Mergers & Acquisitions (M&A) refers to the combination or merger of different companies or the acquisition of a company or shares of such a company. Such transactions can be carried out in two ways: through the asset deal or the share deal.
The German lawyers at Schlun & Elseven Rechtsanwälte will be happy to explain the advantages and disadvantages of these two options for buying or selling a company. Please, do not hesitate to contact us directly for specialised legal advice.
Differences
Whereas in a share deal, company shares are acquired, in an asset deal, the buyer acquires individual assets or economic goods of a company. With both variants, the complete acquisition of a company is possible. Which method is used or applied depends on the circumstances of the individual case. However, it can be said with certainty that the share deal is easier to realise, whereas the asset deal gives the acquirer more control. Both variants, therefore, have advantages and disadvantages.
Before you decide on one of the transaction options, you should consult an experienced lawyer. The lawyers at Schlun & Elseven will be happy to explain which method suits your interests and goals best.
Advantages and disadvantages
In a share deal, company shares are acquired. The buyer thereby indirectly receives the company in the form it currently exists. The asset and liabilities are also taken over through such a company purchase. In essence, this means that with the acquisition of company shares, any agreements concluded with third parties, as well as tax aspects and other contracts, are also taken over in the form in which they exist at the time of the acquisition. Accordingly, the takeover within the framework of a share deal does not affect the ongoing business relations.
A share deal offers the advantage that the acquired assets do not have to be defined in detail, as all assets and liabilities automatically take over with the purchase. The administrative expense is very low with this transaction option.
However, this aspect can also be a disadvantage. Before the purchase, it is often not recognisable if the company is structurally and organisationally well-positioned and successful when acquiring the shares. The acquisition of shares also exposes the buyer to liability risk. Due to these aspects, thorough due diligence and the advice of legal counsel are necessary, especially before concluding a share deal. In this way, you can avoid unpleasant surprises and ensure that you are indeed acting in your best interests.
Please note: The acquisition of shares in a limited liability company (GmbH) in Germany requires notarization under Section 128 of the German Civil Code (BGB).
Asset Deal
In an asset deal, the buyer acquires individual assets, such as land, building, machinery or similar. If an acquire wishes to maintain the company in its unity within the framework of this purchase variant, the acquisition of all assets is necessary.
However, his procedure often proves to be lengthy. The more assets are acquired, the more likely the buyer and seller will lose track of them. Therefore, a precise list of these assets is usually drawn up. When transferring these, it is essential to note whether each required or intended asset was actually acquired and thus transferred. This is particularly the case when it comes to contractual relationships that are not automatically transferred to the buyer. For the transfer of contractual relationships/agreements with third parties, such as suppliers or landlords, the consent of these is required.
While the time aspect can be a disadvantage, the asset deal also has a clear advantage compared to the share deal: the buyer has more control over the acquisition. By listing in detail, the assets to be acquired and existing contractual relationships with third parties, it is still possible for the seller to maintain an overview. In addition, with this acquisition, you reduce the risk of making a purchase you regret later.
Also, note that intangible assets such as patents and trademarks can be acquired during a business purchase. Here, the market value of these should be determined. The valuation should be prepared in advance.
Asset deals are particularly attractive during insolvency, as the assets in question can be acquired more cheaply at this time. However, a transaction can also lead to complications with the insolvent company’s creditors. In such cases, the encounter between the insolvent company, the insolvency administrator, and the creditors requires a specific negotiation skill. Our experienced German lawyers advise you in such complex cases and conduct the negotiations with the various parties.
Liability
Due to the takeover of all rights and obligations in the context of a share deal, the acquirer of the shares in the company is also liable for all transactions of the predecessor. In principle, the buyer is responsible from the time of the takeover. However, liability for events that have already occurred is not entirely excluded. For example, the acquirer can be held liable for offences before purchasing.
In the asset deal, on the other hand, the buyer only assumes liability for the assets he acquires.
The Necessity of a Due Diligence Review
Whether the acquisition takes place in the form of an asset or a share deal, a so-called due diligence review should always be carried out beforehand to assess and, if necessary, reduce any risks. An external advisor usually carries out this examination. The lawyers of Schlun & Elseven will be happy to carry out this due diligence, inform you about the results and illustrate the advantages and disadvantages of your project. In this way, you can decide before purchase which form of transaction is suitable for your project and which risks need to be weighed up.
We assess the company to be acquired as a whole, evaluate it from a financial and legal point of view and analysis its structure/organisation as well as employment and tax law aspects.
Please look at our page “German M&A Lawyer” for further information. If you have further questions or need legal advice, contact our M&A practice group via our online form.
Drafting Contracts
Letter of Intent, Term Sheet, NDA
Before the final contract for the transfer of shares in a company or individual assets are signed, documents are usually drawn up which are not legally binding in part but are nevertheless highly relevant. These are the so-called Letter of Intent and the Term Sheet. Both documents contain the essential points of the acquisition and serve as a roadmap for the M&A transaction following the conclusion of the contract. Even though the documents are not legally binding, they must be carefully reviewed before signing them. The lawyers of Schlun & Elseven will be happy to assist you in this, as well as in any subsequent phase of the M&A transaction and advise you comprehensively on any legal aspects.
Non-disclosure or confidentiality agreements (NDA) and/or an exclusivity clause are also usually agreed upon. These primarily serve to protect the seller and the buyer.
The Purchase Contract
The contract for the purchase of shares in a company or assets of a company often contains the following clauses:
The purchase agreement concluded in the context of the acquisition of a company is subject to the statutory provisions on material defects and weaknesses of the title. Depending on the form of transaction (assets or share deal), the acquirer is liable at specific points after the purchase. To avoid undesirable liability risks, a due diligence review is usually carried out before the conclusion of the contract. A so-called liability/guarantee clause can also provide additional security.
The seller may also be subject to a non-competition clause. While the pre-contractual exclusivity clause obliges sellers not to negotiate with third parties for a certain period, the non-competition clause specifies in the purchase contract projects the purchaser from competing with the seller after the conclusion of the contract.
Our contract law experts will be happy to answer any questions about the law of sale and purchase and support you in drafting any contracts.
Employment Law Aspects
In a share deal, the acquirer generally takes over employment relationships, and any agreements concluded with third parties. It should be noted that while in a share deal, company shares are acquired and transferred and thus assets and liabilities are taken over, this is not the case in an asset deal. This does not mean that employment relationships are not also transferred to the acquirer in the latter transaction option/form. Regardless of the state of an M&A transaction, the employees of the sold company (if there is a transfer of business) will continue to be employed in it. If a company has been transferred to the buyer so that a transfer of business is to be affirmed, the legal consequences of Section 613a of the German Civil Code (BGB) are triggered. This norm states, among other things, that the transfer of a business does not automatically lead to the dismissal of the previous employees. This means that the transfer of the business itself does not constitute grounds for dismissal. If you, as the new owner, want to restructure the company, there is the possibility of issuing dismissal for optional reasons.
It can sometimes be difficult to determine under which circumstances a transfer of an undertaking has occurred. Our lawyers explain to you when a project transfer occurs, how this is to be distinguished from the closure of an undertaking and what consequences are associated with the transfer. For more information on this topic, please look at our article “Transfer of Business Ownership in Germany”.
Also, bear in mind that unjustified dismissals can give rise to employment law problems. Our employment law practice group will advise you and ensure that you act correctly from a legal point of view. Please feel free to visit our page on German employment law.
Practice Group for M&A
Practice Group for M&A
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