Healthcare M&A 2024 Comparisons

In 2023, we saw less deal activity in the German healthcare M&A market. The healthcare service provider sector was severely impacted by increasing costs (energy, rent, and staff), inflation, staff shortages, and regulatory and macroeconomic uncertainties. The pharma, biotech, healthcare-IT, and consumer health M&A markets remained strong, even though the overall deal volume decreased. However, deal activity picked up in the last quarter of 2023.

Focus on Healthcare IT

In the healthcare service sector, inflation, rising costs, and a shortage of skilled and unskilled staff have led to a heightened focus on improving the efficiency and quality of care delivery. This is being achieved through innovative healthcare IT solutions and exploring how generative AI can be utilised in these settings. 2024 is expected to see an increase in scope deals and investors seeking access to disruptive technologies, innovative products, and leading market positions.

Consolidation and Secondaries

The inpatient sector has been significantly impacted by recent cost increases (energy, rent, and labour costs), inflation and the inability to pass on these quickly increasing costs to customers, the expiration of public funding provided during the COVID-19 pandemic, the fiscal situation of public payors, and staff shortages. The hospital reform will also have a significant impact on hospitals. This will likely lead to an increase in co-operations and joint ventures, divestitures of inpatient facilities, and most likely, distressed M&A.

In 2023, the global, macroeconomic, and political uncertainties led to a challenging fund-raising environment, and an increase in PE sponsor holding periods.  In 2024, we will see a mix of exits, along with PE sponsors opting for secondaries and continuation vehicles to provide liquidity to limited partners and funds.

Increase of Competition from Impact, Infrastructure, and Tech-Focused Investors

Private equity and venture capital investors with specialised healthcare teams and expertise have already faced increasing competition from strategic investors in recent years due to decreased access to easy bank debt and rising interest rates. In addition, the focus on healthcare IT and generative AI solutions has already drawn the attention of tech-focused investors. It remains to be seen what influence the increased competition among investors will have on deal valuations and closing the valuation gap between sellers’ expectations and investors’ offers.

German founders usually incorporate new start-up companies in Germany. They usually choose a corporation. A corporation can either be established by a deed of incorporation or acquired from a provider of shelf companies. The minimum share capital of a German limited liability company (Gesellschaft mit beschränkter Haftung, GmbH) is EUR25,000 and half of that amount needs to be paid in at incorporation. The minimum share capital of a German stock corporation (Aktiengesellschaft, AG) is EUR50,000 and for an entrepreneur company (Unternehmergesellschaft, UG) EUR1. The registration of a newly established corporation in the commercial register usually takes from two to ten business days.

When choosing the correct type of entity, founders should, among other things, consider the desired corporate governance structure and required flexibility, limitation of liability, transfer restrictions, as well as tax implications. So far, the most common type of entity at incorporation of a start-up is a GmbH or its “little” sister the UG, because they provide the most flexibility. Some start-ups already choose the form of an AG because, while the corporate rules are stricter and more formal, stock can be more easily transferred (a GmbH share can only be transferred by notarised deed) and the members of the management board and the supervisory board are not considered employees for wage tax and social security purposes.

Early-stage financing is usually provided by business angels, family offices, local and (to a lesser extent) foreign investors as well as government-sponsored funds, public subsidy programmes and subsidised loans.

Venture capital is mainly provided by European (and sometimes US and other foreign) VC funds as well as government-sponsored funds (eg, High-Tech Gründerfonds). While venture capital is generally available for start-ups in Germany, valuations are often lower in comparison to, for example, the US venture market.

In Germany, we do not yet have one standard set of documents that will be used for venture capital transactions. Most legal advisers active in the VC market have developed standards that are also based on standard documentation from other jurisdictions. However, some VC organisations have also developed standard documents that can be used for VC transactions, notably the German Standards Setting Institute (GESSI).

In general, start-ups often retain the legal form and jurisdiction in which they were established. In order to be listed on a stock exchange, a GmbH needs to change its legal form to an AG or SE. Under the German Transformation Act (Umwandlungsgesetz, UmwG), a change of legal form requires a notarised shareholder resolution with a qualified majority of at least three-quarters of the votes. The change of legal form becomes effective upon registration in the commercial register.

