Corporate M&A 2024 Comparisons

The following chapter featured in Corporate M&A 2023 and is awaiting update from the firm.

M&A activity in 2022 was impacted by rising interest rates, inflation, the ongoing COVID-19 crisis and significant disruption of the markets, particularly the energy markets, caused by the Russian attack on Ukraine. This led to a highly volatile stock market, declining share prices and a widespread fear of recession. As a result, we saw a global decline in transaction volume and value, particularly in the second half of the year. These developments also affected Germany, while the overall number of transactions only decreased modestly compared to 2021. Due to rising financing costs and an increasing scarcity of available financing sources, strategic transactions, such as the acquisition of Con Edison Clean Energy by RWE or the establishment of a battery joint venture by Volkswagen with Umicore dominated the market. Cross-border transactions, in particular from the US and Mittelstand deals continued to be an important part of overall M&A activity. Financial investors reacted by increasing their equity financing portion and being selective in acquisition opportunities. Their overall market share decreased. The IPO market was quiet, with the noteworthy exception of Porsche's IPO, and is expected to continue to be a rare exit alternative.

The government continued its path of increased scrutiny of non-EU investments in critical infrastructure and technology (see 2.3 Restrictions on Foreign Investments), and prohibited, inter alia, the acquisition of Siltronic, Heyer Medical and Elmos by Chinese investors. FDI approvals have become a new normal in many cross-border transactions and heavily impact structuring and timelines. At the same time, the government has nationalised energy suppliers such as Uniper and Gazprom Germania/SEFE. The trend towards stronger national independence of key sectors will likely continue.

The outlook for 2023 remains cautiously optimistic, with an expectation of a continued trend towards fundamental strategic acquisitions with a long-term perspective driven by digital and technological transformation towards sustainability. However, markets will be volatile and much will depend on the overall geopolitical climate.

Digital/Technological Transformation Processes and ESG

Digital and technological transformation continue to be key deal drivers. The German automotive industry, the traditional stronghold of the nation's economy, is steadily transitioning to e-mobility, which is having a far-reaching impact on the supplier industry in the combustion engine sector, among others. Traditional business models, such as in retail and consumer finance, are becoming increasingly digital, while investments in green technology/sustainability and those driven by ESG (environmental, social and governance) considerations will drive many transactions. The shift to clean energy will be a particularly strong focus in the coming years.

Private Equity

Private equity continues to be a strong player in the overall M&A market in 2022, while its overall market share decreased to approximately 25%. Due to rising financing costs and the increasing scarcity of available financing sources, equity financing portions have risen, however, and deals are not as competitive as before. The established seller-friendly transaction model – with a locked box and nil liability concept – continues to dominate the market and is increasingly seen in transactions without private equity (PE) involvement as well.

Notable transactions include Advent's acquisition (together with Lanxess) of Royal DSM's plastics business, the sale of VTG to GIP by Morgan Stanley, the acquisition of Bayer's pest control business by Cinven, Mutares' sale of Lacroix+Kress to Superior Essex or FSN Capital's acquisition of Bäcker Görtz.

See 1.1 M&A Market and 1.2 Key Trends. As in previous years, the German market will continue to be driven by global M&A trends. Large individual transactions, which cannot necessarily be assigned to specific industries, will be decisive for the allocation of the total market volume relative to industry segments.

Private M&A – Acquisitions of Non-listed Companies

Private M&A transactions are generally structured through (bilateral) negotiations, which can vary widely in terms of form and process.

In competitive M&A scenarios, well-established auction processes administered by M&A advisers are often employed. Usually, interested parties must sign a non-disclosure agreement before gaining access to an information memorandum containing basic financial and legal information about the target company. They will then be invited to submit non-binding offers setting out purchase price and other key transaction items. Bidders who submit the best indicative bids will subsequently have access to a data room for due diligence; usually, the seller also provides legal and financial as well as tax fact books or even vendor due diligence reports in this context to help bidders assess the data room. Also, indicative offers for W&I insurance are sometimes made available in the data room.

The due diligence process is followed by binding bids often requiring a first mark-up of the key legal documentation; the seller then enters into negotiations with those bidders who have submitted the most attractive bids. Sometimes, the seller grants (temporary) exclusivity at this stage.

The negotiation process concludes with the execution of a sale and purchase or merger agreement. Core elements of an agreement are the determination and structuring of the purchase price, which typically follows a locked-box model or a cash-free/debt-free mechanism with working capital adjustment at closing, seller warranties, potential specific indemnities (in particular on tax matters), provisions on available remedies, closing conditions as well as seller and purchaser covenants.

W&I insurance

W&I insurance has gained significant importance in recent years and has become common in most PE and many non-PE transactions, with the level of seller exposure having migrated to non-recourse models and special coverage being available for historically uninsurable items (such as tax or antitrust risk). In distressed M&A situations, purely synthetic W&I insurance has also become available lately. Insurance is almost always taken out by the purchaser, but can be pre-arranged by the seller in (soft or hard) stapled form.

Public M&A – Acquisitions of Listed Companies

The most practical way to obtain control over a publicly listed company in Germany is to acquire shares by way of a public takeover offer (see 6. Structuring), often in conjunction with stakebuilding measures and/or pre-agreed acquisitions of shares from key shareholders (see 4. Stakebuilding).

