After the 2021/HY2022 record numbers, the German M&A market overall (as well as the tech M&A sector) saw a downturn during the second half of 2022 and Q1/2023 driven by numerous challenges (difficulties to obtain third-party financing, inflation, recession fears, geopolitical conflicts, supply chain problems). However, with Q2/2023 numbers picking-up pace again, it is likely that the M&A activities in the German technology sector will continue to resurge over the next period. Driven by the aim of the entire industry to transform their business models and optimise them for future challenges, the technology, media and communications sector set another record for deal volumes in Germany with tech assets accounting for the largest portion within this sector.

See 1.1 Technology M&A Market.

Place of Incorporation

Start-up companies active in the German market are usually incorporated in Germany.

Incorporation Process and Timing

Usually, entrepreneurs are advised to acquire existing (limited liability) companies already incorporated by professional shelf company providers. This process is faster compared with the incorporation of a new company (approx. two business days compared with approx. five to ten business days, depending on the speed of the respective commercial register). The service providers will charge a fee for providing a shelf company in the area of EUR3,500-EUR4,000.

Capital Requirements

Initial capital requirements depend on the type of company chosen by the entrepreneurs. In the case of a typically chosen limited liability company, the statutory minimum registered share capital amounts to EUR25,000, of which (i) at least 25% of each share and (ii) 50% of the share capital in the aggregate need to be paid in at the time of registration. Companies offered by service providers usually come with a fully paid-in share capital which needs to be taken over and reimbursed.

In Germany, entrepreneurs are usually advised to choose a limited liability company (Gesellschaft mit beschränkter Haftung – GmbH) for the initial incorporation. The GmbH provides a significant flexibility in the corporate governance (in particular compared to stock corporations (Aktiengesellschaft – AG)) and may be tailored to the needs of the entrepreneurs.

Early-stage financing is provided for by different means and includes various government-sponsored programmes as well as professional business angels and early-stage investors as well as family offices. There is no mandatory form of documentation but a common practice for early-stage investments which may be provided either by equity or debt.

Common sources providing venture capital are specific venture capital funds, corporate venture capital investors/funds established by renowned corporate/blue-chip players and government-sponsored funds. The investor scene in Germany is very busy and active and offers a variety of potential capital investors. In addition to domestic funds, international players are very active in the German market, offering venture capital investments.

Unlike in other jurisdictions (for example, the United Kingdom), there are no standards for venture capital documentation provided by state authorities or other associations of interest.

Start-ups incorporated in the form of a limited liability company (GmbH) stay in this legal form until an IPO is contemplated which may only be conducted if the company has the legal form of a stock corporation (Aktiengesellschaft – AG) or Societas Europaea (SE). However, GmbHs remain the corporate of choice as they provide for more flexibility in their corporate governance and are much easier (and less costly) to handle in the ordinary course of business. Companies tend to migrate out of Germany mostly for tax reasons or if they envisage a listing at another European hub. Otherwise, the German legal system provides a stable, well-established and reliable basis for start-ups and does not incentivise migrations.

Investors willing to exit a start-up company will predominantly structure their exit by way of a private sale process. While IPOs remain in principle attractive instruments as well, they require considerably more preparation, are much more cost-intensive and bear bigger risks in their execution, including volatile markets, risk appetite of outside investors and complex listing rules. Therefore, the number of IPOs significantly decreased over the last quarters in view of unstable markets and challenging macro-economic environments. While investors wishing to achieve maximum flexibility in their exit event might opt for a dual-track process, such processes are not often conducted given their increased complexity and costs which limit their use to start-ups of considerable size.

Most companies usually opt for a listing in their home country exchange to avoid additional regulatory efforts when being listed in a foreign jurisdiction.

Despite a foreign listing, the company remains subject to the applicable German corporate regimes which provide the guidelines for future sales outside of the stock exchange. Therefore, measures like squeeze-outs or other comparable corporate restructurings need to follow both applicable mandatory German law as well as the rules of the foreign stock exchanges. This does, of course, increase the complexity of a sales process.

Auction processes may be structured as bilateral negotiations or as structured auction processes. Investors choose the structure for the auction process on a case-by-case basis, depending on the specifics of the respective circumstances. However, if the circumstances permit, sellers will usually try to structure a sale process as a competitive process to maximise the results and outcome to the benefit of the seller. Auction processes are market practice in Germany and all stakeholders involved are used to the particularities (transaction speed, orchestrating the process, transaction documents).

Usually, the entirety of the company is sold with no investors remaining. Potential bidders might request that founders that are still active in the company remain on board for a certain period of time – sometimes connected to the offering of a deferred consideration element (earn-out).

