Energy & Infrastructure M&A 2024 Comparisons

The energy and infrastructure M&A market in Germany has experienced significant changes over the past year, influenced by economic pressures and geopolitical events. However, despite these challenges, the market overall has shown resilience and a continued commitment to sustainability.

Macro- and Microeconomic Pressures

Inflation has driven up costs for materials and labour, impacting project valuations. The European Central Bank’s interest rate hikes have made borrowing more expensive, leading to a preference for equity financing over debt. Stricter lending criteria have also made securing loans more challenging.

Geopolitical Impacts

The conflict in Ukraine has disrupted supply chains and driven up energy prices, prompting increased investments in renewable energy and energy security. Providing stable energy supply, green energy projects are receiving increasing support from the general public.

Germany v Global Trends

Germany's M&A activity has been mixed compared to global trends. While deal volume has remained stable, the value of deals has fluctuated significantly. For instance, M&A deal values in Germany’s energy sector dropped in Q1 2024 compared to the previous quarter. Despite this, Germany's focus on renewable energy aligns with the global trend towards sustainable investments.

Key Trends and Challenges

Speeding up energy turnaround

Investment in renewable energy has increased, driven by sustainability goals. The market has remained active despite a rise in corporate insolvencies, and the investor base has broadened as much as the amount and types of assets, which now increasingly include ancillary services like storage, demand-side management (eg, smart meters), charging infrastructure and H2 infrastructure.

Industry decarbonisation

Decarbonisation pressures are leading to evermore joint ventures and co-operations between energy producers and carbon-heavy industry as well as – depending on strategies – deeper vertical integration.

New market entrants

Besides industrial players, further new players are entering the energy M&A market for different reasons. The increasing need for capital keeps attracting different institutional investors (eg, leading to transactions of development projects and platforms). Digitalisation challenges and a slowing down of investor confidence in other types of start-ups are also leading to an increase in startup-transactions concerning energy business cases. A slowing-down of the real estate sector combined with synergies in investment processes, investor base and, at times, assets has also increasingly motivated core real estate investors to focus on renewable energy assets.

Financing challenges

Both renewable energy and infrastructure projects face financing challenges, with high initial costs, market risks and complex project structures contributing to difficulties in securing investment. Adding to this is the dependence of decarbonisation projects on subsidies and similar state support, which has become more scarce following a ruling by the constitutional court limiting the government’s flexibility to circumvent constitutionally anchored austerity.

Grid delays

Land and permits were previously the core challenges for any power project, but the overall transformation is increasingly overwhelming both Transmission System Operators (TSOs) and Distribution System Operators (DTOs).

Incorporating a start-up in Germany's energy and infrastructure sector is common, and founders usually prefer a German-based entity for the German market. Although European law leads to broad flexibility for market participation of other EU-incorporated entities, debt providers and local stakeholders favour entities that incorporate in the same jurisdiction as that in which the asset is located. Germany offers a structured and reliable process for company incorporation, ensuring transparency and legal compliance, making it an attractive location for start-ups. Entrepreneurs may be surprised, however, by German bureaucracy when setting up and by formalism when incorporating their first German entity.

The most popular legal forms include the limited liability company (Gesellschaft mit beschränkter Haftung – GmbH), the entrepreneur company (Unternehmergesellschaft – UG) and the limited partnership (Kommanditgesellschaft – GmbH & Co. KG).

• A GmbH requires a minimum share capital of EUR25,000, with at least EUR12,500 deposited at incorporation. The process takes around two to three weeks and includes notarising the articles of association, opening a business bank account and registering with the local commercial register, trade office and tax authorities.
• a GmbH & Co. KG is a hybrid of a GmbH and a KG. The GmbH is required to hold EUR25,000 in capital, while the partnership as such has no minimum capital but commonly includes contributions from limited partners. The incorporation process takes three to four weeks, with additional steps like the conclusion of a partnership agreement (simple written form being sufficient) and registering both the GmbH and KG separately with the commercial register and tax authorities.
• a UG is a simplified version of a GmbH and can be started with as little as EUR1, although a higher initial capital is advisable. It follows a similar incorporation process as the GmbH, also taking two to three weeks but with less stringent capital requirements.

Since formalities and the required steps may take too long, it has become common to acquire shelf companies from professional providers. For a top up of 10–15%, founders will have their entity readily available in only a few days. Timewise, the KYC process when opening a bank account has proven to be quite lengthy in some circumstances and needs to be given early attention in order to avoid delays.

The selection of the right legal entity is mainly influenced by tax considerations and distribution mechanisms.

• GmbHs and UGs are frequently selected for their adaptability and uncomplicated corporate governance. The GmbH is a taxable entity, meaning that its profits are subject to corporate taxation. Distributions to shareholders, including dividends, incur withholding tax and may lead to dual taxation, first at the company level and then at the shareholder level.
• The GmbH & Co. KG is tax transparent, meaning that the partnership is not subject to (income) taxation at the entity level. Profits are directly distributed to the partners (both general and limited, depending on the agreed participations), who are thereafter taxed individually according to their separate profit shares. This tax transparency can offer specific tax benefits, potentially providing more advantageous tax treatment for specific investors, particularly in cross-border investment scenarios or when partners are governed by varying tax regimes.