A public takeover offer can be friendly or hostile. Although the management board of the target company is subject to the principle of neutrality, certain defence measures can be implemented with the consent of the supervisory board (see 9. Defensive Measures).

Joint Ventures

Whereas joint ventures are often only seen as a tool to jointly develop a new business, they can also be used for M&A activity. While in a standard M&A scenario, control in a business transfers from the seller to the buyer, a joint venture structure may be chosen where the seller shall stay involved and seller and buyer intend to establish a co-operation in relation to the target. In the situation described, a deal has both a transaction component and a co-operation component.

The transaction side of a joint venture relates to the buyer as new partner joining the existing business either by acquiring shares in the joint venture vehicle previously held by the seller, by joining as a new shareholder in such vehicle by way of a capital increase or by way of the establishment of a new joint venture entity to which the seller transfers the existing business. The transaction part of setting up a joint venture usually involves similar steps as a standard M&A transaction, such as non-disclosure arrangements and a due diligence review of the existing business. The co-operation side of the deal consists in setting up the joint venture structure, including corporate governance rules and exit arrangements.

Antitrust and FDI Regulators

There is no single general M&A regulator in Germany. Depending on the industry the transaction involves, banking or environmental authorities may be competent to review a transaction or aspects thereof. In other cases, public licences (eg, in the pharmaceutical sector) need to be renewed due to the change of control in the target company.

Aside from these industry-specific cases, many transactions are subject to merger clearance (see 2.4 Antitrust Regulations) and acquisitions by non-EU/EFTA investors may be subject to FDI review (see 2.3 Restrictions on Foreign Investments).

BaFin as Key Regulator for Public M&A

The German Securities Acquisition and Takeover Act (Wertpapiererwerbs- und Übernahmegesetz), the Takeover Act Offer Ordinance (WpÜG Angebotsverordnung) and other statutory ordinances regulate public takeovers of listed companies. Legislation not specific to public takeovers also applies, in particular the rules of the Market Abuse Regulation, Securities Trading Act (Wertpapierhandelsgesetz) and the Stock Exchange Act (Börsengesetz) as well as Stock Exchange Ordinances (Börsenordnungen). Compliance with these rules of German Takeover Law is generally overseen by the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, or BaFin).

The German Securities Acquisition and Takeover Act governs any public offer (öffentliches Angebot) to acquire shares of publicly listed stock corporations, European companies (SEs) and partnerships limited by shares that have their registered seat either in Germany and whose shares are traded on the German regulated market (the German Securities Acquisition and Takeover Act does not apply to stock corporations listed only in the open market segment), or – under certain further conditions – in another European Economic Area (EEA) member state.

There are three classes of public offers:

• a (voluntary) takeover offer (Übernahmeangebot), aimed at obtaining control of the target – ie, at least 30% of the target’s voting rights, individually or on a joint basis acting in concert with others;
• a mandatory offer (Pflichtangebot), which must be made if and when a level of 30% of voting rights has been obtained by other means than a takeover offer; and
• an acquisition offer (sonstiges Erwerbsangebot) not aimed at acquiring control, by buying less than 30% of the target’s voting rights (together with any other target shares attributed to the bidder), buying additional shares if control has already been obtained, or buying non-voting preference shares only.

The Foreign Trade Act (Aussenwirtschaftsgesetz) and the Foreign Trade Ordinance (Aussenwirtschaftsverordnung) provide for the review of foreign direct investments into German companies (be it by way of share or asset deal).

First, any non-German investments in domestic companies active in the military and defence sector may be prohibited (sector-specific review).

Second, under the so-called cross-sectoral review, the Federal Ministry of Economics and Energy (Bundesministerium für Wirtschaft und Energie, or BMWi) may review any direct or indirect acquisitions by a non-EU/EFTA investor. Particular notification obligations apply for 27 business sectors involved in critical infrastructure or critical technology: the acquisition of voting rights reaching or exceeding 10%, 20%, 25%, 40%, 50% or 75% (for seven of these sectors) or 20%, 25%, 40%, 50% or 75% (for the other 20 sectors), or of assets constituting an essential or definable part of the operations of a German undertaking, is subject to a mandatory FDI filing and a standstill obligation.

Even outside these 27 sectors, the acquisition of at least 25%, 40%, 50% or 75% of voting rights or of assets constituting an essential or definable part of the operations of a German undertaking by investors from outside the EU/EFTA can be reviewed by the German government to determine whether such acquisitions may potentially affect public order or security in Germany or other EU member states.

FDI control law now also covers the acquisition by a non-EU/EFTA investor of an “effective stake in the control” of a German undertaking in another way, in particular an acquisition of voting rights nominally remaining below the relevant threshold combined with additional rights effectively resulting in influence corresponding to a share of voting rights meeting the relevant threshold.

The German government may ultimately prohibit such acquisitions or impose obligations to safeguard public order or security. With 2022 seeing the prohibition of a multibillion euro non-EU acquisition (Global Wafers/Siltronic) as well as the prohibitions of, inter alia, the Heyer Medical and Elmos transactions, FDI controls will continue to play an ever greater rule in the practice of M&A law.

The merger control provisions of the German Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen) apply if transactions qualify as concentrations and the parties meet certain thresholds. If a transaction is subject to German merger control, it must be notified to the German Federal Cartel Office (Bundeskartellamt) and must not be consummated before clearance has been obtained.

