the stabilisation of interest rates has expanded the range of available financing options compared to 2023, allowing for more flexible deal structures.

The ongoing conflict in Ukraine continues to act as a significant impediment to any M&A activity involving Russia. It is now common practice for any Russian subsidiaries to be divested before closing, making it an often-seen condition precedent in the sale and purchase agreements (SPAs) for deals involving German companies with Russian assets.

Foreign Direct Investment Reform

Germany’s Foreign Direct Investment (FDI) reforms in 2020 and 2021 have significantly impacted private equity transactions, particularly in sectors critical to national security, such as ICT, healthcare, biotech, energy, and hi-tech industries like aerospace and semiconductors. The amendments to the German FDI regime expanded the scope of sectors under FDI review, increasing scrutiny on foreign-backed investments and adding complexity to due diligence and transaction planning. The FDI process now requires thorough preparation to navigate these challenges. As of late 2023, the FDI screening process transitioned to a fully digital procedure.

German Competition Act Reform

The latest reform to the German Competition Act (Gesetz gegen Wettbewerbsbeschränkungen – GWB) tightened competition law by introducing a new tool for the Federal Cartel Office to address market disruptions, even without evidence of unlawful behaviour. This is particularly relevant for private equity firms with portfolio companies in concentrated markets, as it increases regulatory oversight and potential intervention. The reform also enhances the authority’s ability to absorb anti-competitive practices, adding complexity to transaction planning and execution. A new reform is in progress to further modernise competition law.

EU Foreign Subsidies Regulation

The EU Foreign Subsidies Regulation (FSR) adds scrutiny to private equity transactions involving foreign subsidies. The FSR requires substantive approval for concentrations if the target or parties involved meet certain turnover and subsidy thresholds. This regulation has become a crucial consideration in the transaction process. Early cases indicate the FSR’s growing influence, particularly in cross-border deals. In June 2024, the European Commission initiated its first in-depth investigation under the FSR, scrutinising Emirates Telecommunications Group’s acquisition of PPF Telecom Group over concerns about foreign subsidies.

ESG and Supply Chain Compliance

The German Act on Corporate Due Diligence Obligations in Supply Chains (LkSG), the EU Corporate Sustainability Reporting Directive (CSRD) and the EU Corporate Sustainability Due Diligence Directive (CSDDD) have significantly increased compliance obligations for private equity portfolio companies as well as for private equity companies themselves. Since January 2024, the LkSG applies to companies with more than 1,000 employees, requiring the implementation of comprehensive due diligence processes to ensure respect for human rights and environmental standards across (direct and indirect) supply chains. These developments are driving private equity firms to integrate environmental, social, and governance (ESG) factors more deeply into their investment strategies, reflecting the growing importance of environmental, governance and social factors such as sustainability and human rights in the regulatory landscape.

Private equity transactions in Germany may be subject to both merger control by the Federal Cartel Office and FDI screening by the Federal Ministry for Economic Affairs and Climate Action (Bundesministerium für Wirtschaft und Klimaschutz – BMWK). These authorities enforce German and EU competition laws while assessing national security risks. The Federal Cartel Office operates independently and is not subject to political directives, despite being assigned to the BMWK.

Merger Control

Merger control is mandatory for transactions that meet specific thresholds, requiring private equity-backed buyers to account for these regulations during transaction planning. This is especially important in concentrated sectors, where potential merger control risks could impact future exits. The majority of notifiable private equity transactions are cleared in Phase 1, although exceptions occur, confirming the general rule.

FDI Screening

Recent legislative changes in Germany (see above) have tightened FDI screening, expanding the number of sectors covered and lowering filing thresholds. The screening process differentiates between sector-specific reviews for sensitive areas like military, defence, and IT security, and cross-sectoral reviews for critical infrastructure, biotech, and AI. The FDI rules apply more rigorously to non-EU/EFTA investors and are particularly stringent for investors from countries such as China. The BMWK tends to scrutinise investments from these regions more critically. Although the total number of cases reviewed by the BMWK has decreased since 2023, the overall level of scrutiny remains high. Fewer cases have required in-depth reviews, and the percentage of cases facing restrictive measures has remained stable.