Start-Up Financing

Generally, start-ups in Germany benefit from diverse funding sources and a structured, transparent documentation process.

Early-stage financing may be received from various sources, including local venture capital firms, business angels, family offices and constructions like the High-Tech Gründerfonds (HTGF), a public-private partnership between the government, Germany’s federal investment bank KfW Bank and private institutions.

The financing process is documented through a term sheet, followed by an investment agreement, a shareholders’ agreement and, in some cases, a convertible loan agreement. The company's articles of association are then updated to reflect the new shareholding structures.

Market-Specific Infrastructure Financing

For projects in the energy and infrastructure sector in particular, obtaining early-stage project financing can be challenging, especially if a developer wants to fund not only CAPEX but also DEVEX.

In these cases, project developers tend to team up with other partners (such as infrastructure funders or larger developers) and enter into joint venture or joint development agreements. While one of the partners may bring access to the project (eg, land use agreements, permits or licences), the other partner(s) may bring not only funds but also additional know-how to the partnership. Such a contractual arrangement is usually agreed upon in a joint venture (or joint development) agreement that stipulates when and how funds are provided, how final investment decisions are taken and how partners can exit the project.

In Germany, venture capital predominantly originates from domestic venture capital firms that are actively investing in start-ups. International venture capital firms actively observe the German market and regularly offer financial opportunities. Moreover, infrastructure funds have progressively integrated venture capital investments into their strategies.

Following the German corporate law’s formalities, venture capital investments follow standard steps. Legal advisers and notaries usually work with certain standard documents. While templates (partly available to the public) are common, terms will be customised during negotiations.

Key documents include:

• a term sheet that outlines basic terms such as investment amount and equity stake;
• an investment agreement that finalises the terms;
• a shareholders' agreement that defines shareholder rights and exit strategies;
• a convertible loan agreement that allows loans to convert into equity later; and
• the articles of association, which are updated to reflect changes in the company’s structure and, unlike the other documents, are publicly available in the commercial register.

In Germany, start-ups that have been incorporated as a UG first (owing to reduced capital prerequisites) usually change their corporate form. As businesses expand and get venture funding, they often transition to GmbHs to indicate maturity and stability – a process referred to as “growing up” to GmbH.

Start-ups generally operate within the German jurisdiction, capitalising on its strong legal and regulatory framework. As they expand, many are recommended to establish holding structures (or to be included in holding structures as subsidiaries) or to create subsidiaries to enhance tax and operational savings. Altering jurisdiction is uncommon, as corporations typically modify their corporate structure while remaining within Germany.

IPO Market Developments

In Germany's energy and infrastructure sector, the choice between an IPO and a sale depends on factors like stock market conditions, growth stage, the company’s size and potential market cap – and depends heavily on investor preferences. Many larger companies now use a dual-track process, preparing for both options to remain flexible, but this involves substantial resources.

The IPO market has seen volatility, although Germany remains a leader in IPO numbers. As a general rule, the choice of going public leads to a much higher level of transparency and a stricter corporate and regulatory framework for the company and potential transactions. This substantially binds management resources.

Sale as a Default for Project Developers

Whether a sale or an IPO is the right market approach is also a question of the strategy behind the liquidity event. A sale process will usually offer quicker liquidity and a more confidential transaction, especially if strategic buyers or private equity firms are interested.

In the energy and infrastructure sector, there is a substantial difference in the strategies of market players: while there are companies that work with a build-and-hold strategy (ie, aiming to develop assets and to operate them over a longer term), several developers would rather work with a develop-and-sell approach (ie, to generate revenue through project sales).

For companies pursuing a build-and-hold strategy and seeking to raise funds to expand and operate their assets long-term, an IPO might be an attractive approach. On the other hand, a sale generates immediate revenue for future projects and is the approach of choice for developers following a develop-and-sell strategy. Portfolio deals – where a large number of projects are sold – or the sale of greenfield projects are typically structured in straightforward sales (and not as IPOs).

Farm-Down as a Market-Specific Approach

The farm-down approach is a very specific yet popular transaction model in the energy and infrastructure sector, and is especially used by utilities. In this model, a project is developed through all stages. Upon commissioning, the developer divests a portion of its equity, usually keeping a portion of the equity and often continuing to run the operations and maintenance of the project. The utility usually buys and markets the generated electricity under a power purchase agreement (PPA).

This strategy offers a fair mix of risk reduction and consistent revenue, enabling developers to recycle capital into new projects while keeping a long-term stake in the asset and assisting in its operational success. For investors (in particular mere financial investors), this can be an attractive model since it offers access to assets without the requirement of specific industry experience.

