Germany: Private M&A Comparative Guide

1 Deal structure

1.1 How are private M&A transactions typically structured in your jurisdiction?

A private M&A transaction is usually structured as either:

• a bilateral negotiation between the seller and a single potential buyer; or
• an auction process with a number of interested parties.

There are other options too – for instance, in distressed environments – but most private sales will follow one of these routes.

1.2 What are the key differences and potential advantages and disadvantages of the various structures?

If the auction process is professionally managed, this structure allows the seller to optimise the outcome of the sales process. Not only is there a higher probability that the sale will be closed, an auction also usually leads to more favourable commercial and legal conditions for the seller. On the downside, the costs of this process will most often exceed those of a direct bilateral negotiation. It is even more vital that the seller's advisers have both capacity and experience in managing large auction processes at all stages; otherwise, the seller may lose control of the process and thus its credibility in the market.

A bilateral negotiation – in particular, between existing contacts – may turn out to be more constructive and less focused on optimising the position of one party. However, this will often depend on:

• the parties involved;
• their existing relationship; and
• their mutual interests in the transaction.

If that is the case, the logistics of managing the transaction process may be easier than under an auction structure. On the other hand, a personal relationship between seller and buyer can also negatively influence the parties' headroom to negotiate their positions. If there is no existing personal relationship, a bilateral discussion may effectively turn out similar to the later stages of an auction, where there is:

• a formalised due diligence process with Q&A and management sessions;
• negotiation of the documentation; and
• balanced legal and commercial terms of the definite sales agreement.

1.3 What factors commonly influence the choice of transaction structure?

A bilateral negotiation often results from an existing business relationship between the seller and the buyer, either on an operational level or at a senior (or owner) level. It is typical for German family-owned companies to have personal contact with the owners of business partners or other players in the market, which facilitates bilateral discussions on the acquisition or disposal of a company. This is often the preferred route if the seller is primarily interested in ensuring the continued existence of the company and preserving the jobs of employees. Also, if time is of the essence, a bilateral negotiation may be preferable, as this cuts short a number of preparatory steps (setting up the auction and running through the initial phases until a handful of preferred bidders can be selected).

Where there is no personal contact or where other interests come into play – such as additional capital requirements of the company or new strategic options for the business – an auction process can offer advantages to the seller and the target. Also, if the seller is an equity investor (fund or family office), the choice will usually be an auction process, as this allows for a diversification of the process risk and the potential optimisation of the deal conditions.

1.4 What specific considerations should be borne in mind where the sale is structured as an auction process?

An auction process requires professional advice from a very early stage: the entire process must be professionally set up and managed to avoid disadvantages or legally relevant issues, starting with the preparation and management of:

• an adequate confidentiality agreement for all bidders;
• a suitable teaser;
• a process letter;
• the information memorandum; and
• a single external point of contact for all communications with bidders.

Also, many private equity transactions involve warranty and indemnity (W&I) insurance. It is essential for the seller to have experienced advisers who can integrate the W&I process into the auction process and into the sales documentation, as it may expedite the process if the seller can provide an initial set of transaction documents which is already aligned with a possible provider of W&I insurance.

2 Initial steps

2.1 What agreements are typically entered into during the initial preparatory stage of a private M&A transaction?

In almost every transaction, confidentiality is vital. Hence, one of the first topics to cover is the confidentiality undertaking by the potential buyer. This is usually referred to as a non-disclosure agreement and can be either unilateral or bilateral, depending on whether the seller may also gain access to sensitive information of the buyer.

If the seller provides information on the target in an (online) data room, the buyer must accept the 'data room rules', which also cover confidentiality.

If the parties to the transaction have competitive businesses, particular thought should be given to safeguarding and documenting full compliance with competition law. This may be done by installing a so-called 'clean team': an independent team of researchers (usually lawyers or financial advisers) who have access to sensitive data but may report to their client only on an aggregated and limited basis. This approach requires a clean team agreement between the buyer, the seller and the clean team members.