Transactions are predominantly carried out against a consideration in cash.

The catalogue of representations and warranties and the scope of liable sellers is subject to intense negotiations among the parties. Investors will usually try (and oftentimes succeed to) refrain from issuing any business-related representations and warranties but push these representations to the selling founders/management of the company who need to issue such representations and incur respective potential liabilities.

Spin-offs are an instrument which, in particular, large corporates use to streamline their operations by divesting certain business areas which become non-core business. While spin-offs are not the dominant restructuring tool, some spin-offs generated significant public attention (like the sale of Thyssenkrupp elevator or the spin-off of Vantage Towers from Vodafone and the subsequent sale to private equity investors).

Spin-offs may be structured as tax-neutral at the company level and the level of the shareholder. Besides other prerequisites, only spin-offs of separate business units (Teilbetrieb) are covered by these provisions, whereas a 100% shareholding in a corporation or an interest in a partnership qualify as separate business units. In Germany, you separate between spin-offs, hive-downs and split-offs. In the case of a spin-off, the assets to be spun off need to qualify as a separate business unit and the remaining assets also need to qualify as a separate business unit.

While it would be technically possible that a spin-off is immediately followed by a business combination, this is not the customary route chosen in Germany.

Mandatory law enables a spin-off within a period of a few months, depending on the various waiting periods to be observed (in particular whether or not works councils needs to be involved). In practice, however, spin-offs require a thorough preparation taking into account operational, business, tax and legal aspects to allow for a day-one readiness. Thus, spin-off processes tend to last at least one year from the initial kick-off to their consummation.

In preparation of a public takeover offer, bidders might consider acquiring shares in the target prior to announcing the takeover offer. However, if a bidder (or any other acquirer) reaches, exceeds or falls short of 3%, 5%, 10%, 15%, 20%, 25%, 30%, 50% or 75% of the voting rights, this must be notified to the company and the BaFin. Shares held by affiliated companies or by third parties acting in concert with the bidder are attributed to the bidder. Moreover, the requirement to publish a mandatory offer (see 6.2 Mandatory Offer) needs to be taken into consideration.

Bidders need to consider that any acquisitions of shares consummated by the bidder, its affiliates or persons acting jointly with the bidder within six months prior to the announcement of the intention to launch a takeover offer are taken into consideration for calculation of the offer consideration as a minimum pricing threshold.

A mandatory bid for all the shares in the capital of a target company is triggered in principle if a shareholder, either acting alone or in concert with others, acquires an interest of 30% or more of the voting rights in the target company. Exceptions may apply to selected circumstances, including waivers granted by the German Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht - BaFin). Mandatory offers are governed by stricter rules than voluntary offers, both in terms of the consideration offered as well as in view of offer conditions (which are generally not permitted).

Public takeovers are usually carried out by an offer directed at all shares of the listed company. Offers intended to acquire only less than 100% of the shares are permitted (unless the offer is a mandatory offer), but not frequently used. While in principle the acquisition of public companies could also be structured by measures provided for under the German Conversion Act (Umwandlungsgesetz), mergers and comparable structures are not commonly used under German law. The main reason for not opting for merger structures lies in their specific formal requirements and shareholder involvement given the requirement for supporting votes of the general meetings with at least 75% of the share capital and related shareholder claims.

Mandatory Offer Consideration

As consideration for the target shares, the bidder must offer cash or shares that are liquid and admitted for trading on a regulated market in the European Economic Area (EEA), whereas such shares must not necessarily be issued by the bidder. In addition to such mandatory consideration, the bidder may offer a voluntary alternative consideration, which may consist of listed or non-listed shares (including outside the EEA). A cash consideration is mandatory in the case of an acquisition of target shares prior to the voluntary takeover offer of at least 5% against cash within six months preceding its announcement.

Minimum Pricing Rules

The voluntary takeover offer needs to comprise a mandatory consideration of at least the higher of:

• the highest consideration directly or indirectly paid or agreed upon by the bidder (including by persons acting in concert with the bidder) during the six months preceding the start of the voluntary takeover offer acceptance period; and
• volume-weighted average stock market price during the three months preceding the voluntary takeover offer announcement as determined by BaFin.

Such mandatory consideration needs to be retroactively increased to the level of any higher consideration directly or indirectly paid or agreed upon by the bidder (including by persons acting in concert with the bidder) outside

the voluntary takeover offer either during the voluntary takeover offer acceptance period or, in the case of acquisitions outside the stock exchange, during one year after the expiration of the acceptance period.