In Germany, investors in a successful start-up most often choose a private sale as a means of exit. Exits by IPO are still in the minority. Given the global uncertainties, such as the war in Ukraine and the conflict in Gaza, as well as numerous political elections this year, it is unclear whether IPOs of healthcare start-ups will increase in 2024. It remains to be seen whether the changes in the German stock corporation law that became effective in 2024 (in particular the inclusion of rules on SPACs) will trigger an increase in IPOs. Additionally, due to the costs and complexity involved, dual-track processes have been rare in the healthcare sector in recent years.

The choice of listing depends on a number of factors such as the target market, the attractiveness of an index, etc.

The choice of listing does not impact the applicability of German corporate law to corporations incorporated in Germany. In addition, the rules of the exchange will apply.

The sale process may be initiated by an interested party or by the company. Often, when the company initiates the sale process, it will engage an M&A adviser and contact a number of potential buyers with the aim of entering into a competitive auction process with two or more interested parties. Auction processes are quite common in healthcare transactions in the German market.

In healthcare transactions, the transaction structure is often not just driven by tax and liability considerations but also by regulatory considerations and questions regarding the transfer of assets, data, and IP. The easiest way to transfer all assets, rights, and contractual relationships is through a share or interest deal. A buyer will usually seek to acquire all, or at least the majority of, shares in the VC company. If the founders are still active in the company and vital for achieving the planned growth or other milestones, they will often be asked to keep a certain stake in the company or reinvest by contributing some of their shares to the buyer entity (roll-up or roll-down). Under certain conditions, this allows for a tax-neutral exchange of shares.

If a share deal is not possible (eg, due to factual, tax, or inherent risk reasons), the transaction might also be structured as an asset deal. In that case, all assets, rights, and contracts need to be transferred individually according to the applicable rules for transfers of such assets or rights. Contracts can only be transferred if the other contractual party agrees to such transfer.

Mergers are not very common in the healthcare sector in Germany.

Most transactions are structured as a sale for cash. Sometimes founders are provided with the opportunity to sell a certain amount of shares for cash and contribute the other shares against issuance of shares in the buyer. In German healthcare transactions, the cash compensation is often split into an upfront payment and certain earn-out or milestone payments later on.

The purchase agreement will usually provide for:

• a fixed set of warranties;
• a specific definition of losses;
• specific consequences of a breach of warranties;
• a de-minimis and a threshold amount;
• caps for fundamental and business guarantees;
• an overall cap (100% of the compensation);
• a tax indemnity;
• a non-compete;
• closing conditions (such as merger control, MAC, etc); and
• covenants for the time between signing and closing.

VC and PE investors are often reluctant to provide business warranties, in which case they are provided solely by the founders and/or management. In particular, in auction processes, the shareholders of the VC company incentivise bidders to offer a W&I insurance limiting the liability of the selling shareholders for warranty breaches to EUR1. In bigger mid-cap, as well as high-cap, transactions, the use of W&I insurance has increased. In some auction processes, the sellers even offer stapled W&I insurance packages.

Spin-offs are one of three ways under the German Transformation Act to divide one company into several enterprises by way of partial universal succession. The other two are split-ups and hive-downs. In a spin-off, a part, or several parts, of the assets of a legal entity are transferred to a newly formed entity in return for shares in this newly formed entity being issued to the shareholders in the transferring legal entity. The main feature being that all assets, rights, and contractual relationships transfer to the new entity by way of partial universal succession. Spin-offs can be a great tool to separate certain products, branches, or risks. In the healthcare sector, spin-offs are sometimes used to transfer early-stage products or high-risk or high-growth parts into a new entity to win investors (who would not be interested in investing in the main business of a healthcare company), to ring-fence liability/certain risks associated with early-stage products and services, to find joint venture or co-operation partners for that part of the business, or to prepare for a sale or an IPO.