2.2 Which advisers and stakeholders are typically involved in the initial preparatory stage of a private M&A transaction?

A private sale is often triggered by market opportunities. Once the owners have decided to start the sale process, different advisers may be involved depending on whether this is a private equity portfolio disposal or a business owned by one or more individuals (families).

A private equity investor will typically engage an M&A adviser that specialises in the target's industry if an auction sale is preferred. A commercial adviser and a legal adviser will usually be selected to prepare the target for sale (eg, preparing vendor due diligence) and structure the sales process.

An individual or family-owned company will often initially be counselled by its long-term tax adviser and a legal adviser that specialises in private M&A.

In case of the sale of a subgroup of companies, the management and eventually the supervisory board of the parent will be involved in the decision-making process. The sale process is then often prepared by internal resources such as the M&A or legal department of the group.

2.3 Can the seller pay adviser costs or is this limited by rules against financial assistance or similar?

It is standard that each party bears its own costs and those of its advisers. The situation is a little different where a warranty and indemnity insurer enters the game.

3 Due diligence

3.1 What due diligence is typically conducted in private M&A transactions in your jurisdiction and how is it typically conducted?

The typical set of investigations includes commercial, financial, legal and tax due diligence. Depending on the target and its business, special types of due diligence may also be required – the most prominent being environmental due diligence if the company owns (business) premises.

While it was traditionally common to conduct due diligence in a physical data room, today standard due diligence is almost exclusively conducted via online data rooms established by the target, the sellers or an M&A adviser with one of the leading providers of online data room resources. Only in rare cases will an in situ review be necessary. Of course, a site visit will take place in person, but this typically will not be conducted by the advisers.

The due diligence process is usually structured in two or three stages:

• The potential buyer undertakes a commercial and/or financial review of the target, including attending management presentations, to verify its interest in a possible transaction.
• Once that has been established, along with the major commercial terms of the transaction, legal, tax and financial due diligence will be conducted. Along with the review of documents, a Q&A process will be established to support the document review.
• If warranty and indemnity insurance is involved, there may be additional rounds of due diligence in relation to the insurance policy.

3.2 What key concerns and considerations should participants in private M&A transactions bear in mind in relation to due diligence?

A privately owned company often will not have fully documented all business transactions in every respect. Chain of title and financial documentation may not meet the standards of international corporations. In many cases, a single person will be in charge of the due diligence process and will have to do this in addition to his or her daily tasks. A potential buyer must be prepared for the fact that the information-gathering process during due diligence does not always run smoothly or quickly. However, this usually has no bearing on the quality of the target.

In terms of the information to be provided, the German courts are quite strict when it comes to the information duties of a seller vis-à-vis a potential buyer. Statements in the dark are considered fraudulent and lead to the unlimited liability of the seller. Recent jurisprudence has shifted the burden of information even further to the seller, confirming that the seller must inform the buyer on its own initiative of any facts that may reasonably be of material importance for the buyer in relation to the transaction. It will not suffice to provide this information in the data room. Instead, the seller must ensure that the buyer actually takes notice of such information. In practice, it will often be difficult to draw the line between unforced information obligations and the buyer's duty to inform itself of the target and those aspects relevant to its decision.

3.3 What kind of scope in relation to environmental, social and governance matters is typical in private M&A transactions?

Environmental due diligence (tier 1) is typically conducted if the target owns (its business) premises.

Thus far, dedicated environmental, social and governance (ESG) due diligence has not become market standard in all businesses. This may differ if debt financing resources put more emphasis on this aspect for their investments; but so far, it seems that in private M&A transactions in the mid-tier sector, this is still not a focus. In corporate transactions, things may be different depending on the buyer. Larger corporates already tend to review the ESG standards applied in the target from the perspective of how they match the buyer's own policies.