EU Foreign Subsidies Regulation (FSR)

The new EU FSR applies to any company operating within the EU, including those involved in private equity transactions in Germany. It adds a layer of scrutiny to deals involving foreign subsidies, making it a more and more common closing condition alongside antitrust and FDI clearances. Early cases under the FSR emphasise its growing significance, particularly in cross-border private equity transactions. The recently initiated first in-depth investigation under the FSR, involving a UAE state-owned telecom provider, highlights the extensive time frames and importance of such investigations for private equity deals. It remains to be seen to what extent private equity funds will be affected specifically by these new rules – in particular, there appears to be no clear guidance by regulators so far concerning, for example, the question of whether investments into funds’ limited partners by investment entities of foreign governments may qualify as subsidies under the FSR.

Sanctions and Export Controls

On sanctions and export controls, the EU recently gave final approval to the introduction of a law covering EU-wide minimum rules for the prosecution of violation or circumvention of EU sanctions in member states, requiring private equity investors to scrutinise even more both investment decisions as well as management of portfolio companies. On ESG, in addition to the broader supply chain due diligence-related laws mentioned above, compliance with industry-specific regulations such as the EU Deforestation Regulation (EUDR) is becoming more and more crucial for investment decisions. 

Typically, a high level of legal due diligence is conducted to identify potential major risks and issues associated with the target and its business. This comprises the review of documents provided by the seller in the (predominantly virtual) data room (VDR) and information obtained from public sources, in particular the commercial register, the land registers and from public authorities. Identified key findings are typically described in a legal (red flag) due diligence report. This report also provides the client with recommendations on how to mitigate the risks arising from the transaction and comments on the commercial implications of these risks.

Usually, the legal due diligence compromises corporate law, commercial contracts, finance, employment, intellectual property, IT and data protection, real estate, compliance, insurance and litigation. However, the scope needs to be tailored to the specific target and needs of the investor and the key areas of focus depend on various factors, in particular the industry in which the target operates. Furthermore, the scope is dependent on external influences such as global crises (eg, the COVID-19 pandemic, wars) which affect supply chains, price adjustments, sanctions and the overall legal framework.

Due to the development in the private equity market described above, there is an increasing focus on IP, IT (including cybersecurity) and data protection matters as well as on new regulations such as ESG compliance.

For private equity sellers, conducting vendor due diligence is nowadays more or less the standard, in particular for larger auction sales. In most cases, the sell side provides a legal fact book rather than a due diligence report in a formal sense – ie, a document which describes the facts in respect of the legal affairs of the target, but does not include a comprehensive assessment of potential risks and issues or recommendations.

Both forms (legal fact book as well as vendor due diligence report) facilitate a more streamlined transaction process and enable potential buyers to assess the target more efficiently. Furthermore, a vendor due diligence or a legal fact book gives the seller the advantage of identifying potential deal-critical issues in advance and allows it to properly address those issues before or during the transaction process.

Vendor due diligence reports as well as legal fact books are typically provided without reliance and potential buyers must sign a release letter in advance before access is granted. After obtaining these reports, buyers will typically conduct additional buy-side (top-up) legal due diligence in order to ensure the accuracy of the vendor due diligence report or legal fact book provided by the sell side.

In Germany, the acquisitions by private equity funds are mostly carried out by way of a (private) share purchase and transfer agreement with the goal to buy (and acquire) a minority, majority or sole shareholding in the target from the seller (share deal). Tender offers for publicly listed companies occur from time to time, but are the clear exception in the private equity sphere. Privately negotiated SPAs offer flexibility and the ability to negotiate tailored terms directly between the buyer and seller. More rarely, private equity funds buy selected assets, liabilities and obligations from the company (asset deal). Since asset deals tend to be more burdensome for all involved parties, they are usually utilised only in cases where a specific reason exists to do so – eg, in certain carve-out scenarios or in distressed deal situations.

Both one-on-one and auction processes are common in private equity transactions. As a tendency, the larger the target is, the more likely it is that a sale will be structured by way of an auction rather than a one-on-one process. In one-on-one processes, the private equity buyer often has more influence over the deal terms, including representations and warranties, indemnities, and price adjustments. This allows for a more customised approach to risk allocation and deal structure.