The bidder may be able to allocate a consideration premium solely to the voluntary alternative consideration component (eg, shares in the bidder not admitted for trading on a regulated market in the EEA) as long as the voluntary takeover offer comprises a mandatory consideration in line with the minimum consideration rules; details would need to be discussed with BaFin.

Voluntary v Mandatory Offers

A voluntary takeover offer, contrary to a mandatory takeover offer, can be made subject to conditions except for those which are under the direct or indirect control of the bidder (no subjective conditions); thus, a voluntary takeover offer may not comprise a financing out or any withdrawal rights to the benefit of the bidder.

Customary and Permitted Offer Conditions

Except for regulatory conditions (including merger control), BaFin does not permit conditions which refer to any periods after the expiry of the acceptance period.

Typical conditions for voluntary takeover offers comprise:

• regulatory conditions (including merger control);
• minimum acceptance level;
• MAC (designed to be determined by independent third party); and
• absence of defence actions by target (in hostile/semi-hostile situations).

Offer Document

The offer document needs to be filed in the German language with BaFin and must comprise inter alia the following information:

• Summary.
• Description of bidder and target.
• Description of shares subject to the offer.
• Kind and amount of consideration.
• Any conditions of the offer (including status of regulatory proceedings).
• Date of commencement and expiration of the acceptance period.
• Necessary measures taken by the bidder to ensure its ability to deliver the consideration offered.
• Potential effects of a successful voluntary takeover offer on the asset, financial and earnings position of the bidder (which in practice requires respective pro formas).
• The bidder's intentions with respect to the target's future business.
• Financing confirmation to be issued by an independent financial services institution and to generally cover all target shares other than those held by the bidder.
• Description of all benefits granted or promised to the target's management board as well as supervisory board members (in practice detailed discussion with individuals only after the voluntary takeover offer).
• Description of target shares held by the bidder and relevant acquisitions of such shares prior to the voluntary takeover offer.
• Elements of a listing prospectus in case the bidder intents to offer shares as consideration.

The bidder is responsible for the correctness and completeness of the offer document, which needs to be confirmed by the bidder within the offer document. Usually, bidders will also publish a (non-binding and convenience-only) English version of the offer document on the internet.

Business Combination Agreements

The bidder and target may agree on certain essentials of the transaction and the subsequent integration of the target into the bidder’s group (eg, with respect to maintaining the target’s corporate name, business sites or workforce), which may be a condition for the Target supporting the tender offer by entering into a business combination agreement (BCA) or investment agreement.

A BCA should not allow for instruction rights of the bidder vis-à-vis the target, to ensure that the agreement is not deemed a (hidden) domination and profit and loss transfer agreement (Beherrschungs- und Gewinnabführungsvertrag) which would be subject to special and strict rules.

Provisions contained in BCAs may include:

• Goals, objectives and timing of the contemplated transaction, which provide indications for the target's management whether the transaction is in the best interest of the corporation.
• Issuance of a - supportive - reasoned opinion of the target's management and supervisory board subject to the transaction being within the Target's best interest.
• Break fees; limitation/cap of the bidder's interest in the company; fiduciary out provision.
• Not very frequently: operative measures, for example co-operation in R&D projects or supply chains.

Irrevocable Undertakings

Depending on the shareholder structure of the target company, bidders might try to enter into so-called irrevocable undertakings pursuant to which (key) shareholders of the target company - irrevocably - agree to tender their shares into the takeover offer (see 6.12 Irrevocable Commitments).

Minimum Acceptance Threshold

BaFin allows bidders to include minimum acceptance thresholds into voluntary takeover offers; if a mandatory takeover offer needs to be launched, the Securities Takeover Act prohibits any conditions. The threshold included in such conditions varies and is significantly dependent on whether the bidder wants to implement a domination and profit and loss transfer agreement (DPLTA) which requires a 75% majority of the share capital present at the shareholders' meeting deciding about such agreement. Bidders usually therefore take historic presence quotas into consideration, resulting in minimum acceptance conditions between approximately 60% and 75%. In some instances, bidders include higher acceptance thresholds.

Back-End Speculation

In the context of voluntary takeover offers, hedge funds often engage in so-called back-end speculations in order to benefit from the economic implications of a future DPLTA. Hedge funds will try to negotiate with the bidder to increase the takeover offer compensation to incentivise the hedge funds to tender in their shares – which might be required to successfully close the offer.