Spin-offs may trigger taxes on the shareholder or corporate level, in particular if hidden reserves are realised. However, spin-offs that meet certain requirements can be structured tax free. The main conditions for a tax-free structure are:

• The spin-off must transfer a business unit, a co-entrepreneur interest, or share in a corporation comprising the total nominal capital.
• A business unit must remain with the transferring company.
• In case of a transfer of a co-entrepreneur interest, the transfer of assets that do not constitute a business unit within a period of three years prior to the spin-off is harmful if the co-entrepreneur’s share has been acquired or increased as a result.
• The spin-off must not constitute the consummation or preparation of a sale to persons who were not shareholders of the involved entities before the spin-off. A spin-off takes place in preparation for a sale if more than 20% of the shares of the legal entities involved in the spin-off are sold within a lock-up period of five years.
• The law contains a special anti-abuse provision in the case of a so-called separation of shareholder groups, providing for this particular case of demerger that the shareholding in the transferring corporation must have existed for at least five years prior to the transfer date for tax purposes.

During a spin-off, offsetable losses, remaining loss carry forwards, uncompensated negative income, interest carry forwards and EBITDA carry forwards of the transferring corporation are reduced in proportion to the assets transferred to another corporation based on their market values.

In recent years, the relevance of carve-out transactions has increased in Germany. Whether a spin-off followed by a business combination is the appropriate transaction structure depends on a number of operational, tax, regulatory, and other legal issues. Considering the tax consequences, for the sellers, of a spin-off in preparation for a business combination (see 5.2 Tax Consequences) and certain tax benefits of an asset deal for the purchaser (eg, higher amortisation potential), spin-offs are more often used for corporate restructuring purposes (focusing assets and efforts, separating risks, etc) rather than in preparation for a business combination.

The timing of a spin-off depends on certain factors, such as the existence of minority shareholders or a works council (then waiting periods will apply), cash pooling arrangements, and the separability of the business unit from the rest of the business. This requires detailed planning. A spin-off is usually implemented within a time period of two to eight months. If there is uncertainty about whether the preconditions for a tax-neutral spin-off are met or how realised hidden reserves will be evaluated, obtaining a binding tax authority ruling, which takes roughly three months, can be beneficial.

To a certain extent, it is possible to acquire shares or increase a stake in a public company prior to making an offer. However, anyone who (alone or in concert with others) reaches, exceeds, or falls below 3%, 5%, 10%, 15%, 20%, 25%, 30%, 50% or 75% of the voting rights in an issuer by means of acquisition, sale or in any other way must notify the issuer and the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) immediately, at the latest within four business days.

Acquirers are obligated to make a mandatory takeover offer if they (alone or in concert with others) gain control of listed stock corporations, SE, or partnerships limited by shares (Kommanditgesellschaft auf Aktien, KGaA), other than through a voluntary takeover bid, for the first time. The control threshold is a minimum of 30% of the voting rights in the target company. Under certain conditions, BaFin may grant exemptions from the attribution of voting rights or the obligation to publish an offer in individual cases.

Public companies are usually acquired by way of making an acquisition offer or a voluntary or mandatory takeover offer. Public mergers are quite rare in the German healthcare market.

The offered consideration must consist either of a cash payment in euros or liquid shares that are admitted to trading on an organised EEA market. Shares offered as consideration for voting shares must also grant voting rights.

In the case of an acquisition offer, no minimum price rules apply. In the case of a takeover offer, the consideration needs to be adequate. Shareholders of the same class have to be treated equally. If the shares of the target company are admitted to trading on a stock exchange, the consideration must be at least equal to the weighted average domestic stock exchange price of these shares during the last three months prior to the publication of the offer.

Prices paid in the stakebuilding process also influence the minimum price. The consideration for the shares in the target company must be at least equal to the value of the highest consideration granted or agreed by the bidder, a person acting jointly with the bidder or their subsidiaries for the acquisition of shares in the target company within the last six months prior to the publication of the offer.

Common conditions for a takeover offer in the German healthcare space are merger clearing, required regulatory approvals, obtaining clearance required under the foreign investment control rules, and minimum acceptance thresholds. The conditions must be objective (not under the control of the bidder) and must be met by the end of the acceptance period. In case of a mandatory takeover offer, only merger, foreign investment control, and other regulatory conditions are allowed.

In preparation for a friendly bid, the bidder will often contact the target’s management board in advance. Then, an investment agreement or business combination agreement might be concluded. Subject to ad-hoc and other disclosure rules, the bidder and target may also agree on a non-disclosure and confidentiality agreement.