Germany’s emphasis on renewable energy and infrastructure has also made listing more attractive for companies in the sector. There are currently four listed energy companies. One of them is Encavis AG, which has recently been targeted by KKR.

In 2024, a German energy and infrastructure company deciding where to list would consider several options.

• A Frankfurt Stock Exchange listing offers local regulatory familiarity, access to German investors and support for renewable energy projects. It can also enhance the company’s reputation within Europe.
• A foreign exchange like NYSE or NASDAQ provides larger capital pools, higher liquidity and global exposure, potentially leading to higher valuations, which offset the substantially higher transaction costs.
• A dual listing combines these benefits, maximising investor reach and liquidity.

With Germany leading in IPOs in 2024, the choice depends on the company’s goals and market conditions, guided by financial advisers.

Listing on a foreign exchange can complicate future sales, especially regarding minority squeeze-outs. Different countries have varying rules for this process. For example, Germany allows majority shareholders (90–95%) to buy out minority shareholders, but foreign exchanges like the NYSE may have stricter or different regulations. This can hinder full control post-acquisition and discourage potential buyers.

While foreign listings might offer increased capital and investor exposure, they introduce regulatory complexities that can affect future sales. Careful consideration and legal advice are crucial when navigating these challenges.

In Germany, the sale process of a privately held company can take different forms based on factors like the company's size, industry and stakeholder preferences. The following two approaches are common.

• Auction process – this is typically used when there is strong interest from multiple buyers. This can be the case in particular if a single type of assets (wind or solar farms, battery storages, etc) is sold. By creating competition among bidders, an auction can drive up the sale price. It is a more structured process, sometimes involving several rounds of bidding.
• Bilateral negotiation – this is more common when dealing with a strategic buyer and/or the formation of a joint venture. It is usually faster and more confidential than an auction, making it preferable when the seller wants to act in a more discreet way, if the transaction is complex or when market conditions do not support competitive bidding. Usually, bilateral negotiations are chosen if the price is only one of several factors in the choice of an investor.

In Germany, there is no consistent pattern in the sale of privately held energy and infrastructure enterprises with venture capital investors; it fluctuates according to the company's operations and the nature of the investors engaged.

A crucial consideration is the potential for replacing the management team and the associated risk of a brain drain to the company's future. Larger infrastructure funds rather opt to acquire the entire enterprise but generally incorporate management retention provisions to maintain stability. On the other hand, when new venture capital firms enter the already existing venture capital investors, they rather acquire a substantial equity stake without pursuing control, thereby permitting the original management and existing investors to retain their involvement.

The choice between divesting the entire firm or a controlling stake depends primarily on the prospects for sustained growth and the strategic objectives of the stakeholders.

In Germany’s energy and infrastructure sector, the form of consideration in the transaction can vary, with several common approaches.

• Cash transactions are frequently used, particularly in larger deals, as they provide a clean exit and immediate liquidity, which are the aspects sellers often aim for. Documentation is straightforward and W&I insurance coverage is common and can be easily integrated.
• Stock-for-stock transactions are less common but can occur when a larger company aims to integrate the acquired business. They are attractive to sellers who see long-term potential in their sold business and in the purchaser’s strategy.
• Combination of stock and cash – this hybrid model offers a balance of immediate liquidity and potential future gains. It is often offered to sellers by private equity investors.

The choice of structure typically depends on the strategic goals of both parties and the buyer’s financial position. However, as a general observation, cash transactions make up the majority of sales in the energy and infrastructure sector.

Founders and venture capital investors in Germany are typically expected to assume responsibility for representations, warranties and certain liabilities after a transaction closes.

Key aspects include the following.

• Representations and warranties – in recent months, the German M&A market has started to shift from a seller-favourable climate, characterised by only limited warranties from sellers, to a more buyer-friendly landscape. Sellers must now give not just title and capacity warranties but also operational and business-related warranties.
• Liability is often limited to a fraction of the purchase price, in any case not exceeding 100% of the purchase price.
• Indemnifications are typically provided for risks detected during due diligence, particularly for historical tax liabilities. The liability for indemnifications is usually uncapped.
• Escrow/holdback – a portion of the purchase price can be held in escrow for a set period to cover potential claims related to breaches or liabilities. Escrows are advantageous for protecting warranty claims; nonetheless, in Germany, they are held and managed by notaries. Notarial fees will be charged based on the amounts held in escrow, and will lead to further substantial transaction expenses.
• W&I insurance is less common in Germany than in other regions, but its use is growing, offering coverage for breaches and reducing the need for large indemnification or escrow provisions. W&I insurance coverage is gaining popularity as an alternative that provides protection and mitigates transaction complexity.