Alternative Squeeze-Out Mechanics

German law provides for different squeeze-out mechanisms which relate to different prerequisites:

• Merger squeeze-out – based on a shareholding of 90% in the target, a bidder may pursue a so-called merger squeeze-out by way of upstream merger into a stock corporation pursuant to which all minority shareholders will be forced out of the company and the listing of the target will terminate; bidder acquisition vehicles are therefore sometimes immediately structured as stock corporations for the purposes of a later merger squeeze-out.
• Stock Corporation Act squeeze-out - based on a shareholding of 95% in the target, a bidder may pursue a squeeze-out pursuant to the Stock Corporation Act to be resolved upon by the shareholders' meeting.
• Takeover squeeze-out - if a bidder holds 95% upon expiration of the additional acceptance period, the bidder may initiate a so-called takeover squeeze-out. The squeeze-out will be decided upon by the local court of Frankfurt and no shareholders' meeting is required. If 90% of the shares subject to the tender offer have been tendered, the offer price will be regarded as adequate squeeze-out compensation.

It should be considered that the takeover squeeze-out usually takes longer than the merger and Stock Corporation Act squeeze-out; thus, in practice, the merger and Stock Corporation Act squeeze-out are the prevailing transaction routes.

Consideration

Minority shareholders will be entitled to a cash exit compensation comparable as in the context of a domination and profit and loss transfer agreement; in addition, the bidder will need to provide the target with a commitment of a financial institution guaranteeing the due and punctual payment of the cash exit compensation.

Certain Funds Confirmation

In the case of a cash consideration, an independent financial services institution needs to confirm that the bidder has taken the necessary measures to secure sufficient funds to finance such cash consideration. The confirmation needs to cover a volume assuming a full acceptance of the voluntary takeover offer (ie, tender of all target shares other than those held by the bidder). The financing confirmation is to be issued by an independent financial services institution (Wertpapierdienstleistungsunternehmen) generally with a seat in the EEA and must be filed with BaFin together with the offer document. A confirmation issued by a German branch of a US financial services institution may also suffice subject to BaFin confirmation.

Non-tender Agreements

Depending on the transaction structure, it may be beneficial to enter into a non-tender agreement and securities blockage agreement to reduce the volume of required financing.

Compared with the US market, German takeover law is much more limited when it comes to deal protection instruments – partially also because the management of the target company is much more restricted in interfering in the takeover offer.

While break-up fees (comprised in business combination agreements with the company) are permitted in principle, they are not commonly used as (i) they would need to be disclosed in the offer document and (ii) they need to be carefully drafted in order to ensure the discretion of the management board on whether or not to support the offer.

No-shop provisions are possible, subject, however, to a strict fiduciary out provision allowing the management to at least evaluate competing offers and, in case a competing offer is deemed more favourable to the company, discontinue to support the initial offer and rather support the competing offer.

Domination and Profit-Sharing Agreement

A domination and profit and loss transfer agreement (DPLTA) under German law is a typical instrument for a majority shareholder to control the business operations of the target, to financially integrate the target (cash-pool) and to effect a tax group. While the corporate governance of a (listed) stock corporation or SE provides a huge discretion to the management to run the company, a DPLTA provides the right to render legally binding instructions to the target's management even if disadvantageous as long as in the group's interest. Further, the bidder would be entitled to receive the annual profits of the target and would, in turn, be obliged to compensate for any annual losses of the target.

The conclusion of a DPLTA requires the holding of a stake of at least 75% of the share capital represented at the respective shareholders' meeting of the target approving the DPLTA. Due to this requirement, a 75% minimum acceptance threshold and condition is part of many voluntary takeover offers, which to date is more and more reconsidered in light of hedge fund exposure (see 6.7 Minimum Acceptance Conditions). Given the increased governance rights of the majority shareholder, mandatory law provides for various minority protection rights.

• Cash exit right: shareholders need to be able to exit the target company against compensation in cash. The adequacy of the offered cash compensation must be the higher of (i) an enterprise valuation pursuant to the so-called German IDW S1 standard, and (ii) volume-weighted average stock market price during the three months preceding the announcement of the DPLTA. In practice, the valuation will likely be challenged by minority shareholders in special court proceedings, which typically last for several years and often result in a significant increase in the initially offered cash exit compensation. The acceptance of the cash exit right may be declared by minority shareholders at any time until two months after a binding decision in a special court proceeding has been announced, de facto resulting in a put option for many years.
• Guaranteed dividend: moreover, the DPLTA needs to provide for a guaranteed dividend for those shareholders who decide to stay in the company and do not exit the company against cash compensation.
• Interest payment: interest on the cash compensation amounts to 5% above the respective base rate. It will be offset later with guaranteed dividends received by minority shareholders until acceptance of the cash exit right. However, if the interest amount is higher, any difference needs to be paid to minority shareholders.
• Guarantee by ultimate shareholder: in practice, the performance under the DPLTA to pay a cash compensation and a guaranteed dividend is usually guaranteed by the ultimate controlling shareholder.