That said, individual aspects of ESG (particularly the 'G' in terms of good governance and compliance with applicable laws and regulations) has been a standard matter of review in legal due diligence for years. Any risks in this field are usually reflected in the warranties and indemnities in the purchase agreement. They are also an issue for post-merger integration.

4 Corporate and regulatory approvals

4.1 What kinds of corporate and regulatory approvals must be obtained for a private M&A transaction in your jurisdiction?

As a baseline, private M&A transactions do not require government consent.

However, approvals must be obtained in certain situations, the most prominent of which are merger control clearance and clearance under the Foreign Trade Act:

• Merger control clearance must be obtained if the parties involved in the transaction exceed certain limits in relation to turnover. In this case, it is strictly prohibited to execute the transaction unless clearance has (or is deemed to have) been obtained. Depending on the turnover, clearance must be obtained from the German or European authorities and may also be needed from foreign sources.
• If the buyer is, or is controlled by, a foreign entity, the German government may prohibit the transaction under certain circumstances.
• The recent EU Foreign Subsidies Regulation includes provisions which are similar to those of the EU Merger Regulation. Under certain circumstances, the transaction must be filed and approval obtained. Otherwise, implementation of the transaction is prohibited.

Corporate approvals may be required in particular if:

• the free transfer of shares is prohibited in the articles of association or a share in a partnership will be transferred;
• the sale encompasses all or almost all of the selling entity's assets; or
• the seller is a married individual and the sold share forms (almost all of) his or her entire assets.

The above lists are not exhaustive and other conditions may apply which require consents to be obtained.

4.2 Do any foreign ownership restrictions apply in your jurisdiction?

In principle, any company may be owned by a foreign entity. However, please see question 4.1 in relation to governmental control over a sale to a foreign entity or person. Further restrictions may apply with respect to:

• critical infrastructure; or
• companies engaged in highly sensitive industries.

4.3 What other key concerns and considerations should participants in private M&A transactions bear in mind in relation to consents and approvals?

Any violation of a prohibition of the execution of a transaction (eg, prior to obtaining the necessary competition clearance) may lead to the imposition of fines on the parties.

5 Transaction documents

5.1 What documents are typically prepared for a private M&A transaction and who generally drafts them?

The most important documents usually include the following:

• Non-disclosure agreement: This is typically drafted by legal adviser (sell side).
• Teaser/information memorandum (in auction processes): These are usually drafted by an M&A adviser or the seller.
• Due diligence reports: These are provided by the respective advisers (sell side).
• Heads of terms/memorandum of understanding/letter of intent, typically provided by the purchaser and his legal advisers.
• Share (or asset) purchase agreement: This is usually drafted by the legal adviser (typically the first draft comes from the sell side; but exceptions may apply).
• Disclosure schedules (to be attached to the purchase agreement): These are typically drafted by the seller.
• (New) service agreements for directors, reinvestment ('vesting') agreements etc: These are typically drafted by the legal advisers (buy side).

5.2 What key matters are covered in these documents?

The names and descriptions should be self-explanatory.

5.3 On what basis is it decided which law will govern the relevant transaction documents?

Typically, the law of the country in which the seller has its place of jurisdiction or – if there are different places – where the company headquarters are located will apply. It would be unusual for a seller to accept the law of a foreign jurisdiction.

6 Representations and warranties

6.1 What representations and warranties are typically included in the transaction documents and what do they typically cover?

A standard set of representations and warranties without specific reference to the industry will generally cover

• title and ownership;
• financial condition;
• business accounts;
• employment (eg, number of employees, pension plans, works councils, company agreements, freelancers);
• intellectual property;
• environmental matters;
• customer agreements/supplier agreements;
• compliance/regulatory matters (compliance with all regulatory requirements and applicable laws, availability and validity of all required permits or approvals for the business); and
• tax.

6.2 What are the typical circumstances in which the buyer may seek a specific indemnity in the transaction documentation?