It is a particular feature of German merger control law that concentrations subject to review are not limited to control acquisitions. For instance, acquisitions of 25% or 50% of the voting rights or capital interests also qualify as concentrations, as do acquisitions of a competitively significant influence.

The notification thresholds are met if the combined aggregate worldwide turnover of the involved parties exceeds EUR500 million, the German turnover of at least one involved party exceeds EUR50 million and the German turnover of another involved party exceeds EUR17.5 million. The EUR50 million and the EUR17.5 million thresholds were increased in January 2021 from EUR25 million and EUR5 million, respectively.

If the last threshold (ie, a German turnover exceeding EUR17.5 million) is not met by the target or another party, a notification will still be required if the value of the consideration for the transaction exceeds EUR400 million and the target has significant activities in Germany.

Aside from the German antitrust regulator, other national antitrust authorities may be competent to review concentrations depending on applicable turnover thresholds. If certain (higher) turnover thresholds are met and several EU member countries are involved, competence for merger control is shifted away from the national (German) authority to the European Commission.

In the public M&A context, the target company’s management board must, without undue delay, inform that company’s works council or, if there is no works council, the target’s workforce directly, of a takeover announcement, and must forward to them the public offer document. The works council may comment on the offer; its comments have to be attached to, and published with, the target’s management board’s reasoned opinion.

In private M&A, the (economic committee of the) works council of the target must equally be informed of any acquisition of the enterprise before binding documents are executed.

According to the German Co-Determination Act (Mitbestimmungsgesetz), certain companies (stock corporations, partnerships limited by shares, limited liability companies and co-operatives) with more than 2,000 employees have to establish a supervisory board in which half the members must be employee representatives.

The same applies to companies with more than 500 employees, pursuant to the German One Third Participation Act (Drittelbeteiligungsgesetz), but only one third of the members are required to be employee representatives.

See 2.3 Restrictions on Foreign Investments.

As noted (see 2.3 Restrictions on Foreign Investments), German FDI rules have recently been significantly tightened.

In September 2018, the German Federal Supreme Court (Bundesgerichtshof, or BGH) took a landmark decision on the definition of so-called “acting in concert” under the German Securities Trading Act. The legal instrument of acting in concert has various impacts on the scope of co-operation between two or more shareholders of a public listed company.

The BGH ruled that a one-time agreement between two shareholders regarding the exchange of the members of the supervisory board in order to achieve business realignment does not constitute acting in concert. Therefore, a co-operation does not lead to a mutual allocation of voting rights under the German Securities Trading Act. While the decision was issued in the context of voting rights notifications, the analysis applies to acting in concert potentially triggering a mandatory takeover offer as well.

Stakebuilding in listed companies below the mandatory offer threshold is subject to strict notification requirements (see 4.2 Material Shareholding Disclosure Threshold) so that it is in practice limited to a level of shareholding/instruments below the notification threshold (2.99% physical plus max 2% financial instruments). Open stakebuilding above these levels is permissible however, and agreements to tender or irrevocable commitments are possible (subject to their having to be disclosed as financial instruments at the time of conclusion).

Reaching 30% of (directly held or attributed) voting rights triggers a mandatory takeover offer.

If the 30% threshold is crossed as the result of the settlement of a voluntary takeover offer, the bidder subsequently is free to acquire additional shares without being required to issue another (mandatory) takeover offer. This allows to combine package deals with a (voluntary) public offer. However, minimum pricing rules and post-offer most favoured treatment rules apply with respect to the initial (voluntary) offer.

Disclosure thresholds and filing obligations mainly concern listed companies on organised markets. Investors that build stakes (in shares or financial instruments such as derivatives, directly or through attribution) in listed companies on an organised market are required to notify the company as well as BaFin if their voting rights exceed or fall below 3%, 5%, 10%, 15%, 20%, 25%, 30%, 50% or 75% of the voting rights (with the 3% threshold not applying to financial instruments). The company is obliged to publish any notifications of its shareholders.

In particular, voting rights held by subsidiaries and by different investors who co-ordinate their actions with respect to the company (“acting in concert”) are to be attributed. These rules can lead to unintentional violations in complex legal situations. It is advisable to examine these attribution rules thoroughly, since violations can not only lead to serious fines but also to a suspension of all shareholders’ rights for the period during which the infringement persists and, under certain conditions, even for longer periods.

Stock Corporations

For private stock corporations and stock corporations listed in the open market segment, disclosure thresholds and filing obligations are much less rigid. If the stake of investor exceeds or falls below 25% or 50% of the shares in a German stock corporation, the investor is obliged to notify the company.

Under certain circumstances, shares of third parties are to be attributed. The respective rules are similar but less complex than those applicable to listed companies on an organised market. A failure to comply with the notification requirements leads to a suspension of the relevant voting rights.

Acquiring Shares in a GmbH

The acquisition of shares in limited liability companies (GmbH) follows its own legal rules. These rules allow tracing of any acquisition of shares, since the commercial register contains a list of the shareholders that is to be updated after shares have been traded.

The German Money Laundering Act

The German Money Laundering Act (Geldwäschegesetz) also provides for certain disclosure requirements. All legal entities governed by private law, registered partnerships, trusts and similar legal forms are obliged to file certain data, including on the ultimate beneficial owner, with the Transparency Register.