In contrast, an auction sale typically involves multiple bidders, leading to a more competitive environment. The seller often dictates (certain) key terms of the sale, which are set forth in a standardised sell-side SPA with limited room for negotiation. Auction processes tend to result in higher purchase prices for sellers and often come with tighter timelines and less flexibility for private equity buyers to conduct extensive due diligence or negotiate individual terms.

Private equity-backed buyers are typically structured through a series of special purpose vehicles (SPVs), with the most common structure involving a bidding company (BidCo) that directly acquires the target company or group. These SPVs are typically incorporated in Germany, mostly as German limited liability company (Gesellschaft mit beschränkter Haftung – GmbH), and/or in countries with a favourable tax environment for private equity investments (typically Luxembourg, the Netherlands or the Channel Islands). The private equity fund itself generally remains at a higher level in the ownership chain and does not directly involve itself in the acquisition or sale documentation, except for providing commitments under equity commitment letters. Instead, the BidCo or other SPVs are the entities that enter into the transaction agreements and hold the investment. Under German law, the execution of the SPA and the transfer of the shares typically require the involvement of a notary – notarisation is mandatory for the acquisition of shares in limited liability companies, being by far the most common legal form in the German market for private equity investments.

Deals are typically financed through a combination of equity from the private equity fund and external debt. The equity portion is often secured through an equity commitment letter, which provides contractual certainty that the private equity fund will supply the necessary equity to consummate the transaction at closing. This commitment is especially critical in competitive transactions, where sellers require strong assurances of the buyer’s financial capability to complete the deal without delays or financing failures. Due to German notarisation requirements, where a limited liability company is the target, equity commitment letters are typically notarised together with the main transaction documentation.

For the debt portion, it is common to evidence committed debt financing in place at the time of signing the purchase agreement – debt commitment letters are typically attached to SPAs in such situations.

In addition, it is standard in German SPAs to include representations and warranties of the purchaser in the SPA, guaranteeing that the purchaser has/will have the required financing sources required to consummate the transaction available at closing.

Over the past year, with financing conditions becoming more challenging due to economic uncertainties and rising interest rates, there has been a noticeable shift toward securing more robust financing commitments early in the deal process. Additionally, there has been a growing trend toward using alternative financing sources, such as private credit funds or vendor loans, to overcome impediments in a tighter credit environment.

Deals involving a consortium of private equity sponsors are not particularly common but do occur in specific circumstances, especially in large to very large transactions where pooling resources and expertise is necessary. Co-investment by other investors alongside the lead private equity fund is more common. These co-investments typically involve passive stakes by limited partners (LPs) already invested in the fund, though participation of external co-investors, such as family offices or institutional investors, occurs from time to time as well. Consortia that include both private equity funds and corporate investors are relatively rare but can be strategically valuable when the corporate investor offers industry-specific expertise or synergies.

In German private equity transactions, the predominant consideration structures are fixed-price mechanisms with a locked box and completion accounts. The locked-box approach was more common in recent years and is particularly favoured by sellers for its price certainty, fixing the value at a specific date pre-closing, thereby minimising post-closing adjustments and potential for disputes. With the end of the seller bull market and a tendency to see more corporate carve-out transactions, the more buyer-friendly and, in respect of carve-outs, more flexible closing accounts mechanism has recently gained popularity when compared to recent years. Earn-outs and deferred considerations are also common, especially to bridge valuation gaps or align incentives, although earn-outs can be contentious due to performance disputes.

Private equity involvement typically influences the choice of consideration mechanism. Private equity sellers often prefer locked-box structures to ensure a clean exit with minimal post-closing exposure, while buyers might favour completion accounts or earn-outs to tie the price to the actual performance of the target.

Fixed price locked-box consideration structures are commonly used. It is typical for “interest” to be charged on the equity price during the locked-box period to compensate the seller for the time value of money, usually calculated from the locked-box date to the closing date. This locked-box “interest” is often structured as a pre-defined daily cash amount rather than an interest rate, such amount being based on calculated cash flows of the target rather than interest rates on the debt markets.

It is not particularly common to include provisions for charging reverse interest on any leakage that occurs during the locked-box period. In cases where such concept is used, the reverse interest is typically designed to penalise the seller for such leakage and protect the buyer’s interests.