If the due diligence reveals specific legal risks, the buyer will seek an indemnity for any detriment that occurs if such risks materialise. Warranties are also usually requested:

• to cover any potential risks associated with the target and its business; and
• to back up the information provided in the due diligence.

6.3 What remedies are available in case of breach and what is the statutory timeframe for bringing a claim? How do these timeframes differ from the market standard position in your jurisdiction?

If a warranty is violated, the buyer will have a statutory claim for breach of contract under German contract law. In consequence, it can claim all damages suffered due to the warranty being untrue. The statute of limitations varies but most claims will be time barred three years from the end of the year in which:

• the claim occurred; and
• the buyer obtained knowledge of the claim.

6.4 What limitations to liability under the transaction documents (including for representations, warranties and specific indemnities) typically apply?

The share purchase agreement usually limits the scope and time of damages. A typical item of negotiation is whether and to what extent the buyer may be entitled to claim consequential damages in case of a breach. Further typical limitations of claims for breach of a warranty include a de minimis amount and a threshold or basket. In almost all cases, we see a cap on the total amount of damages (and sometimes several different caps). The time limits commonly range from 12 to 36 months, with title claims ranging around five years from closing. Contractual indemnities, on the other hand, will often not be capped or time limited.

6.5 What are the trends observed in respect of buyers seeking to obtain warranty and indemnity insurance in your jurisdiction?

Warranty and indemnity (W&I) insurance is an important issue in private M&A transactions. In recent years, the share of transactions that have been backed by W&I insurance has significantly increased. Private equity transactions are now almost always backed by W&I insurance, while the parties to other private transactions avail of it from time to time.

6.6 What is the usual approach taken in your jurisdiction to ensure that a seller has sufficient substance to meet any claims by a buyer?

Usually, part of the purchase price will be paid into an escrow account arranged with the notary public who notarises the transaction. In some cases, complete W&I insurance will suffice for this purpose. If the transaction involves a carveout of the business premises (ie, the seller retains the premises and rents them to the company as part of the overall consideration), a land pledge might be considered, too.

6.7 Do sellers in your jurisdiction often include restrictive covenants in the transaction documents? What timeframes are generally thought to be enforceable?

Covenants usually cover the period between signing of the transaction documents and consummation of the transaction. If merger control clearance is required, the covenants must be carefully designed to avoid any conflict with the prohibition of enforcement before the transaction is cleared.

6.8 Where there is a gap between signing and closing, is it common to include conditions to closing, such as no material adverse change (MAC) and bring-down of warranties?

It is standard to apply conditions to closing; these typically involve obtaining merger control (and other) clearances and certain approvals that may be required for the transaction. A MAC clause is not uncommon; however, we see it in less than 50% of cases. Usually, the seller can avoid such clause in the negotiations, especially in auction processes.

A bring-down of warranties is rare and is mostly seen in cross-border transactions with Anglo-American buyers.

6.9 What other conditions precedent are typically included in the transaction documents?

Typical conditions to closing include:

• merger control clearance;
• clearance under the foreign trade regulations;
• approval of the transaction by investment committees, supervisory boards or other stakeholders;
• approval of the transaction by certain customers (although this will usually be sought prior to signing); and
• consummation of carveouts (in case parts of the business will not be acquired, such as the business premises).

7 Financing

7.1 What types of consideration are typically offered in private M&A transactions in your jurisdiction?

Private M&A transactions usually rely on cash consideration. In some cases, particularly in the venture capital environment, part of the consideration may be paid in shares of the purchaser (or its ultimate parent). This may also apply if the sale is intended to effectuate a business combination or joint venture.

7.2 What are the key differences and potential advantages and disadvantages of the various types of consideration?

A cash consideration is standard in private transactions. It provides a straight-forward way to calculate and pay the purchase price to the seller.