See 4.1 Principal Stakebuilding Strategies and 4.2 Material Shareholding Disclosure Threshold.

Dealings in derivatives are permissible but can lead to notification obligations (see 4.2 Material Shareholding Disclosure Threshold). Generally, dealings in derivatives are not a feasible way to avoid or circumvent disclosure obligations.

See 4.1 Principal Stakebuilding Strategies and 4.2 Material Shareholding Disclosure Threshold.

If an investor issues a public takeover offer, the offer document has to state the objectives the bidder pursues relating to the target. Therefore, such information is disclosed to the public.

Following the acquisition of 10% or more of the voting rights in a listed company on an organised market, investors are required to inform the target company of their intentions and their source of funding. The law specifies in detail the information to be disclosed in such a scenario, which includes, among other things, whether the investment serves strategic goals or is a mere capital investment, whether the bidder intends to increase the investment and whether there are intentions to influence the management or substantially change the capital structure.

With regard to disclosure duties, a distinction must be made between listed and non-listed companies.

If the target company (or the bidder/seller) is listed, it can be obliged to make so-called ad hoc announcements at different stages of an M&A transaction. The European Market Abuse Regulation (MAR) governs the specific requirements of the obligation to make ad hoc announcements. According to the MAR, an issuer must inform the public as soon as possible of inside information that directly concerns that issuer.

It is therefore decisive whether or not the information in question is “inside information”. For this to be the case, the following conditions must be met. The information:

• must relate, directly or indirectly, to one or more issuers or to one or more financial instruments;
• must be of a precise nature;
• may not have been made public yet; and
• would, if it were made public, be likely to have a significant effect on the price of those financial instruments or on the price of related derivative financial instruments.

Protracted Processes

In a protracted process that occurs in stages – eg, in the case of an M&A transaction – it is recognised that not only the final steps (signing/closing) may trigger the obligation to make an ad hoc announcement, but that this may already be the case for significant intermediate steps.

The MAR allows for exceptions, however.

• “Self-exemption” – where an issuer may, at their own risk, delay disclosure of inside information if the following conditions are met:
1. immediate disclosure is likely to prejudice the legitimate interests of the issuer;
2. delay of disclosure is not likely to mislead the public; and
3. the issuer is able to ensure the confidentiality of that information.
• “Market sounding” – where an issuer may disclose possible inside information to potential investors to determine the interest of potential investors in a possible transaction.

The legal requirements for these exceptions to grant relief are quite complex, however. It is therefore recommended, and also common practice, to take legal advice prior to any delay of disclosure.

If the target company and/or bidder is not listed on an organised market, it has no obligation to publicly disclose the transaction or the related intermediate steps (see 2.5 Labour Law Regulations).

Although all parties involved – the target company, the bidder and the seller – are usually interested in avoiding early disclosure, it is not possible to defer from legal requirements. However, the parties may attempt to structure the transaction in a way that allows for a delay of disclosure.

With regard to listed companies, the issuer can delay disclosure of inside information if certain conditions are met (see 5.1 Requirement to Disclose a Deal). In this context, the disclosure of the transaction can no longer be delayed if there are already sufficiently accurate rumours about the transaction in the market. Here, the issuer must disclose the inside information to the public as soon as possible.

The target company's management is generally permitted to disclose company information to a potential acquirer only if doing so aligns with the company's best interests, a determination that must be assessed on a case-by-case basis. Nonetheless, both public (except hostile) and private transactions commonly involve purchaser due diligence. The scope of the due diligence largely depends on the specific circumstances of the transaction.

In most cases the potential purchasers will conduct financial, legal, tax, operational and compliance/ESG due diligence. Transactions in technical industrial fields often require technical and environmental due diligences. The impact of the COVID-19 pandemic on the business case has emerged as a new aspect of due diligence.

By concluding a standstill agreement, the bidder commits not to further increase its stake in the target company. Therefore, the target company sometimes demands standstill agreements as a means of defence. Although standstill agreements are generally permitted under German law, they are rare in Germany. In addition, in a public offer for control, a bidder must extend its bid to all shares of the target company, preventing a standstill agreement.

An exclusivity agreement, in contrast, obliges the seller of the target company not to negotiate or sign with other potential buyers (for a limited period). It is not uncommon for a buyer to demand such an agreement at some advanced stage of a transaction to justify further investments in the course of preparing for the transaction.

Exclusivity agreements are generally permitted under German law and may in particular be concluded with key shareholders. However, in a public M&A context, the target company itself will usually be precluded from agreeing to exclusivity, except in exceptional circumstances, due to the applicability of the corporate benefit test. Recently, target management has also started to initiate auction processes for the company, a practice common in the USA, when approached by a potential purchaser.

In a private M&A context, definitive agreements can vary widely depending on the transaction structure, while certain market standards for “typical” SPAs are firmly established.

For public bids, the German Takeover Act, supplemented by the German Takeover Act Offer Ordinance governs the legal requirements (see 2. Overview of Regulatory Field).

Both regulations mandate that the offer document contains very detailed information to provide target company shareholders with a sufficient information bases for their decision to accept or reject the offer. The offer document must contain information on, inter alia:

• the consideration;
• the offer period;
• the possible effects of a successful offer; and
• the bidder’s intentions with regard to the target company.

