Buying a Business in Germany

When buying a business in Germany, several legal structures are commonly used. The choice of structure depends on various factors, including the nature of the business, tax considerations, liability concerns, and the desired level of control.

At Schlun & Elseven Rechtsanwälte, we advise clients closely on the different legal structures, including:

• Asset deals
• Share deals
• Mergers
• Joint ventures

It’s important to note that each structure has specific legal and tax implications, and the advantages and disadvantages can vary depending on the specific circumstances of the transaction. Our experts in German corporate law are ready to advise our clients regarding the implications of each form. With our support, they can make an informed decision based on their specific goals, characteristics, and requirements.

Advantages: In an asset purchase, the buyer acquires specific assets and liabilities of the target business, allowing for selective acquisition. This structure provides flexibility in choosing which assets to acquire and can help avoid assuming unwanted liabilities. It will enable the buyer to start fresh with their selected assets and adapt the business to their needs.

Disadvantages: The buyer may need to negotiate individual contracts and agreements with customers, suppliers, and employees. Some deals may not be transferable without consent. Additionally, certain liabilities may remain with the seller, which could create complications if they are not adequately addressed in the purchase agreement.

Advantages: A share purchase involves acquiring the target company’s shares, resulting in ownership and control of the entire business. This structure allows for a more straightforward transfer of assets, contracts, and licenses. It may also provide continuity in existing customer and supplier relationships, contracts, and permits.

Disadvantages: The buyer assumes all assets, liabilities, and potential legal risks associated with the target company. It is essential to conduct thorough due diligence to identify any hidden liabilities or legal issues. In some cases, minority shareholders’ consent or statutory approval may be required for the share transfer.

Advantages: A merger involves combining the buyer’s existing company with the target company, resulting in a single entity. This structure allows for pooling resources, talents, and customer bases. It can lead to synergies, cost savings, and increased market share.

Disadvantages: The merger process can be complex, requiring approval from regulatory authorities and the consent of shareholders. Integration challenges may arise, such as cultural differences and harmonizing systems and processes. It is crucial to carefully plan and manage the integration process to ensure a successful merger.

Advantages: A joint venture involves forming a new entity with another party, combining resources and expertise for a specific business objective. This structure allows for risk-sharing, access to local knowledge and networks, and cost-sharing. It can be beneficial for entering a new market or pursuing a specific project.

Disadvantages: Joint ventures require careful negotiation of ownership, control, and decision-making rights. Differences in management style, strategic objectives, and cultural factors can create challenges. Detailed agreements and mechanisms for dispute resolution are necessary to address potential conflicts between joint venture partners.

When purchasing a company, or seeking to buy a business, conducting legal, financial and operational due diligence is essential. The scope of the due diligence process will be based on the specific transaction and the purchasing company’s objectives. At Schlun & Elseven Rechtsanwälte, our lawyers are available to review the financial records, contracts, permits and licenses, intellectual property, employment matters, litigation history, and any other relevant areas of the other company. Our team will identify any potential risk or problems with that company, and provide our clients with comprehensive advice based on thorough research

Remember, legal due diligence needs to be tailored to the specific circumstances of the transaction and the nature of the target business. Our team will guide you through the due diligence process and provide expert advice based on your unique situation.

Our lawyers regularly advise clients on financial due diligence, whereby we review the target company’s financial statements, including balance sheets, income statements, cash flow statements, and tax returns. Such analysis allows us to assess the company’s financial health, profitability, and key financial ratios.

Working with our legal experts ensures your due diligence is organised, efficient and prepared for the purchasing process. Our lawyers will carefully follow the process to ensure that every material aspect is thoroughly documented and that your target company is accurately assessed.

Our team is prepared to examine the legal framework of the target company, including its corporate structure, articles of association, shareholders’ agreements, and minutes of meetings. This process also involves reviewing contracts with customers, suppliers, employees, and other stakeholders. Thorough legal due diligence will allow us to identify any ongoing or potential legal disputes, litigation, regulatory compliance issues, and contractual obligations.

The value of intellectual property due diligence cannot be overstated. Our intellectual property law experts will assess the target company’s IP portfolio, including trademarks, patents, copyrights, and trade secrets. This process is vital as regards verifying the ownership and validity of the IP assets, and it also enables us to identify any encumbrances or licensing agreements, and assess potential infringement risks or disputes.