Sometimes, we see irrevocable undertakings by existing shareholders including warranties given to the bidder. The target itself does not provide warranties due to, among other things, capital maintenance and financial assistance rules as well as the fact that the management needs to act in the interest of the company.

However, in recent years, the number of hostile takeover offers has increased. Here, the deal documentation mainly consists of the takeover offer documentation as reviewed by the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungen, BaFin).

Minimum acceptance conditions are only allowed in the case of voluntary takeover offers. The thresholds are determined by the level of control the bidder wants to acquire – eg, acquiring a majority in the general meeting (based on historic attendance numbers), acquiring a qualified majority of 75% of the target, or meeting the requirements of a squeeze-out, etc.

One way to achieve a squeeze-out is the merger of the target entity with the majority shareholder holding at least 90% of the voting rights in the subsidiary. Such a squeeze-out by merger is possible if the involved entities are stock corporations, SE or KGaA. Irrespective of the legal form of the shareholder, the German Stock Corporation Act (Aktiengesetz, AktG) allows a majority shareholder holding 95% of the share capital to initiate a shareholder resolution on the squeeze-out against cash compensation.

The offer document published by the bidder needs to contain information on how the offered compensation is financed. The offer cannot be conditional upon the attainment of financing. That means that, in the case of debt financing, the CPs under the loan agreements should match the conditions under the offer and should not fall outside of the control of the bidder (eg, MAC, etc). In addition, if all or part of the compensation offered is in cash, a financial institution – usually a bank – independent of the bidder must confirm that the bidder has taken the steps necessary to ensure that it will be able to pay the cash compensation when due.

Bidders mostly seek deal protection by entering into irrevocable undertakings and conditional stock purchase agreements with strategically important shareholders. In cases of a friendly takeover, acquirers will try to enter into a business combination agreement with the target.

As a general rule, the management of the target company may only agree to deal protection measures such as, for example, break fees or no-shop obligations if this is in the best interest of the target and not in breach of the rule of neutrality. In cross-border cases, targets sometimes agree to a break fee in case of third-party interventions. Such break fees must be drafted carefully to prevent a violation of financial assistance prohibitions.

If, after the offer, minority shareholders remain in the company, the bidder might nevertheless seek to gain additional governance rights. With a vote of at least 75% of votes represented in a general meeting, the general meeting might resolve on the conclusion of a domination (and profit and loss pooling) agreement. If the bidder acquired 90% or more of the shares, it might be able to squeeze out the minority shareholders (see 6.8 Squeeze-Out Mechanisms).

Irrevocable commitments or undertakings from principal shareholders are common in Germany, in particular with respect to institutional investors. When entering into these agreements, a bidder needs to comply with the obligation to treat shareholders of one class of shares equally. Furthermore, existing irrevocable commitments must be disclosed in the offer.

Before announcing its decision to launch an offer for the target shares, the bidder needs to notify BaFin and the relevant stock exchanges thereof. The offer itself must be submitted to BaFin who will review the offer document for completeness and obvious violations of the German Securities Takeover Act (Wertpapiererwerbs- und Übernahmegesetz, WpÜG) within ten (+ five in case of comments) business days.

Within four weeks (extendable to a maximum of eight weeks in exceptional cases) after announcing the decision to launch an offer or after gaining control for the first time, the bidder needs to submit the offer to BaFin. BaFin will review the offer for completeness and obvious violations of the WpÜG within ten (+ five) business days. The offer must then be published immediately.

The management and supervisory board then have to publish an opinion including reasons for the takeover offer without undue delay (at least within two weeks).

The acceptance period for a voluntary offer is determined by the bidder but may not be shorter than four weeks or longer than ten weeks. The final number of shares tendered must be published by the bidder after the end of the acceptance period without undue delay, and shareholders then have a further two weeks to accept the offer. The acceptance period may be extended if a competing offer is published with a longer acceptance period.

The consummation of the offer occurs once all regulatory approvals/conditions are fulfilled.