Spin-offs (Abspaltungen) are a popular alternative to asset deals in Germany's energy and infrastructure sectors, especially when a company wants to sell part of its assets without transferring the full business. This approach is particularly beneficial in cases when obtaining agreement from all contractual parties for an asset transfer would be difficult or time-consuming. For example, when selling a portion of a wind farm portfolio, transferring individual agreements with suppliers, landowners and grid operators often requires clearance from each party, which may be a time-consuming and complex process.

A spin-off, on the other hand, provides for the formation of a new business to hold the relevant assets, eliminating the need to seek clearance before transferring each individual contract. The buyer can then take ownership of the new corporation, including its assets. This structure simplifies the process by eliminating the need to renegotiate many contracts, making it especially appealing in the energy sector, where assets are frequently subject to long-term contracts.

However, a spin-off presents certain complications:

• first, it might involve the buyer becoming liable for the remaining business prior to the spin-off date;
• second, certain formal requirements can make it cumbersome on the timeline of the deal; and
• finally, spin-off documentation must be notarised, which might result in higher transaction costs than uncomplicated asset transfers.

Despite these complications, the flexibility and lack of contractual permissions make spin-offs a viable tool to consider for energy corporations seeking to dispose of a portion of their portfolios while retaining continuity in their remaining activities.

Spin-offs can be structured as tax-free transactions at both the corporate and shareholder levels in Germany, provided certain conditions are met, as follows.

• Requirement of two separate business units – a tax-neutral spin-off requires the company to be reorganised to have two separate business units that are viable on their own – ie, after the spin-off, both companies (transferor and transferee) must have a business that is viable on a standalone basis.
• Allocation of assets – all assets that are essential for a business unit must be allocated to that unit; assets that are essential to both units constitute an impediment to a tax-neutral spin-off.

• No disguised disposal of business unit – the spin-off must not lead to an (indirect) disposal of a business unit to a third party, nor pave the way for such disposal.
• Formal application for rollover relief – the spin-off is tax neutral at the level of the company and the shareholder only if the company and the shareholder(s) file a formal application for rollover relief within the period defined by law.
• Forfeiture of tax losses and other tax attributes – generally, the spin-off leads to a partial or full forfeiture of tax losses and other tax attributes of the company. To a certain degree, tax attributes may be utilised for a (partial) set-up of the tax asset basis at the time of the spin-off.

By fulfilling these criteria, companies can achieve a tax-neutral spin-off, enabling them to restructure and focus on core business areas without incurring substantial tax liabilities.

In Germany, it is allowed (and not unusual) to conduct a spin-off immediately followed by a corporate merger, sometimes known as a “spin-off and merger” or “spin-merger”. Spin-mergers (both the spin-off and the subsequent merger) are governed by the Corporate Transformation Act (Umwandlungsgesetz), which mandates a variety of spin-off and merger agreements as well as shareholder resolutions and auditors' reports.

Spin-mergers are frequently used to improve balance sheets prior to a merger, such as spinning off pension provisions. However, they cannot perform wonders. A crucial aspect is that all parties involved, including the original and spun-off enterprises, are jointly accountable for any obligations or claims incurred prior to the spin-off. This liability passes to the merged entity, necessitating detailed cross-indemnifications to control risks and safeguard all parties involved.

The timing for a spin-off in Germany varies based on transaction complexity, regulatory requirements and the specifics of the companies involved. Typically, the entire process can range from several months to over a year.

Key phases include the following.

• Planning and preparation – this initial phase involves strategic planning, due diligence and documentation preparation. Depending on the business complexity and detail required, it can take several months.
• Regulatory approvals – securing necessary approvals, including from antitrust authorities, usually comprises not only the spin-off but also the subsequent transfer to the investor. This combined approach increases transaction certainty.
• Shareholder approval – if needed, obtaining shareholder approval adds extra time, as it involves preparing and distributing information, holding meetings and securing votes from shareholders.
• Execution and implementation – once approvals are obtained, the actual spin-off execution takes a few weeks to a few months, involving the transfer of assets, liabilities and operations to the new entity.
• Transfer of NewCo – the newly created entity (together with the spun-off business) is then transferred to the investor.

In addition, seeking an advance tax ruling from the competent tax office is advisable, although not mandatory. This ruling clarifies the tax implications and helps ensure tax neutrality, avoiding unexpected liabilities. The process for obtaining such a ruling can take several months, influenced by the transaction's complexity and the tax office’s workload.

Acquiring stocks in a public company before making a formal offer is possible in Germany but must be done in accordance with capital markets regulations. Insider dealing rules have to be followed, and acquirers are required to notify authorities once certain thresholds are reached. Compliance with the German Takeover Act (WpÜG) is also required.

A mandatory offer might be required if an acquirer gains control over a public company.

In Germany, public company acquisitions can be structured in a variety of ways. The most common method is a share deal, in which the acquirer buys stock directly from other stockholders. Mergers are possible, but are less common due to their complexity and the degree of shareholder involvement.

When acquiring a public company in Germany, cash consideration is common. If the bidder aims to de-list the corporation or to gain control, they have to offer a minimum price.