Opposed to that, a consideration (partially) including shares in the purchasing entity or its parent requires a careful evaluation of this company to calculate the conversion ratio. Yet, it can be a sophisticated way to save the purchaser's cash and at the same time effect a reverse participation, which may be sought if a business combination is intended.

7.3 What factors commonly influence the choice of consideration?

In most private equity transactions, as well as in the case of a private sale of the family-owned business, cash consideration is the way to go, as for these sellers the trade rationale is the exchange of the shares against cash.

Particularly in venture capital and business combination scenarios, it may be sensible to split the consideration between a cash component and shares in the buyer or its parent.

7.4 How is the price mechanism typically agreed between the seller and the buyer? Is a locked-box structure or completion accounts structure more common?

Both price mechanisms are common in German transactions. Private sellers (like in family-owned businesses) tend to slightly prefer a locked-boxed mechanism, since in this case they get a better impression of the net cash purchase price that they will actually receive at closing as compared to a closing accounts scenario. In corporate transactions, there are arguments for both mechanisms. Often, a locked-box mechanism is also preferred, because the parties can thus avoid preparing additional accounts on closing and instead rely on the latest annual accounts. However, the viability of a locked-box mechanism decreases:

• the more time has elapsed since the latest annual accounts; and
• the more volatile the business is over the year.

7.5 Is the price typically paid in full on closing or are deferred payment arrangements common?

In many cases, the purchase price will be paid in full on closing, except for some part of it which is transferred to an escrow account to back up the warranties. However, if the parties cannot agree on the credibility of the prospected business development, particularly in cashflow-driven transactions (eg, private equity or family office deals), deferred payments or earnouts will be agreed. Where the investment is of a strategic nature, these factors usually do not apply. Rather, these scenarios typically see a fixed purchase price that is paid in full on closing.

7.6 Where a deferred payment/earn-out payment is used, what typical protections are sought by sellers (eg, post-completion veto rights)?

The buyer typically will not allow the seller to veto its business decisions. To manage the risk for the seller, the relevant factors for an earnout will usually be normalised. By nature, it is a very specific task to customise the normalisation procedures so as to maintain the buyer's freedom to make business decisions while avoiding putting the seller's earnout at risk.

7.7 Do any rules on financial assistance apply in your jurisdiction, and what are their implications for private M&A transactions?

Private companies are often incorporated in the legal form of a limited liability company. The law in principle prohibits the company's registered share capital from being paid out to shareholders. This includes financial assistance for the acquisition of shares in the company, provided that such financial assistance affects the registered share capital. Other than that, the company may principally fund the price for its own acquisition. This is common in debt push-down scenarios.

If the target has the legal form of a stock corporation, different principles apply. In this case, it may serve as a rule of thumb that the target may not provide financial assistance to the buyer in relation to the acquisition of its own shares.

7.8 What other key concerns and considerations should participants in private M&A transactions bear in mind from a financing perspective?

In many cases, a company will be financed by shareholder loans, among other things. As long as the company is financially capable, shareholder loans may be repaid without specific limitations.

However, in the event of the company's insolvency, the administrator may challenge and reclaim all repayments on shareholder loans made within the last year prior to the insolvency. For this reason, the seller of a company will want to ensure that repayments on its loan cannot be challenged by a future administrator. Two sorts of protection clauses are common:

• On the one hand, the seller will impose a duty on the buyer to ensure that the target does not become insolvent within at least one year of consummation of the transaction. To back this covenant, appropriate protection should be sought (eg, through a parent guarantee of the buyer, a bank guarantee or an escrow).
• On the other hand, it is usually preferable from the seller's perspective to sell an existing shareholder loan rather than have it repaid by the company on closing. However, pursuant to jurisdiction, this does not completely eliminate the risk of the payment being reclaimed.