The offer document also determines the subsequent content of the share purchase agreement and contains its terms and conditions. To support the shareholders in their “take it or leave it situation”, both the management board and the supervisory board of the target company are obliged to give a reasoned opinion on the assessment of the offer.

Joint Ventures

The legal documentation for a joint venture usually consists of a business combination agreement – covering the transaction aspect of the joint venture – and a shareholder agreement – covering the co-operation side of the deal. Both components may be kept separate or combined in one document. The business combination agreement focuses on the establishment of the joint venture. Its content depends on the deal structure and may vary from a share purchase agreement to an investment agreement setting out the entrance of the buyer into an existing legal entity or the establishment of a new legal entity by the joint venture partners, including the transfer of existing businesses to such entity.

In the shareholder agreement, the joint venture partners usually agree on the corporate governance and financing structure of the joint venture entity, restrictions on the transferability of the shares and further covenants, such as non-compete obligations, as well as anticipated exit scenarios. The corporate governance is usually determined by way of pre-agreed articles of association for the joint venture entity as well as pre-agreed by-laws for its management, including lists of reserved matters, super majorities, quorums, minority shareholder protection and anti-dilution.

For a future exit, the joint venture partners frequently agree on pre-emption rights and, depending on the specific situation, on tag along, drag along, call option or put option rights, exit waterfalls or even on a (rather vague) framework for a potential future IPO.

The duration of a takeover process cannot be generalised and differs between private and public transactions.

In private M&A transactions, the duration varies widely. In small transactions, the whole process can be completed in a matter of weeks. In large and more complex transactions, it can take months or in some cases years (considering the whole time from the planning stage to the closing of the transaction).

Public M&A transactions typically take around three months from the bidder’s announcement of the intention to issue an offer to completion (the maximum is 22 weeks; longer durations are possible if competing offers are published). The duration of preparatory actions, particularly stakebuilding and due diligence, are not included and can vary widely.

Overall, government measures implemented to address the COVID-19 pandemic have not led to substantial practical delays or obstacles in these processes.

An investor who acquires 30% or more of the voting shares of a company that is listed on an organised market is required to issue a mandatory offer to all other shareholders. The bidder may apply to BaFin to be exempted from the obligation. However, such exemptions are only granted in extraordinary cases.

Consideration is determined by market dynamics in the private M&A field. In a competitive landscape, locked box deals with a pre-determined fixed purchase price have become common. Earn-out constructs have also become somewhat more common due to valuation difficulties in the context of the COVID-19 pandemic, but are difficult to structure; they may prove a more common feature in 2022 as well, given the fundamental uncertainties created by Russia’s aggression in the Ukraine and the political and market disruption caused by it.

In contrast, consideration in public transactions seeking control (or in mandatory offers) is heavily regulated.

In principle, both cash and shares (or a mix of both) can be used as consideration. If the bidder uses shares, these must be liquid and listed on an organised market, and the owners of voting shares in the target must be offered voting shares as consideration. Moreover, if the bidder acquires 5% or more of the target shares for a cash consideration during the six months before the announcement of the takeover offer, a cash consideration must be offered to all shareholders of the target; a consideration in shares can be offered as an alternative. When shares are publicly offered, equivalent disclosure and prospectus requirements apply, as in other public share offerings, and the German Securities Prospectus Act (Wertpapierprospektgesetz) must be adhered to.

The bidder is obliged to offer consideration of an “adequate” value. Such consideration is required be at least equal to both:

• the value of the highest consideration paid or agreed to by the bidder, a person acting in concert with the bidder or any of their subsidiaries for the acquisition of shares in the target within the six month period prior to the announcement of the takeover; and
• the weighted average price of such shares on the stock exchange during the last three months before the announcement of the takeover.

In addition, most favoured treatment rules apply: if the bidder acquires shares at a higher price during the offer period or within 12 months after the end of the offer period, the higher price is to be paid to all shareholders who accept the takeover offer.

Mandatory offers cannot be made subject to conditions (except where the conditions concern legal requirements for the takeover, such as merger control or FDI clearance).

With regard to voluntary takeover offers, less rigid rules apply and bidders are generally free to define conditions that must be met for the offer to become effective, unless the satisfaction of these conditions is under their control (an offer made subject to revocation or withdrawal is inadmissible). Permissible conditions can comprise minimum acceptance conditions (ie, a certain percentage of shares must be tendered before the offer becomes effective) or material adverse change (MAC) clauses, and regulatory clearance always remains a permissible condition.

Minimum acceptance conditions are generally permissible in the public M&A context and often relate to the acquisition of 50 or 75% of voting rights.

In general, the resolutions of the shareholders’ meetings of a German stock corporation are taken with a simple majority that exceeds 50% of the votes. However, for some important measures, particularly all measures that require an amendment of the articles of association, a majority that exceeds 75% of the share capital represented in the shareholders’ meeting is required.

For some measures – in particular regarding a squeeze-out of minority shareholders – even higher majorities are required (see 6.10 Squeeze-Out Mechanisms). Therefore, in some cases, bidders may consider even higher minimum acceptance thresholds than those previously covered.

No regulations apply in this regard in private transactions, while satisfactory commitment letters are usually required by sellers in a leveraged transaction and the balance sheet of the purchaser is assessed. Financing-outs may also be stipulated as closing conditions.

Before issuing a public takeover offer, the bidder is required to ensure that it has the necessary financial resources to fulfil the obligations to the shareholders who accept the offer.