Takeover offers have to comply with the German Takeover Act (WpÜG), and the Federal Financial Supervisory Authority (BaFin) will review the offer conditions. These offers can include conditions, such as minimum acceptance thresholds and regulatory approvals.

In addition to the offer documentation, transaction agreements outlining further details of the deal are not uncommon. They aim in particular to protect the bidder and add transaction certainty.

Bidders tend to include minimum acceptance conditions in their offer to ensure sufficient control over the target company.

In Germany, squeeze-outs of minority shareholders after a successful tender offer can be executed through several mechanisms, as follows.

• Takeover Act (WpÜG):
1. the ownership threshold is 95% of the voting rights; and
2. the remaining shareholders must sell their shares for cash if 90% of shares were tendered.
• Stock Corporation Act (AktG):
1. the ownership threshold is 95% of the share capital; and
2. the procedure involves a detailed report and court review of compensation, which can be contested by minority shareholders.
• Transformation Act (UmwG):
1. the ownership threshold is 90% of the share capital; and
2. the procedure is used during a statutory merger – the squeeze-out must be resolved within three months if the majority shareholder is a German stock corporation or similar entity.

Certain requirements under the German Takeover Act (WpÜG) aim to ensure that bidders have secured financing before making a takeover offer.

In Germany, deal protection measures like break-up fees and matching rights can be used, but break-up fees are uncommon and are often considered ineffective. The target company's board must carefully consider these measures to avoid breaching their obligation to act in the best interest of the company.

A bidder can secure further significant rights in a listed company even without full ownership – eg, a substantial shareholding provides supervisory board representation.

Bidders may try to obtain irrevocable commitments from major shareholders, especially institutional investors, to tender their stocks or support the transaction.

Launching a takeover offer in Germany requires approval from the BaFin, which reviews the offer document for compliance with the German Takeover Act (WpÜG). If applicable, the BaFin will assess whether the offer price follows the minimum price rules.

A takeover offer can be extended under certain conditions – eg, if regulatory or antitrust approvals are not obtained in time.

While there are only few legal requirements that must be met to establish a new company, the operation and business of an energy or infrastructure company in Germany may be governed by several laws and may involve several regulatory bodies.

The German energy market, including the M&A market, is very much driven by the underlying regulation of the respective assets.

Renewable Energy Assets

With a phase-out of coal and nuclear power plants, the energy turnaround is well under way. The operation of assets in this market requires different rights and permits. While no independent power producer licence or similar general allowance is required to operate power assets, such projects typically require the following.

Construction and Operating Permit (COP)

This is needed for any types of physical asset granted under:

• the Federal Building Code (BauGB) – eg, for solar PV, transformer stations and (even large-scale) batteries;
• the Federal Imission Control Act (BImSchG) – eg, for onshore wind, most thermal and gas-based plants and infrastructure;
• the Energy Industry Act (EnWG) for power lines and pipelines;
• the Wind Energy on Seas Act (WindSeeG) for offshore wind energy infrastructure; and
• certain asset-specific laws – eg, under the Mining Act (BBergG) for below-ground parts of geothermal plants and offshore interconnector cables, or under the Sea Installations Act (SeeAnlG) for energy islands.

The stages and required steps, including zoning, hearings, etc, will depend on the type of permit that is required (eg, plan approval permit) and the specifics of the project. Amendment permits are common, while permits are mostly technology-specific. Most types of permits have a concentration effect – ie, all aspects of a project are concentrated in one permit decision and procedure, thus making any further permits to build and operate an asset obsolete (although, of course, exceptions apply).

Tender awards

Tenders are awarded for the following, for example:

• a floor price (anzulegender Wert) under the Renewable Energies Act (EEG);
• the right to permit and grid-connect an offshore wind farm under the WindSeeG;
• short-term offtake under the “usage instead of curtailment” statutes under the EnWG;
• the sale or purchase of H2 derivatives under the H2 Global Programme;
• different types of system services provided to a grid operator;
• (in the future likely) under the proposed capacity mechanism for (H2-ready) gas power plants; or
• (envisaged but delayed) subsidies to build the first offshore to H2 project in the German Exclusive Economic Zone (EEZ) under the WindSeeG.

Mind the milestones: German tender awards regularly come with (to different degrees, but often surprisingly fierce) milestones linked to penalties and loss of awards, which often play a significant role in a transaction context.

It is now common practice to conclude PPAs exceeding the floor price obtained in an EEG tender (if applicable). In this scenario, the EEG award serves mostly to ensure a floor price, which of course has a positive impact on project financing. This practice is common and possible, even with regard to parts of an asset’s production only, if the respective volumes are signed into and out of the EEG regime in sufficient time (more than four weeks ahead).

Title to grid

This is governed under the EEG, EnWG and WindSeeG, depending on the type of asset and the rights concerned, and is typically granted in a rather formal procedure governed by each grid operator and not necessarily in line with the underlying statutes. As grid capacity is increasingly scarce, provisions in transactions increasingly consider the relevance of the grid entitlement and the value increase once it is obtained.

