Purchase of a limited liability company (GmbH) in Germany

Company value, contract, taxes and strategy in the purchase of GmbH shares

There are many legal, tax and strategic aspects to consider in any german company acquisition. The successful acquisition of a company and its financing must be carefully prepared from the beginning. Every professional investor knows that already the search for the right target company is difficult. Once the target company has been found, it is examined and evaluated by lawyers and business economists.

After the valuation of the company, the details of the company purchase are negotiated with the seller and the company purchase agreement is agreed between the buyer and seller. Finally, the contract is signed and after all agreed conditions have been fulfilled (closing conditions), the company is legally transferred to the buyer (in rem completion of the company purchase through the closing).

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Purchase a limited liability company (GmbH), purchase a business share in Germany: The process at a glance

Even if the acquisition of a company often appears to be complex: The framework and structure of every acquisition process in Germany is basically similar. Those who know the typical process flow can better navigate through the "M&A jungle", regardless of whether it is a German or international company acquisition.

The first step is to find a suitable company to acquire. If the buyer does not have a precise idea of the target company, he usually uses intermediaries for the search who have contacts and a good knowledge of the market. Such intermediaries in german practice can be lawyers, auditors, M&A consultants or financial services institutions that support the buyer in the search.

This is followed by the following four important steps:

Non-disclosure agreements - so-called NDAs

When buyers and sellers in Germany come together, non-disclosure agreements (NDAs) are concluded between the parties. After all, the buyer of a company wants to learn as much as possible about the company to be acquired before the purchase agreement is concluded; in german practice, the seller must therefore even provide possible trade and business secrets of his company.

However, the purchaser also frequently receives information about the purchaser in the course of an M&A transaction that is not publicly known and is not intended to be made public at a later date, for example in the course of negotiations on a return investment. If a german company purchase agreement is then not signed, it must be ensured that the recipient of the confidential information does not use it inappropriately, or even worse, for competitive activities.

Letter of Intent in Germany - so-called LoI

The initial agreements between the contracting parties in Germany are accompanied by a declaration of intent to purchase and sell the company. This is done by means of a so-called Letter of Intent (LoI for short). With this - not yet binding - pre-contractual declaration of intent, the structure of the company acquisition and a purchase price basis are often already determined between the buyer and seller.

If the seller countersigns the letter of intent, a joint declaration of intent is created, sometimes also called a memorandum of understanding (MoU) in german practice. By countersigning the LoI, the signatory indicates that it is basically prepared to conclude the transaction on the economic and legal terms outlined therein.

Important for buyers in Germany: due diligence

The seller knows its target company and has all the essential information regarding the operational situation and the existing risks. The buyer is usually poorly informed about the opportunities and risks of the target company. It has become german standard practice in corporate takeovers for the buyer to work together with specialized lawyers and consultants to examine and evaluate the GmbH to be taken over from a legal, tax, economic, financial and, if necessary, technical perspective and to identify existing risks (due diligence).

The buyer and his advisors often define  those core areas and concrete documents which are to be viewed and evaluated in the course of the subsequent examination in advance. The seller in Germany is then provided with a due diligence checklist containing information and documents that the buyer considers necessary for a review of the company.

Closing conditions of the purchase agreement in german practice

After the buyer due diligence, when the buyer knows all essential details, the parties agree on the purchase contract. If the negotiations are mature enough, the purchase agreement is signed by both parties (closing date). However, in german practice, the buyer does not become the new owner of the company until all agreed conditions have been met (closing conditions).

Such closing conditions usually involve the approval of german antitrust authorities, banks and shareholders. However, a closing condition can also be that the seller side eliminates risks that should not be transferred to the buyer side. When the conditions have all been met, the closing takes place and with it the legal transfer of the company to the buyer side. This is usually fixed in the so-called closing memorandum.

The subject of the company purchase agreement can be a so-called share deal or asset deal. In Germany, the company can be organized by transferring the GmbH shares (share deal) or by transferring the individual assets that make up the entire business (asset deal).

