M&A Specifics in Germany for Inbound Transactions: An Outtake on Legal Nuances

Puzzles in the background shaking hands. The concept of successful teamwork.

In the complex landscape of M&A transactions, the German legal system brings specific (formal) elements that practitioners may not encounter in other jurisdictions. Our M&A practice frequently advises on complex inbound M&A transactions, taking into account the particularities of German law. The unique legal aspects of these transactions often require comprehensive negotiations and detailed preparatory work prior to the closing of a transaction. In the following overview, we will take a closer look at three selected topics that frequently arise in connection with inbound transactions.

1.       Requirements for Notarization and Registration

One of the more challenging (formal) aspects of conducting M&A transactions in Germany regularly involves the notarization of share purchase agreements and the need to register the transaction in the German Commercial Register. In particular, the transfer of shares in a GmbH (limited liability company), as well as agreements obligating a shareholder to transfer such shares, require notarization under German law. This notarial formality is crucial to ensure the validity and enforceability of the transaction. If the transaction involves foreign entities, the notary and registry court must verify the existence of these entities and the authority of their representatives. If relevant documents from the foreign company’s commercial register are not available, additional certificates may have to be prepared. In addition, documents such as foreign registry extracts and certifications often require notarization as well as an apostille to ensure their acceptance by German authorities. To avoid transaction delays, it is imperative that these evidentiary requirements be identified and satisfied well in advance of the transaction.

2.         Earn-Out-Clauses

An earn-out clause can generally be defined as a contractual provision pursuant to which a buyer in a transaction undertakes to pay an additional purchase price to the seller if the target achieves certain agreed (financial) milestones within a specified period after the closing date. Especially in the context of inbound transactions, German M&A lawyers encounter nowadays more often than in the past earn-out clauses in share purchase agreements. This is primarily due to the current economic situation in Germany, where uncertainties and market fluctuations encourage parties to use earn-out mechanisms to bridge valuation gaps between buyers and sellers.

Earn-out clauses play a key role in transactions, providing a flexible pricing mechanism that adjusts based on the post-transaction performance of the target company. These clauses help resolve valuation discrepancies resulting from uncertain future earnings and differing expectations between buyer and seller. By tying additional payments to specific financial or operational targets, earn-outs align the interests of both parties and mitigate risks such as overpayment and post-sale underperformance. They also bridge valuation gaps and facilitate agreements when initial price negotiations are far apart. Particularly valuable in unstable economic conditions or in deals involving start-ups, volatile industries or new products, earn-outs reduce the risk of overpayment by providing staggered payments and easing financial pressure. Sellers benefit by potentially securing the full value of the business if performance targets are met.

In the context of inbound transactions, earn-out clauses are particularly important for foreign buyers who may not be very familiar with the German market. The parties can then use such clauses to create mutual trust.

However, earn-outs can lead to disputes over performance measures and add uncertainty to the final purchase price. Drafting, negotiating and monitoring earn-outs requires clear definitions of terms such as duration, calculation methods and performance metrics. In cross-border transactions, considerations of differing legal and accounting standards as well as currency fluctuations are critical. While earn-out clauses align interests and manage risks, they require careful management to effectively balance the benefits for both parties.

3.       Investment screening

The Federal Ministry of Economics and Labor (BMWK) may review the acquisition of a German company by a foreign buyer in order to avoid negative effects of foreign investments on public order or security of the Federal Republic of Germany. This always applies if the buyer is not from an EU member state or a member state of the European Free Trade Association (EFTA). In individual cases in the field of arms and defense technology, this also applies to buyers from EU Member States and EFTA Member States. The jurisdiction of the BMWK also depends on the size of the share of voting rights to be acquired in the German company.

Depending on the activities of the target company, the acquisition may even have to be reported to the BMWK (this applies, for example, in the case of the acquisition of critical infrastructure operators; companies that develop industry-specific software for the operation of critical infrastructure; companies active in the field of telecommunications; companies that provide cloud computing services; companies active in the field of telematics infrastructure; companies in the media industry; companies that develop or manufacture certain medical products and equipment; companies that develop and manufacture critical technologies; etc.). In such cases, the acquisition may not be completed until the BMWK has approved the acquisition. However, even if the acquisition is not subject to mandatory notification, the BMWK may subsequently prohibit the acquisition. In order to prevent such subsequent prohibition, it is possible to apply to the BMWK for a certificate of non-objection.

In the context of a transaction, the time required for the procedure after notification or application for a certificate of non-objection must be taken into account. The review of BMWK may take several months. Therefore, the parties should examine at an early stage whether an investment review procedure of BMWK has to be initiated and which measures are necessary or useful.

4.       Conclusion

In the complex field of M&A transactions, the particularities of German law present special challenges and opportunities not typically encountered in other jurisdictions. Given the complexity, it is imperative for the parties involved to seek specialized legal advice. This will ensure that all contractual nuances are carefully addressed and aligned with both German law and international standards, ultimately protecting the interests of all parties involved in the transaction.

    Sie haben Fragen oder Anregungen zum Artikel?

    Jetzt Kontakt aufnehmen:

    * Pflichtfeld

      Related Posts