Valuations of companies often depend on the development status of their respective projects and pipelines, as well as their regulatory classification (whether and at what level a project has received an award in a tender under the EEG or is purely market-based, etc). Therefore, it is common to conclude forward deals on development projects (or pipelines) with agreed milestone/earn-out payments upon reaching development-related milestones (zoning decision, grid reservation, etc). In such transactions, it is essential to have a full grasp of the meaning and consequences of each of these steps, as milestone payments allocated too early or late can disrupt a project's development and lead to discrepancies between valuations and purchase price payments.

Electricity Trading at the Power Exchange

Increasingly, business models require participation in the public electricity market – eg, to offer certain delivery profiles to industry assets or to offer full (ie, uninterrupted) supply to end consumers. PPAs that are not simply structured along an asset’s availability (“pay-as-produced”) typically require the sourcing of additional power elsewhere, which is easiest on the public markets.

To become a European Energy Exchange (EEX) participant, various admission requirements must be met, as regulated in Sections 14 et seq of the EEX Exchange Rules and Regulations and in Section 19 (4) of the BörsG. The following must be observed throughout/re-confirmed following certain transactions:

• recognition as a trading participant by the European Commodity Clearing AG (ECC);
• proof of the personal reliability and professional suitability of the person(s) authorised to manage the company;
• proof of liable equity capital of at least EUR50,000; and
• technical connection to the trading system(s).

Grid Operators

Grid operators are governed under the Energy Industry Act, which entails unbundling provisions driven by EU law. These unbundling provisions restrict control across various sectors of the value chain, if grid assets are involved.

The Federal Network Agency (BNetzA) oversees compliance with unbundling restrictions. Unbundling was implemented to ensure competition and guarantee the openness of grids and networks by excluding any conflict of interest within grid and network operators. Unbundling requires vertically integrated utilities to be separated, and is built on three primary pillars:

• ownership unbundling, which mandates ownership over grid and network operators to be completely separate from generation and supply companies;
• legal unbundling, which ensures that grid and network operators are organised as single entities; and
• functional unbundling, which mandates that the operation of grids and networks is organised independently from the operation of generators and suppliers.

These unbundling provisions can therefore (and increasingly) require deeper analysis in the context of a transaction, especially as asset definitions become more fluid. As assets increasingly offer ancillary grid services and generally serve more than one purpose, it becomes more difficult to uphold a clear sectoral division of the market.

Grid operation requires special licences under the EnWG. Grid fees and returns on investment based on a so-called regulated asset base (RAB) are determined in five-year cycles (in future, cycles will probably be three years). They offer a fixed equity return on an assumed equity share and gearing of the overall asset base.

To buy into this fixed return/low-risk investment profile, so-called Mini-TSOs have been established for some assets (eg, offshore converter platforms). This can open the business for more diversified investors (ie, those that also operate power production assets), so could formally breach unbundling provisions. Mini-TSOs are single-asset TSOs in which the investor holds a largely silent participation. Each such vehicle requires careful co-ordination and a regulatory decision by the BNetzA, which also requires revision and possibly confirmation in each case of a transaction.

The primary securities market regulator in Germany is the BaFin, the Securities Supervision Directorate of which is responsible for overseeing takeovers of companies whose shares are listed on a regulated market in Germany.

In Germany, foreign investment in the energy and infrastructure sectors is heavily regulated.

According to German foreign trade and payment rules, for instance, foreign investors must notify the Federal Ministry for Economic Affairs and Climate Action (BMWK) if they are acquiring 10% or more of the voting rights in critical infrastructure companies, with other sectors having a 25% threshold. This filing is suspensory, meaning transactions cannot proceed until BMWK approval is obtained, ensuring no threat to national security or public order. These measures aim to protect Germany from potentially harmful foreign influence.

Germany reviews foreign acquisitions to prevent security risks. BMWK oversees these reviews, especially for critical infrastructure sectors like energy, telecommunications and defence.

Specific Restrictions/Considerations for Investors

General rules

Non-EU investors must notify BMWK if acquiring 10% or more of voting rights in critical sectors.

Heightened scrutiny

Investments from countries with conflicting policies, such as China, face rigorous review due to concerns like Military-Civilian Fusion.

Export control regulations

Managed by the Federal Office for Economic Affairs and Export Control (BAFA) and in accordance with EU law, Germany’s export controls aim to:

• prevent the proliferation of weapons of mass destruction and the destabilising accumulation of conventional military equipment in crises regions;
• regulate dual-use items; and
• avoid contributing to human rights violations.

Key regulations governing export control include:

• the Foreign Trade and Payments Act (AWG) and Ordinance (AWV);
• the EU Dual-Use Regulation (EU 2021/821); and
• various embargo regulations.