8 Deal process

8.1 How does the deal process typically unfold? What are the key milestones?

• Typically, the transaction starts with the execution of a non-disclosure agreement.
• In an auction process, the information memorandum and a process letter will be issued to the bidder. In a bilateral negotiation, the potential buyer will receive more detailed information on the company.
• Quite often in private bilateral discussions, the parties will agree on a letter of intent/memorandum of understanding in which they set out the cornerstones of the possible transaction.
• At some point in the due diligence, a draft (share) purchase agreement will be provided, usually by the seller. At this stage, finalisation of the due diligence and negotiation of the purchase agreement will run in parallel.
• Once the due diligence is complete, the buyer's advisers will provide a final due diligence report. Any findings therein can now make their way into the purchase agreement.
• Once the level of the representations and warranties asked for in the draft purchase agreement has become sufficiently mature, the seller will start the process of preparing the disclosure schedules.
• Once the purchase agreement and the disclosure schedules have been finally agreed, the documentation may be notarised or signed, depending on the legal form of the target, among other things.
• Depending on the set of closing conditions (and any filing requirements), a separate closing will occur at which the sold shares are actually transferred and the purchase price is paid.

8.2 What documents are typically signed on closing? How does this typically take place?

The set of documents to be signed on closing will depend on the set of closing conditions and closing actions agreed in the purchase agreement. Common documents include:

• new service agreements for managing directors;
• bring-down declarations vis-à-vis warranty and indemnity insurance;
• transitional service agreements; and/or
• similar agreements governing the target's business going forward.

If no other documents need be signed, it is common to execute at least a closing confirmation in which receipt of the purchase price and transfer of the shares are confirmed.

We rarely see a transfer agreement regarding ownership of the shares itself. Instead, it is preferable to transfer the shares in the share purchase agreement subject to the occurrence of the closing.

It is also not common (although it happens in some cases) to have a separate bring-down statement by the seller in relation to the warranties. However, this may vary depending on the parties involved in the transaction.

8.3 In case of a share deal, what is the process for transferring title to shares to the buyer?

See question 8.2. Usually, title in the shares is transferred in the share purchase agreement, subject to:

• the occurrence of the closing; and
• in particular, payment of the full purchase price.

8.4 Post-closing, can the seller and/or its advisers be held liable for misleading statements, misrepresentation, omissions or similar?

The seller's liability is usually limited to the liability regime agreed in the purchase agreement. That said, the seller can always be held liable under mandatory law for fraudulent misrepresentation. This may apply if the seller:

• wilfully provides wrong or misleading statements; or
• omits to provide information that would be important for the buyer's decision to buy the target.

Jurisdiction on the latter point is broad and often case specific. However, it turns out that the courts tend to assume fraudulent misrepresentation by omission rather easily. Only recently, the courts decided that it will not suffice to provide relevant information in a data room; the seller must also ensure that the buyer has acknowledged that information. As always, the details of this jurisprudence still have to be developed.

8.5 What are the typical post-closing steps that need to be taken into consideration?

The necessary post-closing actions will depend on the case. Typical actions include:

• a rebrand of the acquired company;
• the development of standalone IT infrastructure;
• an in-depth review of workflows; and
• harmonisation with the buyer's existing policies.

From a legal perspective, the warranties and representations must be monitored, as well as possible terms of amounts held in escrow.

9 Competition

9.1 What competition rules apply to private M&A transactions in your jurisdiction?

Transactions between competitors must comply with certain rules. Competitors are prohibited from exchanging certain sensitive information, such as:

• prices;
• the names of customers or suppliers; and
• turnover.

In principle, during the early stages of a transaction, only highly aggregated figures may be communicated. Some information may not be provided at all.

9.2 What key concerns and considerations should participants in private M&A transactions bear in mind from a competition perspective?

If particular information is vital at an early stage, this may not be communicated between competitors. The way to move forward is usually to establish a so-called 'clean team'. This is usually a team of external advisers who sign special undertakings as to when and how they may communicate information to the buyer (clean team agreement).