Squeeze-Out

Please see 6.8 Squeeze-Out Mechanisms for squeeze-out related aspects.

Agreements with shareholders of the company, by which such shareholders "irrevocably" commit to tender their shares subject to certain requirements (in particular regarding the amount of compensation offered) being met, are frequently used. It needs to be taken into consideration, however, that any agreement with existing shareholders which includes the sale and transfer of shares in the target company may not offer more beneficial terms to the individual shareholder compared to the terms of the offer document.

The offer document needs to be reviewed and cleared by the BaFin. The BaFin also reviews the offer price and compares it to their information on weighted average market prices.

The timeline for the takeover offer is only regulated as a certain frame. It is up to the bidder to set the exact acceptance period (see 6.14 Timing of the Takeover Offer).

Key milestones of the offer process can be described as follows:

• The bidder needs to submit a draft of the offer document to the BaFin for review within four weeks following the announcement of the intention to launch an offer (the time period may be extended by up to a further four weeks for cross-border offers or if the offer shall be financed by newly issued equity).
• Immediately after the BaFin grants its approval or if BaFin does not prohibit the offer within a period of ten working days (prolongable by BaFin for up to five additional working days), the offer document is to be published (thereby initiating the acceptance period) as well as to be submitted to the target.

• The management board and supervisory board jointly or separately have to publish reasoned opinions without undue delay (in practice no longer than two weeks) after receipt of the offer document.
• The voluntary takeover offer is subject to an initial acceptance period, which expires at the discretion of the bidder after four to ten weeks. In case a competing offer is launched, the acceptance period of the initial offer is amended to match the acceptance period of the competing offer.
• Within this period, levels of acceptance are to be published weekly (daily during the last week).
• After the expiration of the acceptance period, the bidder needs to publish without undue delay the total number of target shares then tendered together with the number of target shares then held by, or attributed to, the bidder.
• In the case of a successful voluntary takeover offer (ie, an applicable minimum acceptance level being achieved), an additional two-week acceptance period starts, providing the opportunity for those shareholders who did not yet accept the voluntary takeover offer to tender their shares.
• After the expiration of the additional acceptance period, the bidder needs to publish without undue delay the total number of target shares then tendered together with the number of target shares then held by, or attributed to, the bidder.
• Closing of the voluntary takeover offer and the settlement of the voluntary takeover offer only occurs once regulatory conditions are fulfilled. Tendered shares can be traded under a separate securities identification number (ISIN). However, while trading the tendered shares under a separate ISIN does not occur automatically nor is an obligation, this approach is rather common in practice.

In addition to general permits (ie, a general business licence) and complying with general regulations (eg, the GDPR), technology companies may require specific permits and approvals in certain regulated sectors. Such include banking, gambling and telecommunications. Whereas, for example, payment solution providers require banking licences, many innovative business models may at first evolve in a legal grey area where the necessity of a special permit is not yet clear. Even if technology companies are not subject to specific approval processes, in certain other sectors they need to be aware of further specific regulation. For example, digital health companies must comply with special data protection obligations and legal tech companies may have to consider legal professional law. Further, changes in the ownership of regulated technology companies often require notification to regulatory authorities.

The primary securities market regulator for public M&A transactions is the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht - BaFin).

Competent Authorities

Restrictions on foreign investments in Germany may be imposed by the German Federal Government under the rules of the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung - “AWV”). The competent authority to screen such investments is the Federal Ministry for Economic Affairs and Climate Protection (known by its German abbreviation as “BMWK”). If a foreign investment is reviewed by the BMWK, it also involves other branches and agencies of the Federal Government (among others, the German Federal Office for Information Security, the Ministry of Defence, and the intelligence agencies).Review Thresholds

Under the rules of the AWV, a direct or indirect acquisition of, or participation in, a German target (meaning a German company or the branch of a non-German company in Germany) by a foreign investor may be reviewed by the BMWK. The rules cover share deals above certain thresholds (10%, 20% or 25% of the voting rights) as well as certain asset deals (where the assets in question constitute a “separable operating unit”). In addition, increasing an existing shareholding above certain thresholds (20%, 25%, 40%, 50% or 75% of the voting rights) may also be reviewable. The rules apply to investments by investors domiciled outside the European Union (EU) and outside the European Free Trade Association (EFTA). For certain defence-related activities, they also apply to investments by non-German investors, ie, including investors from other EU member states.