For a cash offer, the bidder must prove that sufficient funds are available by obtaining confirmation from an investment service company (usually a bank). Therefore, the bidder cannot make a takeover offer that is subject to obtaining financing.

In private M&A, deal security measures can be structured freely (subject to the corporate benefit test as outlined below).

In both private and public contexts, the conclusion of business combination agreements in the preparation of a transaction may conflict with the very strict rules of the Stock Corporation Act on the constitution of a stock corporation. The permissibility and enforceability of such agreements are debated in legal literature and heavily depend on the specific content of the agreement. Therefore, business combination agreements require particularly careful legal assessment and alignment with German corporate law principles.

Subject always to applicable disclosure requirements (eg, a tender agreement or irrevocable commitment may qualify as a financial instrument) and potential most favoured treatment rules, public M&A deal security measures between the bidder and current shareholders are not subject to any specific restrictions and in principle subject to negotiation as long as they are in line with general legal requirements (such as general antitrust law).

Restrictions

Restrictions apply if measures require the target company's co-operation, since the target's management board is obliged to act in the company's best interest (which is not necessarily identical to the interest of key shareholders who intend to sell their shares). Therefore, the target company can only assume obligations in the context of deal security measures if these are in its best interest and comply with all requirements of applicable stock corporation law. This limits, in particular, exclusivity arrangements (see 5.4 Standstills or Exclusivity).

As a consequence, break-up fees are rare if they concern the target. The admissibility of such arrangements can be questioned for a number of reasons, in particular regarding capital maintenance rules and under the corporate benefit test.

Special investor rights depend on the legal form of the target and are permissible in many private companies. However, in German stock corporations, the options to implement special rights for certain shareholders are limited. The basic structure of the corporate governance of a stock corporation and the rights of the corporate bodies cannot be amended. In particular, the members of the management board and supervisory board cannot be bound to follow instructions from the shareholders.

The shareholders generally have to be treated equally and their rights depend only on their respective participation rate; golden shares or multi-vote shares are impermissible. To obtain control over the most important decisions taken by the shareholders’ meeting, 50% of voting rights and, for some decisions, 75% are required (see 6.5 Minimum Acceptance Conditions).

If a shareholder wishes to obtain decision-making powers that they would not normally be entitled to with their participation rate, it is possible to enter into a pooling agreement and co-ordinate voting rights with other shareholders. These, however, may constitute “acting in concert” and trigger notification duties and a mandatory takeover obligation.

A special right that may be granted to a shareholder is the right to appoint a member of the supervisory board; this is quite rare in practice, however. If a shareholder’s participation rate exceeds 50% of the shares, that shareholder can decide on the appointment of supervisory board members anyway by a majority vote. However, a shareholder who does not control the majority vote in the shareholders’ meeting may ask for the right to appoint a representative to the supervisory board. Such right may then be implemented in the articles of association (ie, by shareholder resolution with 75% majority).

Shareholders are permitted to send representatives to the shareholders’ meeting and to vote by proxy.

German law provides for three types of squeeze-out mechanisms, which (only) apply to stock corporations.

Squeeze-Outs under Company Law

The most general squeeze-out mechanism under German law allows any shareholder with a participation rate of at least 95% of a stock corporation’s share capital to force the remaining shareholders to sell their shares. A squeeze-out under company law can but does not necessarily have to take place as a follow-up to a public takeover offer. From a legal perspective, it is not relevant how the majority shareholder’s share package was built.

The implementation of a squeeze-out under company law requires a shareholders’ resolution. If minority shareholders challenge such resolution, the registration of the squeeze-out can temporarily be blocked. However, it is possible to obtain the registration in an accelerated court procedure (Freigabeverfahren), which usually take three to six months. Minority shareholders must be paid a purchase price that is based on a fair market valuation of the company. Disputes about the amount to be paid by the majority shareholder do not, however, block the execution of the squeeze-out but are subject to a specific procedure (Spruchverfahren).

Squeeze-Outs Under Takeover Law

If a bidder holds at least 95% of the shares in a stock corporation following a public takeover offer, it is also possible to buy out the remaining shareholders by way of a squeeze-out under takeover law. This type of squeeze-out mechanism is initiated by filing an application with the Regional Court of Frankfurt am Main. The court will review whether the preconditions of a squeeze-out under takeover law are met. The bidder must pay adequate compensation. Even if the public takeover offer stipulates consideration in shares, such compensation may be paid in cash.

If the previous takeover offer was accepted by shareholders with an (aggregated) participation rate of at least 90% of the share capital, the consideration offered in the takeover offer is “deemed” to be adequate. However, it is debated whether such presumption can be overturned by minority shareholders and due to the related uncertainties, the takeover-related squeeze-out has very little practical relevance.

Squeeze-Outs Under Merger Law

The German Transformation Act (Umwandlungsgesetz) provides for the third option to buy out minority shareholders of a stock corporation. This type of squeeze-out is similar to a squeeze-out under company law but lowers the threshold of shares the majority shareholder must hold to 90% of the share capital.

However, the squeeze-out must occur in the context of an upstream merger with another stock corporation, partnership limited by shares or SE. The majority shareholder is required to adopt the resolution initiating the squeeze-out within three months from the conclusion of the merger agreement and the merger agreement must already contain the prospect of the future squeeze-out. The effectiveness of the squeeze-out in this case depends on the effectiveness of the merger.