10 Employment

10.1 What employee consultation rules apply to private M&A transactions in your jurisdiction?

With regard to a share deal, if a works council has been established and there is an economic committee in place, this committee must be informed about the transaction as soon as the decision to sell the company has been definitively made. Usually, the information is provided only at signing, to protect the requisite confidentiality level of the transaction. This is for information purposes only; no consent by the committee is required.

If the transaction includes the carveout of a business unit which is governed by the Transformation Act, different regimes may apply. In most scenarios, the carveout (but not the sale) must be notified to the works council one month in advance.

Possible other involvement of employees may depend on the individual case.

10.2 What transfer rules apply to private M&A transactions in your jurisdiction?

If the company is sold in a share deal, this has no impact on the employees.

If the company's assets are sold, this may constitute a transfer of business pursuant to Section 613a of the Civil Code. In this case, the employment agreements will automatically transfer to the buyer along with the assets. The employees must be informed about the business transfer and are entitled to veto their personal transfer, with the effect that their employment remains with the selling entity.

10.3 What other protections do employees enjoy in the case of a private M&A transaction in your jurisdiction?

There is no other protection in relation to the sale of a company, as the employment agreements will not be altered or affected. However, if as a consequence of the sale the buyer will make changes to employment conditions (eg, by closing down particular production sites with the effect that employees must work at other premises of the company), this must be discussed with the works council.

In the event of a transfer of business, a principal prohibition against the termination of employment agreements applies. Also, if transferred employees benefit from a works agreement, pension plans or other collective rules, these rules will still apply to the transferred employees after the sale.

10.4 What is the impact of a private M&A transaction on any pension scheme of the seller?

The sale of a company in a share deal has no effect on any pension scheme. The effect is similar if the business is sold in an asset deal and the employees transfer to the buyer by way of a business transfer.

10.5 What considerations should be made to ensure there are no concerns over the potential misclassification of employee status for any employee, worker, director, contractor or consultant of the target?

A typical risk associated with the operations of freelancers or temporary workers is their legal reclassification as employees of the company. This is a standard field of review in legal due diligence. Since a possible reclassification may be triggered by the actual working situation rather than purely by the legal documentation, it is vital to verify not only the legal documents (eg, temporary workers' contracts, employee leasing contracts), but also the factual situation. For instance, the buyer will want to verify that any freelancer engaged by the company:

• is not integrated in the work organisation of the company; and
• spends a substantial share of his or her time working for other clients.

10.6 What other key concerns and considerations should participants in private M&A transactions bear in mind from an employment perspective?

Typical items to verify in a due diligence include:

• the number of employees;
• the status of freelancers, leased employees and/or temporary workers;
• the application of pension schemes;
• the application of works agreements, collective bargaining agreements and/or operational practices;
• the age distribution of the employees;
• employee invention remuneration;
• short-time work and subsidies; and
• subsidies under the governmental aid programmes relating to the COVID-19 pandemic.

If one or more employees are vital to the business, the buyer may want to consider involving them in the transaction – for example, by offering:

• a more favourable long-term employment agreement; or
• reinvestment in the buyer.

11 Data protection

11.1 What key data protection rules apply to private M&A transactions in your jurisdiction?

Any legal requirements on data protection also apply in the context of a transaction. Do not circulate (or upload to a data room) any lists of employees which include their clear names. Be careful when circulating or uploading anonymised lists if individual employees may nevertheless be identified – for example, because there is only one employee in that position.

11.2 What other key concerns and considerations should participants in private M&A transactions bear in mind from a data protection perspective?

In the due diligence, the buyer should verify whether the company:

• has a data protection policy in place; and
• is aware of the applicable rules and standards.

12 Environment

12.1 Who bears liability for the clean-up of contaminated sites? How is liability apportioned as between the buyer and the seller in case of private M&A transactions?

