4.2  Types of Transaction	117

B asks C to develop a takeover strategy for M-GmbH, including detailed comments on the following issues:

•  What type of transaction would appear advisable? •  What are typical steps in the acquisition process?

•  B also wants to know the procedure and potential problems associated with a due diligence of M-GmbH. He wants C not only to explain the purpose and procedure of a due diligence for M-GmbH, but also wants to know about any risks associated with a due diligence and any possible ways of protecting himself from such risks.

4.2  Types of Transaction

From a buyer’s perspective, the acquisition of a company is often carried out in order to improve the buyer’s competitive position and strengthen its position in the market (e.g. improving its strategic position, entering into a new market etc.). From a seller’s perspective, on the other hand, reasons for selling a company can include streamlining the portfolio (e.g. by selling group companies outside of the core business areas), plans for restructuring within the group or, in the case of family-owned businesses, problems regarding successors.

Principally, there are two ways in which to acquire the business of an existing German GmbH: the purchaser may buy the shares of the GmbH (a ‘share deal’; this term is actually also used in the German language) or she/he may acquire the company’s assets (an ‘asset deal’). In the case of a share deal, the buyer will, within the corporate frame of the existing GmbH, automatically acquire all of the target company’s assets, liabilities, obligations etc. when purchasing the shares. In the case of an asset deal, the buyer will only acquire the specific assets, liabilities etc., as identified and described individually in the Share PurchaseAgreement.

4.2.1  Share Deal

A share deal is a much simpler method of acquisition compared to that of an asset deal, the latter requiring much more detailed documentation. In a share deal, all assets, rights and liabilities of the target company remain in the target company which passes to the buyer with the transfer of shares. In the case of shares of a GmbH, there is a statutory notarization requirement (see Sec. 15 paras. 3, 4 Limited Liability Companies Act, GmbHG). Therefore, if the target is a GmbH, the sale and purchase (along with all side agreements), as well as the actual transfer of the shares must be notarized.

Under statutory law, the transfer of shares in a GmbH does not require the consent of the other shareholders or the company. However, the articles of association may provide that the consent of all or certain shareholders or a majority of shareholders or the company must be obtained. If the articles provide that the consent of

118	4  Corporate Acquisitions in Germany

the company is needed (Vinkulierung), then the consent is granted by the directors. This is done to allow the GmbH—and its shareholders—control over who will become a new shareholder.

4.2.2  Asset Deal

An asset deal, by which the purchaser acquires all assets agreed upon of the target company, may sometimes be preferable for tax reasons. Furthermore, the buyer may wish to acquire only certain assets of the target company and be able to exclude certain liabilities of the target company. However, negotiating, concluding and carrying out an asset deal can be quite a complex procedure. Under German law, a great degree of detail is required since all assets, rights, liabilities etc. have to be very accurately described in the sale and purchase agreement. If moveable assets are sold, each item must be accurately listed. If claims have to be transferred, the underlying transaction and the name of the debtor have to be designated. All other rights and obligations and also any intangible assets, such as goodwill etc., have to be listed as accurately as possible. In each case, all assets, rights and liabilities require individual specification and transfer.

Furthermore, the transfer of any contract or liability requires the consent of the other contractual party. Since a business is likely to have concluded a multitude of ongoing contracts—from the important lease agreement for the factory halls to the rather less relevant supply agreement for the office coffee machine—both seller and buyer have to agree with all the relevant contractual parties that the agreement will be transferred to the buyer, including all rights and obligations such as warranty claims, payment obligations etc.

Pursuant to Sec. 613a of the German Civil Code, when acquiring a business, the purchaser automatically takes over all of the employees unless they exercise their right to object to the transfer of their employment contract. This means that neither the seller, nor the purchaser of the business may terminate existing employment contracts merely as a result of the transfer of the business.

The buyer automatically assumes all rights and obligations of the existing employment relationships at the time of the transfer. However, slavery having been abolished some time ago, each employee can object to her/his transfer to the buyer. In order to enable the employees to exercise their right to object to the transfer of business, the seller or the buyer must notify the employees prior to the business transfer.An employee who wishes to exercise her/his right of objection to the business transfer must notify her/his employer by no later than one month following receipt of this notification of transfer. If she/he objects, her/his employment relationship will not be transferred to the buyer and will remain with the seller. In this case, the seller may terminate the employment contract if there is no other vacant position for the employee. It is, therefore, particularly important that the prospective buyer review all labor law issues before signing the sale and transfer agreement.