Company Purchase Agreements in Germany | M&A Transactions

Company purchase agreements in Germany are inherently complex and carry significant risks for both buyers and sellers. Conducting a beforehand is crucial to accurately evaluate the advantages and disadvantages of the acquisition, helping to determine the company’s true value, which influences both the purchase price and tax implications. Risk distribution is a critical component, especially regarding warranty liabilities. A dedicated warranty catalogue can provide the buyer with assurances about key aspects such as the ownership of trademarks and websites, the accuracy of financial statements, and the absence of pending legal disputes. Including due diligence findings in this catalogue further enhances its reliability.

Safeguarding the interests of both parties is essential throughout the purchase process, especially during the transitional phase. Specific clauses in the company purchase agreement, such as those for staggered disclosure of trade secrets and confidentiality agreements (NDAs), play a vital role in protecting sensitive information. Letters of Intent are also frequently used to formalise the mutual commitment to the transaction, offering protection against potential setbacks.

Generally, a distinction is made between two models of company sale: the share deal and the asset deal.  

A share deal involves the sale of shares. In this case, the company purchase contracts are always structured similarly. In such deals, the buyer also purchases the company’s risks, which the above-mentioned catalogue of guarantees is intended to prevent.  

In the case of an asset deal, assets such as patents, company names, property, equipment or inventories are acquired individually. Legal risks here lie in compliance with the requirement for certainty. Non-compliance can jeopardise the transfer of ownership. Of course, all liabilities must be recorded in the company purchase agreement. Only a carefully formulated company purchase agreement can ensure no avoidable mistakes occur.  

A company purchase agreement serves to allocate legal, operational, and tax risks between the contracting parties. The following key elements are typically addressed:

• Precise Definition of Assets or Shares: The company purchase agreement must clearly define whether the transaction is a share or asset deal. It should include all essential details, such as the signing and closing dates, and other relevant milestones to ensure clarity and agreement on the terms.
• Guarantee Catalogue: As discussed earlier, the guarantee catalogue forms a critical part of the contract, providing the buyer with assurances on various aspects of the company’s status and operations.
• Trivial and Cap Clauses: These clauses limit the seller’s liability. Trivial clauses trigger payment obligations only when a certain threshold is met, while cap clauses establish a maximum liability limit.
• Tax Clauses or Guarantees: These clauses are designed to protect the buyer from unforeseen adverse tax consequences, ensuring tax liabilities are appropriately addressed.
• Social Security Clauses: These provisions help protect the buyer from issues related to bogus self-employment and ensure compliance with social security regulations.
• Managing Director and Labour Law Clauses: These clauses facilitate a smooth transition for the workforce, clarifying any changes in management and stipulating whether employees can object to the transfer of their employment contracts.
• Competition Clauses: These clauses prevent the seller from directly competing with the new owner by leveraging the expertise gained from the old company. However, they must be carefully balanced to avoid being overly restrictive, which could render them invalid.
• Shortened Warranty Liability: Parties often prefer to limit warranty liability periods. Therefore, including separate limitation period clauses is recommended to streamline liability provisions.
• Approval by the Federal Cartel Office: For more significant transactions, securing approval from the Federal Cartel Office is a mandatory requirement, ensuring compliance with regulatory standards.

Regulating purchase price clauses is essential in a company purchase agreement in Germany. These clauses distinguish between those determining the purchase price and those governing payment terms. These clauses may also address potential purchase price adjustments. The most common types include fixed price, CFDF (cash-free and debt-free), and earn-out clauses.

• Fixed Price: This clause establishes a specific price based on the company’s value at a particular economic date, preventing the seller from initiating value-reducing outflows between the economic date and the company’s handover. Strict contractual provisions bind the seller during this period. In the Anglo-American context, this approach is often referred to as a ‘locked box.’
• Earn-Out: An earn-out links parts of the purchase price to future performance conditions, such as achieving certain sales targets. This structure incentivises the seller to maintain the company’s performance during the transitional period post-sale, potentially transferring some risks to the seller.
• Purchase Price Adjustment: When not all necessary data is available to set an adequate purchase price at the negotiation stage, parties may agree on a formula and a preliminary price, which will be adjusted later when the data is complete. Recording this agreement early, preferably in a letter of intent, is crucial, as failure to do so can derail advanced negotiations.
• CFDF (Cash-Free and Debt-Free): This approach involves determining a variable purchase price by factoring in cash, cash equivalents, and financial liabilities. The financial structure is pre-determined, and adjustments are made on the balance sheet date, affecting the final purchase price. The purchase price comprises the enterprise value plus cash and cash equivalents minus financial liabilities, debt-like items, and other agreed adjustments. If cash is higher or liabilities lower than expected on the closing date, the purchase price increases accordingly, and vice versa.

Due to the complexity of determining these values, CFDF is generally recommended for more significant transactions. Buyers and sellers often have differing views on relevant items, so it’s advisable to agree on the purchase price and method as early as possible, preferably outlined in the letter of intent, to prevent potential deal failures at later negotiation stages.

After negotiating and drafting the company purchase agreement, a mutually agreed date is set for their formal execution, known as the ‘signing date.’ The ‘closing’ refers to the simultaneous occurrence of payment and the transfer of shares. During the closing process, these actions are typically carried out step by step to ensure compliance and fulfilment by both parties. Often, a notary oversees the process and ensures legal formalities are met. Once the seller confirms the receipt of the agreed purchase price in writing, the notary is instructed to update the commercial register with the new list of shareholders.