The legal liability to clean up contaminated sites lies with the operator of the site as well as with the owner. If both are one and the same, it is almost certain that the authorities will approach the operating company. Legally, however, they can also (primarily) approach and principally hold liable any former owner of the site. At this stage, it is usually irrelevant if a third party (the seller) has caused the pollution on the site.

For this reason, the purchase agreement will usually allocate the risk of possible pollution and the clean-up costs between the seller and the purchaser. If pollution is known, this is typically covered by an indemnity. If there is only a risk of pollution, it will depend on the negotiations as to whether the seller or the purchaser assumes the risk.

12.2 What other key concerns and considerations should participants in private M&A transactions bear in mind from an environmental perspective?

Often, pollution is suspected but not positively known. It is possible to request an excerpt from the public pollution register for the company (although sometimes it takes time to obtain this), but this will only show any known or suspected pollution. Depending on the quality of the (suspected) pollution, the buyer must decide whether it is reasonable to investigate the matter further.

13 Tax

13.1 What taxes are payable on private M&A transactions in your jurisdiction? Do any exemptions apply?

The profit from a private sale is usually subject to income tax on the level of the seller. This may be personal income taxes if the seller is an individual or corporate taxes if it is a legal entity.

13.2 What other strategies are available to participants in a private M&A transaction to minimise their tax exposure?

There is a privilege in case of a sale of shares by a legal entity, in which case effectively only 5% of the profits will be taxed. Hence, quite often a transaction is structured in a way that a HoldCo will act as seller rather than an individual.

13.3 Is tax consolidation of corporate groups permitted in your jurisdiction? Can group companies transfer losses between each other for tax purposes?

The consolidation of profits and losses for tax purposes on a group level requires that a tax group is established. A tax group can be created by concluding profit and loss transfer agreements between the participating entities. Certain requirements apply, among others the fiscal unity cannot (in the absence of good cause) be terminated prior to the elapse of 5 years from its beginning. Note that a tax group for corporate tax purposes will in principle not include VAT, while a VAT group has different requirements.

For income tax purposes, partnerships are basically transparent. Hence, installing a GmbH & Co. KG instead of a GmbH will for tax purposes partially have a similar effect as installing profit and loss transfer agreements while avoiding their disadvantages. However, the effect will vary among different tax types.

13.4 What other key concerns and considerations should participants in private M&A transactions bear in mind from a tax perspective?

Transactions involving real estate (e.g., office or production facilities) require careful consideration of real estate transfer tax.

Another complex field is the payment of transaction bonuses to the target's executives by the seller. Such bonuses usually qualify as taxable wages, requiring the target to withhold income tax.

14 Trends and predictions

14.1 How would you describe the current M&A landscape and prevailing trends in your jurisdiction? What significant deals took place in the last 12 months?

The number of successfully signed and closed M&A transactions has decreased notably over the past two years. This is due to:

• the overall economic situation;
• a dramatic increase in capital cost; and
• the fact that sellers have not yet accepted today's lower price levels compared to the rising prices of the previous decade.

This is mostly true of both corporate and real estate transactions.

However, many corporations are using these years to:

• consolidate their business;
• address the issue of increased regulation (eg, new whistleblower and supply chain sourcing legislation); and
• reorganise themselves.

It seems reasonable to expect a larger number of mid-cap transactions within the next couple of years.

14.2 Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

The new EU Foreign Subsidy Regulation may turn out to be the 'next big thing' – only time will tell ...

15 Tips and traps

15.1 What are your top tips for the smooth closing of private M&A transactions and what potential sticking points would you highlight?

Depending on who your counterpart (seller or buyer) is, develop a cultural understanding of its perspectives and concerns. It is helpful to involve experienced advisers early on in the process to avoid any missteps. Also, discuss, negotiate and agree on the basic terms of the transaction first – for instance, in the form of a heads of terms document. This will save time and money (ie, lawyers' fees) when it comes to the negotiation of the purchase agreement.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.