It is common to have a dedicated expert or other dispute resolution mechanism in place to address issues related to consideration structures. This is obviously mainly relevant for transactions without a fixed purchase price as of the signing date – ie, deals using completion accounts or earn-outs, where the final purchase price depends on specific metrics or post-closing financial performance. In these cases, disputes may arise over the interpretation of accounting standards or the calculation of financial results, making a neutral expert crucial for resolving disagreements efficiently.

For locked-box structures, the need for a dispute resolution mechanism is less pronounced, given the fixed nature of the price. Depending on other features of the individual SPA (eg, earn-outs) it may, however, still make sense to include provisions for an expert determination in the event of disputes.

Transactions in the German market generally exhibit a relatively low level of conditionality beyond mandatory and suspensory regulatory conditions. It is uncommon to include conditions related to financing, as the financing risk is traditionally seen as a pure purchaser risk that should not affect the transaction. Third-party consents as closing conditions, such as consents from key contractual counterparties (ie, usually crucial customers or suppliers), are more common, but are generally limited to critical contracts without which the conduct of the target business would be impossible or at least significantly less attractive. Conditionality in respect of shareholder approvals (ie, actions which are solely in the hands of one involved party) is almost unheard of in the German market; instead, the representations and warranties to be granted by both parties usually include explicit guarantees that all such required approvals have been obtained.

Material adverse change (MAC) or material adverse effect (MAE) provisions are much less prevalent in German private equity transactions compared to other jurisdictions, but they are used in certain cases, particularly where the target business is subject to significant external risks. When included, MAC/MAE clauses are often heavily negotiated, with a narrow scope in order to avoid deal uncertainty. Further, such clauses will usually not be structured as (negative) closing conditions, but rather as rescission rights.

It is uncommon for private equity buyers to accept hard “hell or high water” undertakings for regulatory conditions due to the high risks involved. Private equity firms typically prefer “reasonable best efforts” commitments and would usually exclude divestment obligations in respect of other portfolio companies. As an exception, “hell or high water” clauses may be accepted in cases where the regulatory assessment comes to the conclusion that the risk is rather remote and where transaction dynamics require a more flexible approach. Even in such cases, however, most private equity investors will not accept break fees triggered by any failed regulatory condition.

There is a distinction between merger control, where buyers might be more flexible depending on the individual antitrust assessment, and foreign investment conditions, where caution prevails since results tend to be more political and, thus, less predictable.

Break fees (or termination fees) are sometimes requested by sellers if a deal fails to close by the longstop date, usually due to a lack of merger (or other regulatory) clearance. As a general rule, most private equity buyers will not accept break fees in the German market.

“Reverse break fees”, where the buyer would be compensated if the deal fails due to seller actions, are far less common in German private equity deals. While they gained some attention during periods of heightened market volatility, their usage has remained limited.

In German private equity transactions, the parties usually exclude statutory termination rights in the SPA to the extent legally permissible, as the statutory law is considered too broad and not adapted to the needs of the parties. Instead, the parties establish limited contractual termination rights specific to the transaction which typically remain in effect only until closing.

Generally, the SPA includes a termination right in favour of both parties arising from the failure to fulfil the closing conditions by a designated longstop date, which usually falls between three and twelve months after signing the SPA. The exact period until the longstop date varies depending on the expected timeline for fulfilling the closing conditions (in particular regulatory clearances) and should leave additional room, in particular when the involvement of foreign authorities is needed. In debt-financed deals, it should also be noted that the longstop date must align with the financing agreement in order to avoid conflicts between the transaction and financing timelines.

Further, most SPAs contain mutual termination rights in the event that closing is not consummated due to a party’s failure to perform closing actions within its responsibility, most notably the payment of the purchase price. Usually, grace periods apply in such cases.

Private equity sellers, driven by the need to maximise returns for their limited partners, typically aim to minimise liability in transaction documentation. Unlike corporate sellers, they often push for low liability caps and shorter limitation periods to protect the proceeds from being diminished by potential liabilities under the share purchase agreement. In sell-side transactions, it is absolutely typical for private equity sellers to insist on a W&I-insured deal. Further, the appetite of private equity sellers to accept liability risks also strongly depends on the remaining life cycle of the invested fund – the shorter its remaining life cycle is, the more focused are private equity sellers to achieve a clean cut with only very limited residual liability risks.