In Germany, antitrust filings for takeovers and business combinations are regulated by the Act Against Restraints of Competition (GWB), which is enforced by the Federal Cartel Office (Bundeskartellamt – BKartA). The BKartA prohibits a merger subject to notification (only) if the intended merger would significantly impede effective competition, particularly a concentration that is expected to create or strengthen a dominant position on the relevant market(s).

Key requirements for an antitrust filing include the following.

• There is no obligation to notify the intended merger to the EU Commission.
• Notification thresholds – combined worldwide turnover must exceed EUR500 million in the last business year preceding the concentration, with at least one company having a turnover above EUR50 million and another above EUR17.5 million. An exception to the second domestic threshold may apply if the value of the consideration exceeds EUR400 million.
• Concentration in terms of the GWB –any approach enabling one or several undertakings to directly or indirectly exercise a material competitive influence on another undertaking must be notified, as must the acquisition of:
1. all or a substantial part of the assets;
2. direct or indirect control; and
3. shares if they reach 50% or 25% of the capital or voting rights.
• Pre-merger notification – if the merger is subject to notification, participating companies are obliged to notify the BKartA before implementing the transaction, providing details on the companies involved, the intended transaction and the (potentially) affected markets.

Following the filing, the BKartA reviews the documentation and considers the antitrust implications.

• In Phase I, within one month after complete notification, the BKartA informs the notifying parties either that it has no competition concerns (“one month letter”) or that it will transfer the proceedings to Phase II for review.
• If transferred to Phase II, the BKartA has a further five months to conduct a detailed investigation to decide to either prohibit or clear the intended merger; conditions are possible.

When acquiring a business in Germany, acquirers should be aware of key labour law regulations and requirements, which include the following.

• Transfer of Undertakings (Protection of Employment) Regulations:
1. under Section 613a of the German Civil Code (BGB), employees' rights and obligations transfer to the new owner in case of a business acquisition via an asset deal, while existing employments contracts typically remain in force;
2. employees must be informed about the transfer and have the right to object to their employment transfer; and
3. dismissals due to the transfer are invalid.
• Notice periods: German labour law requires specific notice periods for termination, which vary based on the duration of employment.
• The Works Constitution Act (BetrVG) governs the establishment and operation of works councils, which represent employees at the company level. The works council has co-determination rights on employee transfers, dismissals and restructuring. A works council can be established in companies with more than five employees if requested by the employees. If a works council is established, an employer may be required to consult and disclose information to the works council. The consultation process may delay an acquisition until the works council's concerns are addressed.

• Mandatory consultation – the works council must be consulted on significant changes, including mergers and acquisitions, before final decisions are made. The works council’s opinion is not legally binding on the board, but failing to consult properly can result in economic disadvantages.
• Disclosure requirements – the employer must provide the works council with detailed information about the acquisition, including reasons, consequences and measures for employees, in a timely manner to facilitate meaningful consultation.

Germany does not impose specific currency control regulations that restrict the flow of capital for M&A transactions. However, anti-money laundering (AML) stipulations have an increasing impact on business operations in Germany, and adherence to such provisions is crucial. AML examination is essential to the M&A process from start to finish. This pertains to both the transaction process itself and the due diligence stage, when it is critical to evaluate the target company's compliance with AML regulations.

• Due diligence – the buyer must make sure the target company complies with AML requirements as part of the M&A transaction. This includes confirming the accuracy of the company's financial statements, spotting possible dangers and making sure the target has not engaged in any illegal activity that might result in post-transaction obligations.
• Banks and notaries in M&A transactions have a legal duty to ensure AML compliance. This entails confirming the participants' identities and informing the authorities of any questionable activities. AML requirements apply to banks that facilitate financial transactions for deals; they must carry out due diligence and report any suspicious transactions.

Climate Protection Act

A major legal development in Germany affecting energy and infrastructure companies, particularly in the context of M&A, is the German Federal Constitutional Court’s ruling on the Climate Protection Act (Klimaschutzgesetz) in April 2021. This ruling declared the Climate Protection Act of December 2019 inadequate for meeting Germany’s climate obligations, and called for stricter measures to combat climate change. The decision highlighted the growing legal and regulatory emphasis on sustainability and climate protection in Germany.

Climate Transformation Fund

Furthermore, Germany’s Federal Constitutional Court ruled in November 2023 that the reallocation of EUR60 billion in unused COVID-19 loans to the Climate Transformation Fund violated the constitutional provisions that limit government borrowing. The EUR60 billion shortfall led to an immediate funding uncertainty for several energy transition projects, reducing investor confidence and freezing M&A activity for these projects.

In Germany, the due diligence process regarding public companies must respect the major principles of fairness, confidentiality and transparency.