Delisting

In addition to the above-mentioned squeeze-out variants, another way to acquire the shares of minority shareholders would be a delisting of the target company. The Stock Exchange Act requires that an offer to the remaining shareholders be published prior to delisting. The legal requirements regarding such an offer are very similar to those of a public takeover offer under takeover law. However, since the tradability of shares that are no longer listed is very much limited, there is a chance that shareholders who rejected a public takeover offer accept an offer in the context of a delisting.

It is possible under German law to obtain commitments to tender by principal shareholders or conclude tender agreements. However, tender agreements and irrevocable commitments qualify as financial instruments and thus trigger disclosure obligations to the target company and the supervisory authority (see 4.2 Material Shareholding Disclosure Threshold), so are usually only concluded immediately prior to or in conjunction with a public offer.

In accordance with the German Securities Acquisition and Takeover Act, the bidder has to publish its intention to submit an offer immediately following the respective decision, having communicated it to the stock exchanges’ management and BaFin. The announcement needs to contain the parties involved in the transaction, the offer’s nature and the offer price. It shall be disclosed in German by publication on the internet and via an electronic information distribution system.

Subsequently, the publication has to be sent to the management of the stock exchange and BaFin, and to the target company’s management board.

Within four weeks of publication of the intention to submit an offer, the bidder has to submit the binding offer document to BaFin. As soon as BaFin permits the publication of the offer or if it does not prohibit it within ten days, the offer document needs to be published immediately online, as well as in the German Federal Gazette, or made available for public distribution without charge.

Mandatory Bids

Anyone who directly or indirectly acquires control of a target company – other than as a result of a takeover bid – has to publish this immediately, within seven days at the latest, stating the amount of their share in the voting rights. The publication must be made on the internet and via an electronic information distribution system.

Within four weeks of the publication of the acquisition of control, the bidder has to submit an offer to BaFin and publish it immediately online, as well as in the German Federal Gazette, or make it available for public distribution without charge. Under the German Securities Acquisition and Takeover Act, acquiring control means the holding of at least 30% of the voting rights in the target company.

See 7.1 Making a Bid Public and 6.3 Consideration in connection with public offers. Outside of public bids, any public issuance of shares in a business combination has to be based on a prospectus available in printed form for distribution to the public or on the issuer’s website without charge. Under the German Securities Prospectus Act, the prospectus has to contain, inter alia, various pieces of information about the issuer and the shares to be issued.

The offer document of a public offer has to contain a thorough analysis of the effects of the transaction on the asset, financial and earnings position of the target and thus will need to contain, as part of such analysis, pro-forma combined financial statements.

If shares are issued in connection with a business combination, under EU Regulation No 809/2004, a prospectus has to precede a share issue, which must also include pro-forma financial statements about the companies involved in the transaction and, therefore, also about the bidder. These pro-forma financial statements need to be prepared in a manner consistent with the accounting policies applied by the issuer in recent annual financial statements.

Transaction documents in private transactions are generally non-public and subject to the agreed confidentiality restrictions.

In public transactions, the offer document itself as well as the target’s reasoned statement is published (see 7.1 Making a Bid Public), but ancillary agreements (such as business combination agreements or irrevocable undertakings) are generally not publicly available.

Many private companies in Germany are organised as limited liability companies or partnerships and have one-tiered boards consisting of the management. Management is generally bound by the obligation to act in the target company’s best interest as well as by the shareholders’/partners’ instructions. Sometimes (voluntary) advisory boards are also established.

By contract and with the exception of the one-tier SE, stock corporations in Germany have a two-tier board system. The same applies for co-determined legal entities. In these cases, while the management board runs the company and takes the main business decisions, the (mandatory) supervisory board acts as an advisory and supervisory body. Generally, both boards must act in the target company’s best interest. This applies irrespective of a listing of the shares of the company in question.

For board decisions, business judgement principles generally apply (see 8.3 Business Judgement Rule).

To the extent stock corporations are concerned, takeover committees are sometimes established at supervisory board level in order to increase the efficiency of the decision-making processes if the target company has a large number of supervisory board members. However, it is very unusual to establish a takeover committee at management board level.

In Germany, the business judgement rule applies to entrepreneurial decisions of the members of the management board, if the respective member of the management board could reasonably assume that they were acting in the company’s best interest on the basis of appropriate information. The business judgement rule does not apply in case of mandatory legal requirements, however.

Although the German Takeover Act (for public offers) or general corporate law does not strictly require the management board or the supervisory board to seek external advice, the business judgement rule will only apply if their decisions are based on appropriate information (see 8.3 Business Judgement Rule). In public takeover situations, the boards of the target company are obliged to issue a reasoned opinion, which requires an in-depth assessment of the offer document (see 5.5 Definitive Agreements).

The boards of the target company should take particular care to assess the appropriateness of the consideration, and, at least if a listed target or a seller with minority shareholders is concerned, regularly obtain a fairness opinion on the company’s fair value. Apart from that, outside advice is usually required in the context of due diligence (see 5.3 Scope of Due Diligence).

Conflicts of interest of board members can affect takeover situations for a variety of reasons. It is not uncommon for board members to also hold a board position in another company. In a takeover situation, the interests of both companies can be conflicting. Furthermore, board members can be shareholders of the target company themselves and may therefore be inclined to support or oppose the transaction for personal financial reasons.