In secondary transactions, where one financial sponsor buys from another, private equity buyers generally accept fewer and less extensive warranties than they would in deals with strategic sellers.       

Private equity sellers typically offer limited warranties and indemnities on exit, focusing on title to shares, authority, and basic operational aspects. Liability, other than for title, leakage and certain other fundamental matters, is often capped at 10-30% of the purchase price, with claims limited to 12-24 months.

Tax indemnities, where granted, usually offer higher liability caps up to 100% of the purchase price and claim periods extending up to seven years; however, we have seen a strong tendency in particular among private equity sellers in the recent past not to grant tax indemnities in the SPA at all, and refer the buyer to a purely synthetical tax indemnity negotiated with the W&I insurance instead.

Management teams only very rarely provide additional warranties in German M&A deals. If they do, as an exception, this usually relates to operational matters, but their liability is usually capped at their equity stake, with similar or shorter claim periods than those of the selling private equity investor.

When both buyer and seller are private equity-backed, warranties are further limited, with a strong reliance on due diligence and W&I insurance solutions. Data room disclosure is typically allowed against warranties, significantly limiting the seller’s liability.

Additional protections commonly included in acquisition documentation involve materiality thresholds and knowledge qualifiers in representations and warranties. “Sandbagging” clauses, where buyers are barred from claiming against known issues discovered during due diligence, are also frequently negotiated to limit post-closing liabilities.

Warranty and indemnity (W&I) insurance is nowadays very common in German M&A deals and prevailing in sell-side private equity deals. It is typically used to cover both fundamental and business warranties, offering protection to buyers without requiring substantial liability from the seller. W&I insurance can also – and often does – extend to tax matters (including tax indemnities), particularly in transactions where the parties seek to avoid time-consuming negotiations. Enhancements for the benefit of the purchaser are more or less standard in modern W&I-insured transactions. Also, purely synthetical tax indemnities have been increasingly used in the recent past. It is known in the market that also purely synthetical catalogues of reps and warranties may be offered by W&I insurers under certain preconditions – this concept, however, appears to have been very rarely tested in the market so far.

Escrow accounts or retention mechanisms have been rather uncommon in German private equity deals and in the overall German M&A market in recent years, as a result of the overall seller market. However, when they are used, they are typically applied to cover warranties or specific indemnities, providing an additional layer of security for the buyer. In such cases, the escrow amount is usually a small percentage of the purchase price and is held in escrow for a limited period of time, often aligned with the warranty periods.

German private equity transactions very rarely lead to post transaction litigation or arbitration. Furthermore, private equity buyers often avoid legal disputes with sellers to prevent reputational risks that could deter future transactions. However, there has been a slight increase in such disputes, likely due to market volatility in recent deals.

Private equity buyers are also cautious about pursuing claims against managers who sold their shares but remain involved in the company, especially when these managers are crucial to value creation and potential recoveries are limited. Litigation typically arises over earn-outs, purchase price adjustments, and representations related to balance sheets and material adverse changes. Disputes over completion accounts are generally resolved through mechanisms in the share purchase agreement, often via a binding decision by an independent expert.

Public-to-private transactions involving private equity-backed bidders are becoming more frequent in Germany, though still not widespread.

Recent examples include the takeovers of Software AG, OHB, Aareal Bank and va-Q-tec, as well as the current takeover attempts regarding Encavis.

Material shareholding disclosure thresholds are governed by the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG). The key thresholds at which disclosure is required include 3%, 5%, 10%, 15%, 20%, 25%, 30%, 50%, and 75% of the voting rights in a publicly listed company. When a private equity-backed bidder reaches or crosses any of these thresholds, they must notify both the target company and the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) without undue delay, within four trading days at the latest.

For private equity-backed bidders contemplating a tender offer, these disclosure obligations are particularly critical. Disclosure must account not only for shares directly held but also for those held through subsidiaries, controlled entities, or persons acting in concert. Failure to comply with these obligations can result in significant penalties and affect the validity of the voting rights, which could complicate the tender offer process.

Additionally, private equity bidders must consider the “acting in concert” rules which could trigger disclosure requirements even if individual shareholdings do not independently meet the thresholds. These rules are particularly relevant when private equity firms co-ordinate with other investors or co-investors, making timely and accurate disclosure essential.