Compliance due diligence enables our lawyers to evaluate the target company’s compliance with applicable laws and regulations in Germany, including industry-specific regulations. As a full-service law firm, our team is able to assess the target company’s record regarding compliance with employment laws, environmental regulations, data protection laws, and any other relevant legal requirements.

Our certified experts in German employment law are available during this process to review employment contracts, employee benefits, and compliance with labour laws. Using their expertise, they can identify any pending or potential labor disputes, collective bargaining agreements, and obligations related to employee terminations or severance.

Our lawyers will identify and review permits, licenses, authorizations, or certifications required for the target company’s operations. During this process, we can assess their validity, compliance status, and any potential risks associated with regulatory non-compliance.

Operational due diligence is the process of evaluating the operational aspects of the business, including its organisational structure, production processes, supply chain management, and key operational contracts. Through our team’s work, we can assess the quality and reliability of suppliers, customer relationships, and any dependencies or risks associated with the operations.

Foreign investors need to be aware of specific regulations and restrictions related to buying a business in Germany. The German government has implemented various laws and regulations to protect national interests, ensure fair competition, and safeguard strategic sectors. Therefore, thorough due diligence is strongly advisable before purchasing a company.

Foreign Investment Control: Germany has a foreign investment control regime known as the Foreign Trade and Payments Act (Außenwirtschaftsgesetz, AWG). The law allows the German government to review and potentially block foreign investors’ acquisitions of German companies if they threaten public order or security. Specific industries, such as defence, critical infrastructure, and technology sectors, are particularly scrutinised.

Industry-Specific Restrictions: Some industries have specific regulations and restrictions on foreign investment. For example, the banking and financial sector, insurance, media, telecommunications, energy, and defence industries have specific licensing requirements or limitations on foreign ownership. Researching and understanding any industry-specific regulations that may apply to the target business is crucial.

European Union (EU) and Competition Law: If the buyer is from another EU member state, the general principle of the free movement of capital and establishment within the EU applies, allowing for relatively unrestricted investment. However, antitrust and competition regulations must be considered to ensure compliance, particularly in cases involving significant market shares or potential anti-competitive effects.

Employment Regulations: Germany’s robust employment and labour laws protect employees’ rights, including those of the target company. Foreign investors must comply with German labour regulations regarding employment contracts, termination procedures, working hours, minimum wage, and employee benefits. Acquisitions may trigger information and consultation requirements with employee representative bodies.

Tax Considerations: Foreign investors should be aware of German tax laws, including corporate income tax, value-added tax (VAT), transfer pricing rules, and potential tax incentives or limitations. It is advisable to consult with a tax advisor to understand the specific tax implications and optimise the tax structure of the acquisition.

Foreign investors must consult legal professionals specialising in German corporate and commercial law to navigate these regulations, understand the implications, and ensure compliance throughout the acquisition process.

If conflicts or disagreements arise during or after the acquisition process in Germany, there are several dispute-resolution mechanisms available to the parties involved. The choice of mechanism typically depends on the nature of the dispute, the preferences of the parties, and the enforceability of the resolution. At Schlun & Elseven Rechtsanwälte, our lawyers advise on all manners of dispute resolution in Germany.

Negotiation is an informal process where the parties directly discuss the issues and attempt to reach a mutually acceptable resolution. It is a flexible and non-binding method often used at the initial stage of a dispute.

Arbitration is a private and alternative dispute resolution method where the parties agree to submit their dispute to an impartial third party (the arbitrator or arbitral tribunal) for a final and binding decision. The process is generally faster and more confidential than litigation in court.

The parties can agree on the rules and procedures of the arbitration, including the selection of arbitrators, the place of arbitration, and the language of the proceedings. The decision of the arbitrator is typically enforceable and can be binding on the parties.

Litigation involves resolving the dispute through the court system. German courts have a well-established and reliable judicial system. However, litigation can be time-consuming and costly.

The jurisdiction for the dispute will depend on the specific circumstances, such as the subject matter and the parties involved. Generally, commercial disputes are heard in regional or higher regional courts (Landgericht or Oberlandesgericht), and appeals can be made to the Federal Court of Justice (Bundesgerichtshof).