A further reason for potential conflicts of interest of board members can arise if the bidder seeks to incentivise board members by granting or promising cash payments or non-cash benefits to them. In a public offer scenario, these potential conflicts of interest are directly addressed in the German Takeover Act.

According to the Takeover Act the bidder and persons acting in concert with the bidder are prohibited from granting or promising unjustified cash payments or other unjustified non-cash benefits to members of the management board or supervisory board of the target company in connection with the takeover offer.

By contrast, shareholders are generally allowed to pursue their own interests in a takeover situation.

A public offer does not require the consent of the management of the target company. Hostile takeovers are therefore permissible. However, they are still extremely rare in Germany.

Following the announcement of a takeover bid, the management board may not frustrate a bid under the German Takeover Act (and the EU Directive on Takeover Bids).

German law requires listed stock corporations to disclose all defensive mechanisms in the management report. Based on this information, the supervisory board is required to make a statement on these mechanisms in its statement to the annual general meeting.

If a target opposes an approach by a bidder, it is possible to exclude access to due diligence or to issue a negative reasoned statement to the offer, subject always to the corporate benefit test.

The management board of the target company is prohibited from otherwise actively preventing the success of the offer, however. What remains possible are actions in the ordinary course of management of a prudent manager (ie, without a specific defensive focus). Also, the management board may search for alternative offers by other bidders, so-called white knights.

Defensive measures may also be taken by the management board in exceptional cases with the consent of the supervisory board. Details of permissible defence measures are highly debated and need to be evaluated in each particular case.

In theory, the management board can also propose to the general meeting that anticipatory resolutions be adopted that entitle the management board to take certain defensive actions that are otherwise within the competence of the general meeting (such as capital measures) in case of a hostile approach. However, this authorisation has not proven relevant in practice due to the potential market implications of such a resolution.

The management board of the target company is obliged to act in the best interest of the company at all times. The interests of the company are not necessarily identical with the interests of the shareholders, but encompass and combine the interests of the shareholders, the employees and the creditors. In addition, the defensive measures must be in line with the provisions of German stock corporation law.

See 9.3 Common Defensive Measures.

In private M&A transactions, disputes between the bidder and the target company often involve termination or break-up fee clauses, a breach of warranties or the due date of variable purchase price payments.

However, published court decisions are extremely rare. There are two main reasons for this:

• many German M&A contracts contain arbitration clauses, so arbitral awards are usually not published; and
• disputes before state courts are often settled amicably.

In public M&A transactions, minority shareholders primarily challenge the amount of compensation after certain corporate taking-private transactions subsequent to the takeover, such as the conclusion of domination (or profit pooling) agreements, squeeze-out or delisting resolutions. These proceedings are public.

See 10.1 Frequency of Litigation.

Broken-deal disputes regularly involve the application of MAC clauses or the allocation of antitrust risk. MAC provisions are relatively uncommon in German M&A transactions, but are sometimes seen in the US context. Related disputes are generally non-public for the reasons set forth above, with some notable exceptions such as the recent Fresenius/Akorn case. Given the market is generally on the seller-friendly side, it is to be expected that sellers will continue to be able to insist on transaction certainty as a key condition for a transaction, and have a strong negotiation position in a broken-deal dispute.

Shareholder activism has increased in recent years in Germany. To achieve their goals, activist shareholders make use of their minority rights under the German Stock Corporation Act (eg, the right to request an addition to the agenda or submit counterproposals at shareholders’ meetings, or to initiate legal disputes with board members or majority shareholders), as well as the possibilities to challenge shareholders’ resolutions (see below). The motives of activist shareholders are manifold and their approach varies accordingly, ranging from limited activism to aggressive interaction with the company. The latter cases, in particular, have increased considerably in recent years (see 11.2 Aims of Activists).

Shareholders can file actions for rescission against resolutions of the general meeting on major structural measures such as statutory mergers, control and profit transfer agreements or squeeze-outs to block the entry in the commercial register that is mandatory for them to become effective, and these actions have become a common tool for certain hedge funds (to be distinguished from activist investors in the narrow sense). This practice of professional minority shareholders to use such legal proceedings to their own advantage is important for companies and investors to take into account. However, a court procedure introduced specifically to overcome this blocking effect faster, the release procedure (Freigabeverfahren), now considerably reduces the potential for interference by minority shareholders.

Activist shareholders in Germany pursue a wide variety of objectives. In recent years, shareholder activism has increasingly focused on corporate strategy and restructuring/spin-off measures (eg, Bilfinger, ThyssenKrupp and more recently Fresenius) as well as takeover bids (eg, Deutsche Börse, Stada, Daimler and Celesio). This upward trend is expected to continue.

Activist shareholders with a reasonable direct and/or proxy majority may be in a position to determine the satisfaction of a minimum acceptance condition and thus influence the success of the offer. Often, respective positions are required immediately prior or even during a pending transaction to exert influence on the offer price. Due to the already existing frequency and the current trend regarding the objectives of shareholder activism as well as the expected increase – not least due to the EU Shareholders’ Rights Directive – of such shareholder activism, public transactions are increasingly exposed to risk in this respect.

In addition and as noted above, activist shareholders often intervene in corporate and restructuring measures subsequent to a transaction, which can also influence the decision to make an offer in the first place.