If a shareholder acquires control of 30% or more of the voting rights in a publicly listed company, they are required to make a mandatory offer to all remaining shareholders. This rule is designed to protect minority shareholders by ensuring they have the opportunity to sell their shares at an adequate price in the event of a change of control.

For private equity-backed bidders, consolidation or attribution of shareholdings can be particularly relevant. Under German law, the 30% threshold considers not only shares directly held by the bidder but also those held by affiliated entities, such as other funds within the same private equity group or portfolio companies under common control. This means that if related funds or portfolio companies collectively hold 30% or more of the target company’s shares, the private equity bidder may trigger the mandatory offer obligation. This attribution of shareholdings requires careful structuring and monitoring by private equity firms to avoid unintentionally crossing the threshold.

Cash is more commonly used as consideration in tender offers, especially in transactions involving private equity-backed bidders. The preference for cash offers is driven by the certainty and simplicity they provide to shareholders. However, subject to certain restrictions, shares can also be used, particularly in strategic mergers or when the bidder aims to maintain a lower cash outflow.

The offer price must at least match the highest price paid by the bidder or any party acting in concert with the bidder for the target’s shares within the last six months before the announcement of the offer. Additionally, the offer price must not be lower than the average stock market price of the target shares during the three months preceding the announcement. These rules ensure fairness to all shareholders and prevent bidders from offering prices below the market value or recent acquisition prices.

Private equity-backed voluntary takeover offers typically include several common conditions, such as regulatory approvals (eg, antitrust clearance), a minimum acceptance threshold, and no material adverse change (MAC) affecting the target company. However, German law and the BaFin impose certain restrictions on the use of offer conditions to ensure fairness and transparency, and mandatory takeover offers must be unconditional (except for antitrust clearance and other mandatory regulatory approvals).

A tender offer in Germany generally cannot be conditional on the bidder obtaining financing. Instead, bidders must have secured financing for the offer (as evidenced vis-à-vis BaFin) before launching it, ensuring that the offer is fully funded and not subject to financing contingencies.

If a private equity bidder does not obtain 100% ownership of a target, it can still seek additional governance rights to exert control over the company. These rights may include board representation, veto rights on key decisions (such as changes in business strategy, major capital expenditures, or mergers and acquisitions), and influence over the appointment of senior management. These rights are typically negotiated as part of a shareholders’ agreement with other major shareholders or included in the company’s articles of association.

To achieve a debt push-down into the target following a successful offer, at least 75% of the voting shares are required as this threshold allows the bidder to pass certain shareholder resolutions necessary for capital restructuring, such as the approval of a domination agreement or profit transfer agreement, which are often used to facilitate a debt push-down by enabling the target’s cash flows to service the acquisition debt.

Squeeze-out mechanisms are available under German law for bidders who achieve significant ownership stakes but fall short of 100%. If the bidder reaches 95% ownership of the target’s share capital, it can initiate a squeeze-out under the German stock corporation law, compelling the remaining minority shareholders to sell their shares at a fair cash compensation. If followed by a merger, 90% ownership can be sufficient.

It is relatively common for bidders, including private equity-backed bidders, to seek irrevocable commitments to tender or vote from the principal shareholders of the target company. Obtaining these commitments can significantly increase the certainty of the transaction by ensuring that a substantial portion of the target’s shares will be tendered or voted in favour of the offer.

The nature of these undertakings varies, but they generally require the principal shareholders to commit to tender their shares or vote in favour of the transaction, provided certain conditions are met. However, it is also common for these commitments to include a clause, which allows the shareholders to withdraw their commitment if a superior offer is made. This ensures that the principal shareholders are not locked into the initial offer if a better proposal emerges.

Equity incentivisation of the management team is a very common feature in private equity-backed transactions. This practice aligns the interests of the management team with those of the private equity investors, motivating management to drive the company’s performance and increase its value over time.

The level of equity ownership for the management team in German private equity transactions usually ranges from 3% to 20% of the company’s equity. The exact size of the overall MEP as well as its allocation to individual members of management depend on factors such as the size of the deal, the seniority of the management team, and the specific role of each member within the company. In many cases, top executives may receive a larger portion of the equity, while broader equity participation plans may include mid-level management.