Review Process

If the German target carries out certain listed non-defence-related or defence-related activities, a non-EU/EFTA investor (and in cases of defence-related activities: non-German investor) must notify the acquisition to the BMWK.

The non-defence-related activities include a total of 27 categories (Section 55a AWV). Several of these activities may be considered within or adjacent to the tech sector, eg, cloud-computing, certain IT and AI products, quantum computing and quantum communications, robotics, wireless or wired data networks, etc. The defence-related activities include four categories (Section 60 AWV), which primarily relate to military equipment, including components, and high-security IT products for the processing of government classified information.

Impacts on Transaction

If a filing is mandatory, the parties may not close the transaction before it has been cleared by the BMWK. A violation of this standstill obligation may result in criminal and administrative fines; in addition, the validity of the acquisition is suspended until a clearance from the BMWK has been obtained. If no filing obligation exists, the parties are free to close the transaction at any time without the need for a BMWK clearance. However, the BMWK may review any acquisition by a non-EU/EFTA investor of at least 25% of the voting rights in a German target (even outside the listed sectors) on its own initiative if and when it becomes aware of it (for up to five years from the signing of the purchase agreement). To avoid such a post-acquisition review and the risk of a subsequent prohibition and unwinding order, the acquirer may elect to make a voluntary filing.

Foreign Subsidies Regulation

As from 12 July 2023, the Foreign Subsidies Regulation (FSR) is applicable for transactions which are signed as from 12 July 2023 and consummated after 12 October 2023. Its broad scope applies to both EU and non-EU companies and aims to provide a level playing field for operating in the European market by addressing potential distortions caused by foreign subsidies. The EC found that such foreign subsidies have granted acquiring companies an unfair advantage which needs to be addressed. The M&A related review instrument under the FSR applies to transactions involving financial contributions granted by non-EU governments, where the acquired company, one of the merging parties or the joint venture generates an EU turnover of at least EUR500 million and the parties were granted foreign financial contributions of more than EUR50 million in the last three years. Any such contribution needs to be notified to the EC and is subject to a clearance proceeding. Moreover, the FCR provides for an ex officio procedure to investigate all other market situations, where the EC can start a review on its own initiative. Finally, but not relevant for M&A transactions, the FSR comprises a notification obligation in tender proceedings. Experience with these new FSR are yet limited but will also be of relevance for (larger) tech transactions.

Besides the screening of foreign investments listed in 7.3 Restrictions on Foreign Investments, no additional national security review for acquisitions exits. However, if a foreign investment screening under those rules is carried out, the standard for a prohibition or an intervention is whether or not the investment is likely to affect “public order or security” or, in the case of defence-related activities, “essential security interests”. This assessment depends on a number of factors. Factors that increase the risk of an intervention are:

• the target company is active in a critical sector;
• the acquirer is owned, controlled or financed by a foreign government; and
• there is a risk that the acquirer has already been, or will be, involved in activities adversely affecting public policy or security.

Export controls exist primarily with regard to items on the following lists:

• list of dual-use items (Annex I of Regulation (EU) 2021/821); and
• German Export list (Ausfuhrliste, Annex I to the AWV).

In addition, export restrictions may exist if the exporter has been informed, or otherwise knows, that non-listed items are intended for certain military or other end uses.

Generally, an antitrust filing is required if a transaction constitutes a “concentration” and if it meets the jurisdictional thresholds.

Regarding the “concentration” test, the following events may trigger German merger control:

• the acquisition of all or of a substantial part of the assets of another undertaking;
• the acquisition of (direct or indirect) control of another undertaking, or parts of it, by one or several undertakings;
• the acquisition of a shareholding in another undertaking if the overall shareholding reaches or exceeds 25% or 50% of the capital or the voting rights; and
• any other acquisition enabling one or several undertakings to directly or indirectly exert a competitively significant influence on another undertaking.

Regarding the jurisdictional thresholds, a filing is required if, in the last completed financial year preceding the concentration, all the following criteria were met (turnovers generated in foreign currencies should be converted at the annual average exchange rates of the European Central Bank, where available):

• the combined worldwide turnover of all undertakings concerned exceeded EUR500 million;
• the German turnover of at least one undertaking concerned exceeded EUR50 million; and
• the German turnover of one other undertaking concerned exceeded EUR17.5 million.