Background information and advantages and disadvantages of each type of company purchase can be found here: Asset Deal versus Share Deal.

Overview: Rights and obligations of the parties in the german purchase agreement

The framework of the regulated rights and obligations of the parties in the company purchase agreement (SPA) in Germany can be outlined as follows:

1. Subject matter of the purchase (business shares or assets to be specified in concrete terms)
2. Provisions on warranty and guarantees of the seller
3. Purchase price amount and payment modalities, if necessary purchase price adjustment (e.g. earn out)
4. Liability of the seller for old liabilities
5. Regulation of labor law issues, safeguarding the transfer of operations
6. Antitrust regulations
7. Tax and social security regulations
8. Regulations on the limitation of claims
9. Restrictions on competition for the buyer side, if applicable
10. Arbitration agreements

In particular, the seller must exercise the greatest caution when optimizing the sale for tax purposes.

Purchase price clauses in german practice (so-called earn out)

The company purchase agreement sets out all rights and relationships relating to the purchase of the company. When purchasing a GmbH, the annual financial statements of the last few years play an important role. On the basis of the balance sheet ratios of the annual financial statements, not only is the purchase price determined, but also, if necessary, a subsequent purchase price adjustment.

In german practice, a purchase price adjustment (so-called earn out) is used if the parties cannot agree on a fixed purchase price. In the case of a purchase price adjustment, specific target values are often defined between the parties, which the acquired GmbH will achieve at specified times in the future. Very often, performance-related key figures, such as EBIT or EBITDA, are agreed as target values. If the respective key figure is achieved on the agreed date, the purchase price is increased by a contractually agreed amount.

Since the balance sheet ratios are so decisive for the purchase price amount in Germany, the seller side usually guarantees the correctness of certain balance sheet ratios. If it later transpires that the balance sheet figures were incorrect, the seller is liable to the buyer under the independent guarantee (usually without fault). With the guarantees standardized in the purchase agreement, the buyer can eliminate uncertainties and reduce risks.

Specific liability risks in the purchase of GmbH shares in Germany

As a rule in german practice, the purchaser of GmbH shares assumes that he will not bear legal and economic risks of the acquired company until after the takeover. In doing so, the purchaser fails to recognize the statutory liability system of Sec. 16 (2) GmbHG, which extends liability in connection with contributions to the detriment of the purchaser. According to this liability provision, the purchaser of the shares is jointly and severally liable with the seller vis-à-vis the GmbH also for such contribution obligations which were established prior to the acquisition of the shares and which are still in arrears at the time of the acquisition of the shares. It is irrelevant for this liability under german law whether the purchaser had knowledge or no knowledge of the seller's outstanding contribution obligations. According to the prevailing opinion, the overdue contribution obligations are to be defined very broadly.

It should be noted that the corporate buyer in Germany is liable in the following cases, for example:

1. outstanding, unpaid capital contributions;
2. differential liability claims against the seller pursuant to § 9 GmbHG are covered;
3. the seller's under-balance liability resulting from additional contribution regulations pursuant to §§ 26 et seq. GmbHG (payment obligations and ancillary performance obligations);
4. the default liability arising from Sections 22, 24, 28 and 31 (3) GmbHG is covered;
5. finally, there may be liability for breach of capital raising and capital maintenance provisions and in the event of reimbursement of prohibited repayments pursuant to Sections 30, 31 (1) GmbHG.

There is no absolute protection against these risks to be assumed by the purchaser. It is important that these risks are identified in the german legal due diligence. In order to protect the buyer's own assets, it may be opportune for him to acquire the GmbH participation with the possible liability risks via an investment company (with limited liability).

If there is a suspicion of liability with high financial risks, preventive measures must be taken in german practice. If the aforementioned risks are present, the M&A lawyers must develop hedging instruments within the scope of the purchase agreement that take the interests of the purchaser into account.