While virtual programmes and/or option solutions exist in the German market, the most frequently used and, due to German taxation, preferred method to enable management to invest into the target group in a management incentive scheme is via a purchase of shares in the target group through a joint holding vehicle (ie, indirectly); in German deals, such holding vehicle is typically a limited partnership where the managers acquire limited partnership interests (while the general partner as well as a potential warehousing entity is usually controlled by the  private equity investor(s) (private equity fund) as sponsor of the management incentive scheme).

Management participation via such joint investment vehicle is commonly structured through “sweet equity” to be acquired (indirectly) by management and the “institutional strip” held by the private equity investor. Sweet equity is typically structured through the implementation of different share classes (ie, ordinary shares with unlimited profit participation rights and preference shares with profit participation rights which are limited to a predefined return or shareholder loans). While the private equity investor holds all investment tranches (ie, both classes of shares and shareholder loans) in a predefined proportion (“institutional strip”), the “sweetness” of management’s equity – ie, its above-average participation in value creation, is achieved by management investing into ordinary shares in a higher proportion than the institutional strip. In a situation where the business performs well (ie, after the preference has been satisfied), this leads to the result that, for the same investment amount in the target group, management achieves higher returns on its investment than the private equity investor.

Time- and performance-based vesting provisions for management equity are designed to ensure that the management team remains committed to the company over a specified period. Vesting schedules often span three to five years and are usually based on the management’s continued employment at the target group or, more rarely, the achievement of specific performance milestones. They are not frequently used in management equity schemes, but time-vesting can occasionally be found.

Leaver provisions are (almost) always included in management equity arrangements to address the circumstances under which a management stakeholder might exit the management incentive scheme. These provisions typically distinguish between “good leavers” and “bad leavers”.

• Good leavers are those leaving due to retirement, long-term illness, permanent disability or mutually agreed departures. In the German market it can be seen that they either may have to sell their stake to the private equity investor at fair market value (usually in schemes without vesting) or they may be entitled to retain their vested stake and sometimes be able to sell their unvested stake at fair market value or, in some cases, receive a pro-rata portion based on their time of service (usually in schemes with vesting).
• Bad leavers (such as those dismissed for cause or who resign without cause or mutual agreement) often forfeit their unvested shares and may be required to sell their (vested) stake back to the private equity investor or the remaining shareholders at a discount, often at the lower of cost or fair market value at the time of their leaving.

Management stakeholders typically agree to restrictive covenants such as non-compete and non-solicitation undertakings. The enforceability of these covenants is subject to certain legal limits in Germany. Non-compete agreements, for instance, must be reasonable in scope, duration, and geographic reach, with a generally accepted maximum of two years. Further, a post-contractual non-compete obligation generally requires compensation (Karenzentschädigung) for the affected manager during the term of the non-compete, which must amount to at least 50% of the manager’s last salary. Overly broad non-compete covenants in terms of scope, geographical reach or term may be deemed unenforceable by the courts.

Restrictive covenants are often included in both equity participation agreements and employment contracts to ensure comprehensive enforceability, providing multiple legal options for enforcement if a breach occurs.

Minority protection for manager shareholders is typically very limited in German management incentive schemes. If minority protection rights are applicable, they are typically implemented through contractual agreements rather than through their equity ownership rights.

Anti-dilution protection (indirectly via their joint investment vehicle) is not a prevailing, but certainly not an uncommon, feature for management stakeholders, ensuring that their equity stake is not diluted by future equity issuances or capital increases.

Management generally does not have direct control over the exit strategy of the private equity investor. While they may be involved in discussions or consulted on the timing and nature of the exit, the ultimate decision typically lies solely with the private equity investor. However, management will often have (indirect) tag-along via its joint investment vehicle, allowing them to participate in the exit process under similar terms as the private equity investor(s).

Private equity funds typically exert significant control over their portfolio companies through various mechanisms.

Board Appointment Rights

Private equity funds usually secure the right to appoint one or more members to the portfolio company’s board of directors or supervisory board, as applicable. This allows the fund to directly influence the strategic direction and key decisions of the company.