If the thresholds above are not met, a filing may still be required if the “size-of-transaction” test is met, which was introduced in 2017 specifically with the aim to capture acquisitions of start-ups with little turnover and high market potential. A filing is required if all of the following criteria are met with regard to the last completed financial year preceding the concentration:

• the combined worldwide turnover of all undertakings concerned exceeded EUR500 million;
• the German turnover of one undertaking concerned exceeded EUR50 million;
• the German turnover of neither the target undertaking nor of any other undertaking concerned exceeded EUR17.5 million;
• the value of the consideration for the concentration exceeds EUR400 million; and
• the target undertaking operates to a significant degree in Germany.

Where a filing is required, the transaction may not be closed until it has been cleared by the German Federal Cartel Office (Bundeskartellamt). A violation of this standstill obligation may result in an administrative fine of up to 10 % of an undertaking’s worldwide turnover; in addition, the validity of the acquisition is suspended until a clearance from the FCO has been obtained.

In Germany, there are well-developed employee rights at the individual and collective level, many of which are shaped by EU legislation, but sometimes go beyond it. In the context of M&A transactions, the following points in particular must be taken into account:

Works Council Consultation

If a works council or economic committee has been formed in the target company, there is an obligation to inform the respective body sufficiently in advance of the signing so that it can theoretically still influence the decision-makers' decisions. Outside of public M&A transactions, however, any opinions of the employee representatives are not published. In practice, therefore, the obligation to provide information has not yet proved to be an obstacle. This is all the more true as timely information is generally not an effectiveness requirement for the conclusion of company purchase agreements. Solely implementation measures after signing, which are to be carried out with the help of German conversion law, are only effective if the (draft of the) conversion documentation has been made available to the relevant works council in good time (at least one month) before the decision of the shareholders. In general, the consent of the employee representatives to the transaction is not a technical prerequisite for effectiveness. Something different may result solely from collective agreements, which, however, rarely provide for corresponding regulations.

Co-determination

Germany has a sophisticated system of corporate co-determination which provides for (i) one-third of the supervisory board of corporations (of a certain legal form) or corporate groups with generally more than 500 employees to be composed of employee representatives and (ii) equal representation of employee and shareholder representatives (with trade union participation) on the supervisory board of corporations (of a certain legal form) or groups of corporations with generally more than 2,000 employees. This corporate co-determination is in addition to co-determination at operational level, which is carried out by works councils, and co-determination by trade unions. This must be taken into account not only with regard to the decision-making process in M&A transactions, but also with regard to the intended target structure and timeline.

Central bank approvals are only required in the case of regulated banking industries.

Key trends and developments in the German technology M&A market are closely connected to an increased level of governmental and regulatory intervention. This is highlighted by, in particular, tightened FDI rules, the adoption of the Supply Chain Sourcing Obligations Act (Lieferkettensorgfaltspflichtengesetz - LkSG), and an increased focus on ESG aspects such as the inclusion of further ESG requirements in the German Corporate Governance Code (GCGC). Further, data-driven business models are increasingly subject to extensive regulation. In addition to the GDPR, affected companies will also have to observe, in particular, the recent Data Governance Act (DGA) as well as the upcoming Data Act (DA) and the upcoming Artificial Intelligence Act (AIA). Moreover, platforms have recently been subject to stricter action by competition authorities and legislative activity. Relevant new laws include the P2B Regulation as well as the Digital Markets Act (DMA) and the Digital Services Act (DSA). These significantly tighten platform regulation and present risks of significant administrative fines.

In addition, the German Supreme Court (Bundesgerichtshof) ("Supreme Court") has recently issued a ruling (dated 15 September 2023 - V ZR 77/22) which further clarifies the Supreme Court's case law on a seller's pre-contractual disclosure duty. The ruling makes important comments on the requirements for the disclosure of documents and information in electronic data rooms. The Supreme Court established that disclosure in a data room suffices to satisfy the seller’s disclosure duty if and to the extent that, based on the actual circumstances, the seller may reasonably expect the buyer to take note of the issue that is subject to a disclosure duty by inspecting the data room. In case of doubt and if it is apparent to the seller that the issue in question is of considerable importance to the buyer, the seller has to inform the buyer separately, ie, in addition to the data room disclosure. In assessing whether such additional information is required, all facts of the relevant case need to be considered (volume of disclosure, information on subsequent additions to the data room, time for review of the information, significance of the matter in question, etc).

General Consideration

The management of a public company may allow the bidder to conduct a due diligence in principle. However, the management is required to consider whether the due diligence conducted by the bidder is in the company's (including its shareholders and other stakeholders) best interests. In assessing this, the management needs to take all applicable factors into account, inter alia the likelihood of the takeover’s potential success, the goals of the bidder, potential implications of the successful takeover on the company (and its shareholders and stakeholders). Please also note the impacts of the recent ruling of the Supreme Court on disclosure obligations in M&A situations (see 8.1 Significant Court Decisions or Legal Developments).