• Insider dealing – the information disclosure may already constitute insider information. A public company needs to implement the pertinent compliance procedures (restricted team, confidentiality, self-release, monitoring).
• Information disclosure – unless the information is generally available, a public company may provide financials, business plans, legal documents and operational data to bidders only after due consideration of its interest in protecting its sensitive information.
• Board of directors’ role – the board must balance the interest of confidentiality with the aim of a successful deal with the right measures/monitoring – ie, confidentiality undertakings, restricted teams, third-party review, levels of disclosure.
• Equal information – companies must give the same information to all bidders, to ensure a fair and transparent process.

Data privacy restrictions impacting the due diligence process for energy and infrastructure companies in Germany include the following.

• The General Data Protection Regulation (GDPR) – personal data disclosed in a due diligence process must be handled in compliance with the GDPR, including obtaining consent, ensuring data minimisation and securing data.
• The German Federal Data Protection Act (BDSG) complements the GDPR and adds specific requirements for data processing, particularly concerning special categories of data (such as employee data) and the rights of data subjects. This leads, for example, to the need for additional compliance measures in due diligence processes that involve reviewing employee information.
• Sector-specific regulations provide for data protection rules, but generally do not result in restrictions of a due diligence process that go beyond the GDPR and BDSG. Special data protection obligations only arise in exceptional cases – eg, in the scope of the Metering Point Operation Act (MsbG).

A bid may be subject to a publication requirement under the German Securities Acquisition and Takeover Act (WpÜG), which applies to voluntary offers for public companies with a registered seat in Germany and listed on a European Economic Area or German stock exchange. If a bidder already holds or plans to exceed 30% ownership, or seeks to gain control, they must publish their intent and notify the BaFin and the relevant stock markets immediately after the decision to make the offer.

In general, public offerings in Germany require a prospectus, with a few exceptions. This requirement does not apply to offers of less than EUR1 million made across the EU or to fewer than 150 qualified investors per member state. A prospectus is also not required for securities with a minimum denomination of EUR100,000 nor for securities exchanges during a takeover, if a public document containing transaction details is available.

A public bid offer has to include information on the financing of the offer, including the bidder's:

• assets, financial position and income situation after the offer;
• participation in the target company; and
• intentions regarding the future business activities of the target company and its employees.

Certain transactions in Germany require the filing of transaction or transaction-related documents with different public bodies and authorities, as follows.

• For public bids, the offer document must be approved by the BaFin before publication.
• The German commercial register is publicly available and, for example, requires the publication of merger documents and articles of associations. Because of this public accessibility, parties usually decide to agree on commercial terms in confidential agreements (such as merger agreements, joint venture agreements or shareholder agreements) and include only the legal minimum requirements in a further set of documents to be filed with the register (ie, merger resolutions in case of a merger and articles of association in case of a joint venture).
• Real estate transfers must be documented and submitted to the land registry office, but these agreements are not publicly available.

Managing directors in Germany have several key responsibilities during a business combination, including:

• a duty of care – directors must act with the diligence of a prudent businessperson, making informed and well-considered decisions;
• a duty of compliance – they must ensure that all actions adhere to applicable laws, the company’s articles of association and any shareholder resolutions;
• a fiduciary duty – directors are required to act in the best interests of the company, prioritising its welfare over personal interests; and
• a duty to avoid conflicts of interest – directors must avoid any situation where their personal interests could conflict with those of the company.

While directors owe their duties primarily to the company itself, which indirectly benefits the shareholders, there is increasing emphasis on considering the interests of other stakeholders, such as employees, creditors and the broader community, especially with the rise of ESG regulations.

It is common for boards of directors in Germany to create special or ad hoc committees during business combinations. These committees handle specific tasks or issues, allowing the board to concentrate on strategic oversight while managing the detailed aspects of the transaction.

When directors face conflicts of interest, these committees become especially crucial. An independent committee can be formed to oversee the transaction, ensuring that decisions are made impartially and in the best interests of the company and its stakeholders.

The board of directors plays a key role in the M&A process in Germany, including negotiating the deal, overseeing due diligence and ensuring that the transaction aligns with the long-term goals.

Shareholder litigation is uncommon but can occur if shareholders believe the board has breached its duties, such as by failing to get the best price or providing inadequate information. Measures to mitigate the risk of shareholder litigation include:

• due diligence – thoroughly assess the target’s financial health and liabilities;
• fair valuation – ensure the offer price is justifiable to avoid undervaluation claims;
• transparency – communicate openly with stakeholders to prevent litigation over disclosure issues; and
• conflicts of interest – address any potential conflicts among the target’s directors, possibly using special committees.

Directors typically seek independent advice during a takeover or business combination to make informed decisions and meet their fiduciary duties, including:

• legal advice – ensuring compliance with laws, drafting documents and assessing legal risks;
• tax advice – not only tax due diligence but also tax structuring of the deal is usually provided through external advisers;
• financial advice – evaluating the financial aspects of the transaction, including valuation and deal structuring; and
• technical advice – providing an assessment of the technical status of the assets to be acquired and thereby limiting the risk of an acquisition of unfit assets and the mitigation of environmental risks.