The operation of a new healthcare company is typically subject to various general regulatory license requirements. In addition, healthcare companies that provide services in the statutory health insurance system require a specific admission that is often subject to capacity planning. Such admissions are granted by different regulatory bodies by way of an administrative order or by way of an admission contract. For example, admission as a medical care centre (Medizinische Versorgungszentren, MVZ) in the outpatient sector is granted by the admission board which consists of representatives of the statutory health insurance funds and representatives of the panel doctors’ association. Admission as a so-called plan hospital is granted by the competent health ministry of the federal state where the hospital is located. Depending on the respective subsector, the licensing of a new company can take between three and six months.

The primary securities market regulator for M&A transactions in Germany is BaFin.

Foreign direct investments (FDI) in German companies are restricted under the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung, AWV). Restrictions generally apply to certain investments across all sectors by investors from outside the European Union and the European Free Trade Association (EFTA). Specific regulations apply to acquisitions of certain defence and IT security companies. FDI screening generally applies to share deals in which the acquirer acquires voting rights that exceed certain thresholds (10%, 20% or 25%) and to asset deals that result in respective voting rights. The applicable threshold depends on the respective target company’s specific business.

During the COVID-19 pandemic, the German government extended foreign investment control to transactions in the healthcare sector. Since then, manufacturers of vaccines and antibiotics, manufacturers of certain medical equipment and certain medical devices for the treatment of highly contagious diseases, as well as hospital operators and laboratory service providers, qualify as safety-relevant companies. Consequently, the direct or indirect acquisition of a certain percentage of the voting rights in such companies needs to be notified to the competent Federal Ministry of Economics and Climate Protection (Bundesministerium für Wirtschaft und Klimaschut, BMWK). A FDI clearance decision is required prior to the implementation of the respective transaction.

In the case of acquisitions in Germany by non-EU acquirers, the public interest and national security are protected by foreign investment reviews (see 7.3 Restrictions on Foreign Investments). Applications must be submitted to the BMWK. If an acquisition affects areas of responsibility of other federal ministries (eg, the Federal Ministry of Health), the BMWK will involve them in the foreign investment procedure.

Investors from certain countries could be subject to sanctions law (including Russia and Belarus), preventing them from investments in Germany.

German export controls focus on preventing the proliferation of weapons of mass destruction and the uncontrolled transfer of conventional arms. At the same time, sensitive goods are to be prevented from being used for internal repression or other serious human rights violations, or from being supplied abroad or otherwise made available to promote terrorism. Activities in certain sectors are specifically listed for export control, including biology, biotechnology, and medicine. In the area of research and development, this list generally requires broad interpretation (eg, the generic term “general electronics” also covers medical technology).

A notification to the Federal Cartel Office (Bundeskartellamt) is required if the turnover of the undertakings participating in the concentration reaches the following thresholds in the previous year:

• the aggregate worldwide turnover of all parties to the concentration exceeds EUR500 million;
• the German turnover of at least one of the companies involved exceeds EUR50 million; and
• the German turnover of another party exceeds EUR17.5 million.

If the above thresholds are not met, notification may still be required if the following criteria are met:

• the aggregate worldwide turnover of all undertakings concerned exceeds EUR500 million;
• the turnover of one of the undertakings concerned in Germany exceeds EUR50 million;
• the turnover in Germany of neither the target nor any other participating undertaking exceeds EUR17.5 million;
• the value of the consideration for the merger exceeds EUR400 million; and
• the target company has significant operations in Germany.

If a notification is required, the transaction may only be implemented after clearance by the Federal Cartel Office. Violation of the standstill obligation can result in a fine of up to 10% of the worldwide group turnover. Notifiable mergers implemented prior to clearance are pending and ineffective and may be unwound if the conditions for clearance are not met.

During the due diligence of a German target, certain labour law regulations need to be considered. The labour law due diligence in healthcare transactions should in particular cover employee benefits, existing employee pension schemes, applicable collective bargaining agreements (either directly or by reference in the employment contracts), the use of freelancers such as honorary physicians, in particular, with respect to so-called bogus self-employments, accrued holiday and overtime, employment disputes, and layoff and retention strategies (also with respect to the extensive protection of employees against unfair dismissals).