Non-disclosure Agreements

Even if the management comes to the conclusion that the due diligence is in the best interest of the company, it needs in any event to enter into a non-disclosure agreement with the bidder. Further, the management should consider a disclosure process designed in stages (staggered process), with information being disclosed depending on the status and development of the transaction.

Insider Trading Rules

In conducting a due diligence, bidders need to carefully consider insider trading and information rules as any inside information disclosed in a due diligence may limit the ability of the bidder to acquire shares outside the tender process. This may even apply to cancellations or amendments of pending orders relating to the target shares which may qualify as insider trading.

Due diligence of technology companies generally requires the disclosure of personal data from the seller to the buyer. Therefore, such processing activities have to comply with general data protection requirements. In particular, it necessitates a legal basis under the GDPR. For example, the disclosure of relevant data may be justified as being necessary for the purposes of legitimate interests, which may include conducting the M&A transaction. However, certain information may have to be anonymised. This potentially includes the names of employees as well as certain sensitive personal data such has health data. Further challenges arise if the potential buyer is located outside the EU as the international transfer of personal data requires special privacy safeguards.

Bids need to be disclosed without undue delay after the bidder has formed its intention to launch the bid. Pursuant to the German Securities Takeover Act, such intention to launch a bid needs to be published on the internet as well as through an electronic information system like Reuters or Bloomberg. The publication on the internet is usually conducted by setting up deal-related websites on which all information and documents related to the offer are uploaded throughout the entire process; such websites are offered by service providers who, bound by respective NDAs, prepare the body of the website and populate it accordingly. Moreover, the intention needs to be specifically disclosed to the BaFin and the target company - which in turn needs to immediately upon receipt of such notification publish an ad hoc notification.

Within four weeks of the publication of the bidder's intent to launch the takeover offer, the bidder needs to submit the draft offer document to BaFin for its review and clearance.

In principle, the Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered (Prospectus Regulation) needs to be observed in Germany, too. Article 3 of the Prospectus Regulation provides for a need to publish a prospectus in several instances of share offerings (including stock-for-stock offerings), unless an exemption applies. Article 1 (4) lit. f of the Prospectus Regulation provides a list of prospectus-exempt offerings, including for securities offered in connection with a takeover by means of an exchange offer, provided that a document is made available to the public in accordance with the arrangements set out in Article 21 (2) of the Prospectus Regulation, containing information describing the transaction and its impact on the issuer.

To qualify as a consideration under a takeover offer, shares need to be listed on an organised market within the European Union; ie, shares listed in the US are no suitable consideration under a German law-governed takeover offer.

The offer document to be published under German law requires information on the expected impacts of the takeover offer on the balance sheet of the bidding company. Thus, bidders will need to include at least a rough overview on the balance sheet-related impacts of the contemplated transaction.

The offer document needs to be filed with the BaFin and be published on the website related to the bid.

General Principle

In principle, the management board and supervisory board remain bound by the company's best interest which is determined using a stakeholder value approach. Within this general framework, the Securities Takeover Act does stipulate a duty of neutrality. Therefore, the management board is very limited to interfere with the takeover offer and needs to take only the company's interest into consideration.

Reasoned Opinion

The management board and the supervisory board of the target have to publish reasoned opinions regarding the voluntary takeover offer, discussing:

• the type and amount of voluntary takeover offer consideration;
• consequences of the voluntary takeover offer in particular for the target, its employees and facilities;
• intentions of the bidder as outlined in the offer document;
• the intention of members of the target's management and supervisory boards to tender target shares, if any; and
• a concrete recommendation to shareholders.

In practice, such reasoned opinions are based on one or more fairness opinions provided by independent financial institutions to support the management board/supervisory board in their respective assessments regarding the adequacy of the voluntary takeover offer consideration. The reasoned opinions are to be issued without undue delay (ie, within a period not exceeding two weeks after publication of the offer document) and are in practice regularly rendered as joint opinions.

German law does not require the formation of a special committee in respect of a takeover offer.

The board may be active in particular in the case of a business combination agreement. Otherwise, the role of the management is somewhat limited given the duty of neutrality.

The boards will usually retain legal and financial advice in connection with a takeover offer. As indicated above (see 11.1 Principal Directors' Duties), the boards will, in practice, in particular obtain a fairness opinion to evaluate the offer consideration.