Reserved Matters Requiring Shareholder Approval

Private equity investors commonly negotiate reserved matters that require their explicit approval before the company can proceed. These reserved matters often include critical decisions such as changes to the company’s capital structure, major acquisitions or disposals, approval of budgets and business plans, and significant hiring decisions. The scope of these matters is typically broad, ensuring that the private equity fund retains control over major decisions that could impact the value of their investment.

Information Rights

Private equity funds typically secure extensive information rights, allowing them regular access to financial reports, business updates, and other key data. These rights ensure that the fund can closely monitor the portfolio company’s performance and take timely action if necessary. Information rights often include the right to receive quarterly, and annual financial statements, as well as the right to request additional information as needed.

Particularly when dealing with a portfolio company structured as a limited liability company (GmbH) – which is the by far most commonly used legal form – the principle of separate legal personality generally protects private equity funds from direct liability for the actions of the portfolio company beyond their capital contribution.

Liability risks increase if the private equity fund is seen as exercising de facto management over the GmbH. This can happen if the fund is deeply involved in the GmbH’s daily operations or strategic decisions, effectively acting as the company’s manager rather than just a shareholder. In such cases, the fund could potentially be held liable for certain management actions or obligations of the GmbH under specific preconditions. However, the German Federal Court of Justice (Bundesgerichtshof) has so far only confirmed the liability of the de-facto management in certain cases – eg, the liability for payments following insolvency or over-indebtedness or in case of embezzlement.

Further exceptions to the principle of separate legal personality, which are typically not relevant in the context of private equity transactions, include mixing of shareholder and company assets, and withdrawal of assets without compensation that threaten the survival of the company.

Private sales to other private equity investors or corporates are by far the most common exit processes in the German private equity market. Additionally, exits via IPOs or mergers and demergers (ie, where the portfolio company is merged with or split into different entities) occur from time to time, but are much less common. In particular, the market for IPOs has been bad in the recent past and, thus, many planned IPOs have been postponed or cancelled.

The use of “dual-track” exit processes, where an IPO and a sale process run concurrently, is not uncommon in Germany for certain types of large-cap transactions, but very rare in other market segments. This strategy allows private equity sellers to maximise value by keeping multiple exit options open and creating competitive tension between potential buyers and public markets. “Triple-track” exit processes, in which a recapitalisation is additionally pursued as a third path, happen from time to time, but are less common and would not fall under what is seen as a “standard exit strategy” in the German private equity market.

Private equity sellers in Germany do not typically roll over or reinvest upon exit. Instead, they often seek a complete exit to return capital to their investors. However, in some cases, especially in secondary buyouts, there may be a partial reinvestment or rollover if it aligns with the strategic interests of both of the exiting and acquiring funds.

Drag-along and tag-along rights are standard components of equity arrangements and play a critical role in managing shareholder dynamics during exit events. The typical drag threshold, which allows the majority shareholder to compel the minority shareholders to sell their shares, is generally around 50% of the voting shares. Tag-along rights, which protect minority shareholders by allowing them to join in the sale under the same terms as the selling majority shareholder, usually apply (in some cases pro rata) to any (including a partial) sale of shares by the majority shareholder, depending on the specific equity structure and agreements in place.

Institutional co-investors, who often hold larger stakes and have more substantial negotiating power, may secure more favourable terms within these rights. Their influence can result in tailored conditions that better align with their investment strategies, such as adjusting the thresholds or incorporating specific clauses that further protect their interests. The use of drag-along and tag-along rights in this context ensures that exits can be executed efficiently, minimising potential conflicts. In practice, however, these rights are used rarely, as the private equity investor typically aligns in advance with co-shareholders in case an exit is planned.

Exits via IPOs typically involve a lock-up period of 6 to 12 months, during which the private equity seller is restricted from selling their shares to maintain market stability. Although formal “relationship agreements” between the private equity seller and the issuer are uncommon, governance arrangements such as board representation or veto rights are often negotiated if the private equity firm retains a significant minority stake post-IPO. Timing the IPO to align with favourable market conditions is crucial, and securing cornerstone or anchor investors is a common strategy to ensure a successful offering. These investors provide stability and confidence, which can attract broader market interest.

Private equity-led IPOs in Germany often include both primary and secondary shares, allowing the company to raise new capital while enabling the private equity firm to partially exit its investment.