Whether existing works councils or economic committees have to be involved depends on the transaction structure and the consequences of the transaction for the business and its employees.

M&A transactions in the healthcare sector do not require a central bank approval.

In its decision dated 9 November 2021 (VIII ZR 362/19), the Federal Civil Court (Bundesgerichtshof, BGH) held that the isolated sale of patient data violates professional law and potentially also criminal law (prohibition of kickbacks for referrals). In this case, the purchase agreement exclusively aimed at the transfer of patient data or the “goodwill” of a dental practice. Under the purchase agreement, the seller was obligated to redirect calls from patients and enquiries via its website to the purchaser and recommend the continuation of treatment under the new ownership. This arrangement, where the purchase price was strictly for these referrals, did not involve the transfer of any tangible assets. The BGH emphasised that while purchasing a medical practice in its entirety is acceptable, agreements solely focused on the referral of patients are not.

Moreover, the BGH has issued several rulings in the context of drug advertising law that restrict the business models of telemedicine providers, mail-order pharmacies, and providers of online platforms for healthcare services (eg, ruling dated 9 December 2021, I ZR 146/20 and ruling dated 9 February 2023, I ZR 114/22).

The management of a public company is generally allowed to disclose due diligence information to potential bidders, provided the disclosure is in the best interest of the company. No specific limitations with regard to public healthcare companies exist, except for the limitations that derive from general and health data protection laws.

The disclosure of data from seller to buyer in the course of the due diligence must comply with general data protection rules. In particular, the GDPR generally requires a legal basis for the transfer of personal data. Personal data and health data are particularly protected. Against this background, employee data and health data must be anonymised before such data is disclosed in the due diligence of a healthcare company.

If a bidder decides to make an offer, it needs to notify BaFin and the relevant stock exchanges thereof.

Within four weeks (extendable to a maximum of eight weeks in exceptional cases) after announcing the decision to launch an offer or after gaining control for the first time, the bidder needs to submit the offer to BaFin. The offer needs to include, inter alia, the following information:

• description of the securities that are the subject of the offer;
• financing of the offer;
• impact on the bidder’s net assets, financial and earnings position;
• bidder’s intentions with respect to the target’s future business activities;
• name and address or company name and registered office of the persons acting jointly with the bidder and the target;
• if securities are offered as consideration, the offer document must fulfil the requirements of the EU Prospectus Regulation and additional information has to be provided;
• information on the methods of determination of the offer price, in particular which valuation methods were used and why these are appropriate; if the bidder has used several valuation methods, the resulting value must be stated and the weighting that the bidder has given to each valuation method must be explained (in practice, in addition to the statutory minimum offer price, a comparison is usually made with historical stock market prices, supplemented by an indication of the premium on the respective share prices);
• number of shares and securities held by the bidder (and persons acting jointly with him) and information regarding the type and amount of the consideration granted or agreed for all prior acquisitions within a six-month period prior to announcement of the offer and until the publication of the offer;
• terms of the offer and acceptance period;
• explanations on the acceptance and technical settlement of the offer;
• status of regulatory authorisations and procedures, in particular with respect to antitrust law;
• copy of the cash confirmation for the financing of the offer; and
• other mostly technical information, such as a responsibility statement of the bidder and other persons taking responsibility for the content of the offer.

In general, the bidder is not obligated to publish its full financial statements in the offer. For the financial information regarding the bidder that needs to be included in the offer, see 10.2 Prospectus Requirements.

The offer has to be in German, and it has to be published, inter alia, on the internet.

The management of the target has to act in the best interest of the target company and may not accept benefits or preferential treatment from the bidder. The management board together with the supervisory board also has to publish a reasoned opinion on the offer without undue delay after the publication of the offer. This reasoned opinion needs, among other things, to comment on the consideration offered, the likely consequences of a successful offer, the goals being pursued by the bidder and any intention of board members holding target securities to accept the offer.

In Germany, no requirements for special or ad-hoc committees exist.

The board will be more deeply involved in the process in cases of a friendly takeover or in cases of a hostile takeover that is not recommended by the boards.

In most cases, the management board and the supervisory board will obtain independent legal and financial advice. For the purpose of the reasoned opinion on the offer they also usually obtain a fairness opinion.