M&A Science Podcast
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How to Do M&A Deals in Germany

M&A processes can vary from country to country, making cross-border deals extremely challenging. Understanding the cultural differences is crucial for a smooth transaction. 

In this episode of the M&A Science Podcast, we focus on how to do M&A deals in Germany, featuring Frank Tepper-Sawicki, Partner, Corporate M&A, Private Equity, and Venture Capital at Dentons. 

Things you will learn:

  • How dealmaking is different in Germany
  • Structuring Deals in Germany
  • Letter of Intent in Germany
  • Prioritizations during deals in Germany
  • Regulatory issues in Germany

Across over 80 countries, Dentons helps organizations grow, protect, operate, and finance by providing uniquely global and deeply local legal solutions. Polycentric, purpose-driven, and committed to inclusion, diversity, equity, and sustainability, Dentons focuses on what matters most to clients. Formed in March 2013 through the combination of international law firms Salans LLP, Fraser Milner Casgrain LLP (FMC), and SNR Denton, Dentons is built on the solid foundations of three highly regarded firms.

Law Practice

Frank Tepper-Sawicki

Frank Tepper-Savitsky is a seasoned M&A lawyer with a focus on venture capital and private equity deals at Denton's, a leading global law firm with a robust M&A practice. With 15 years of experience, Frank has expertly navigated both venture capital deals and large-scale private equity transactions, particularly in the tech sector, reflecting the integrated nature of these fields in Germany. Based in Düsseldorf, he continues to shape the landscape of M&A in Germany, leveraging his deep expertise during a career marked by numerous high-stakes deals.

Episode Transcript

How dealmaking is different in Germany

Private equity is a strong business and has been a strong year-driven business for investors and financial sponsors. However, it's not the culture of Germany. Historically, German investors have been more corporates or private high-net-worth individuals.

This trend is changing. Unlike the U.S., which is more private equity dominated, Germany has many family-owned businesses that might be divested to financial sponsors. In Germany, deals can happen anywhere, even in the middle of nowhere, because of these family-owned businesses.

Germany is also experiencing transformation in many sectors, including renewables and tech. Smaller ventures often grow into tech giants, taking over bigger clients and focusing on tech deals. The last 10 to 12 years have indeed been quite dynamic.

Private equity emerging in Germany

Yes, there were always certain private equity investors, but the culture of investments for private individuals and access to privately structured funds is new and reaching a broader mass of investors.

After the Second World War, there wasn't a strong culture of investing in Germany as seen in the U.S., where people commonly put their money into big funds. In Germany, investments were more government-structured, and fewer people were interested. This is changing due to a cultural shift, with more people considering divesting to private equity because they now understand how it works.

In the past, there was fear of dealing with financial sponsors, especially concerning the security of employees in family-owned businesses. However, private equity firms in Germany have done a good job over the last decade.

People are more open to selling their companies to private equity, and the culture is evolving to be more accepting of private equity products. Many family-owned businesses are now considering passing their companies to private equity funds as part of their succession planning.

Structuring deals in Germany

The major difference is that we have codified law, unlike common law. You do not have to include everything in the contract, so the documents are shorter and have fewer definitions because of codified law. You can reference it, and it is binding. If something is not explicitly ruled, it is still binding by codified law, which reduces the documentation needed.

For German lawyers, this is easier since the details are in the codified law, making standard deals more straightforward. However, it can be more complicated for foreigners unfamiliar with codified law. While common law relies on multiple cases for similar situations, codified law provides a secure understanding once you grasp it.

This system is effective because the wording remains consistent unless a higher court decision necessitates a change. If a court's decision diverges from the parliament's intent, the law may be amended to correct this.

One of the biggest differences is that we have some other formalities. These formalities lead to a different deal structure. For example, when looking at the term sheet, it's divided into sections: one binding and one non-binding. A non-binding term sheet is used to get both parties to agree on crucial terms in a high-level wording, giving an idea of the deal's structure.

In this term sheet, you cannot include language to transfer shares because that would require authorization to be binding. Therefore, it's more about expressing the intention to do so, with soft writings included in the term sheet, along with binding parts for breakup fees, etc. This creates security in the deal.

When transferring shares, which is core to changing ownership, you then go into due diligence. This is similar, but in Germany, you also need to consider codified law and the decisions of authorities. Unlike the U.S., where punitive damages and other structures exist, in Germany, violating laws requires restoring the position as if it never happened.

After due diligence, legal documentation is prepared before signing at the notary. The notary ensures all documents are valid and effective, working neutrally with both parties. 

Signing is done in front of a notary, while closing can be done between parties with a closing memorandum. The commercial registry by the local court provides official documents for all registered companies, offering transparency and trust in business transactions.

In Germany, this registry includes detailed information such as recent changes in the company, mergers, spin-offs, changes of managing directors, and establishment dates. This level of transparency is different from the U.S., where there is no central place to access such comprehensive information.

Letter of Intent in Germany

There are different ways of structuring LOIs. A term sheet allows both parties to agree on soft and binding terms. However, letters of intent were more common earlier in my career but are less frequent now, which is a good change. A letter of intent usually contains an offer under certain conditions for taking over shares.

With a term sheet, terms are outlined at a high level from the beginning of the agreement process. This helps both parties understand if they are on the same page and if it's worth proceeding with due diligence and the whole process. Especially in venture deals, this method is preferred because it simplifies the process when dealing with multiple investors.

Many terms in German venture deals are derived from U.S. deals and localized to German law. The wording remains similar to make it convenient for foreign investors. While there are differences due to codified law, the market has adapted to incorporate as much as possible from the U.S. structure.

The most crucial difference in a venture deal is that in the U.S., you negotiate the term sheet more with the investors rather than the company itself. While the company is involved, the focus is on negotiating terms with the old investors. In the U.S., you sign an MOU or a term sheet with the company, and the company runs the financial round.

In private equity deals, especially larger ones, there are structures like rollovers where, for example, you might take over 80% but leave 20% with the founders. The founders then roll over into an SPV. Structuring this can be more complicated in Germany due to various tax issues, so it's advisable to have an experienced tax advisor involved.

Private equity and venture deals are often under time pressure. This could be due to the need to deploy funds quickly or a startup running out of money. The timeline for private equity deals in Germany typically ranges from four to six months, depending on the size and due diligence process. If you're fast, it could be as short as four months.

From LOI to signing typically takes three to four months. This period includes conducting due diligence, drafting the first agreements, negotiating terms, and scheduling an appointment with a notary. The formalities around POAs (Power of Attorneys) are crucial as they must meet specific requirements.

You need to coordinate with the notary to ensure proof of existence and a statement of good standing for the representatives. When dealing with foreign jurisdictions, the notary might not be familiar with their processes, so notarized POAs and documentation are necessary to validate the legal representation of the company. Otherwise, you cannot execute the deed.

Prioritizations during deals in Germany

At the beginning, I would say, let's get the POAs done. For example, if you're in Canada, it could take weeks to get the POAs because you need proof of authorization. You have to notarize and apostille it, which requires a stamp from the authority, taking time and potentially screwing up your timeline. It's good to handle this early to avoid delays at signing.

When dealing with a foreign investor, I provide a standard term sheet for them to review. This helps them understand the terms and reduces work during negotiations. 

Familiarity with the term sheet structure, which often mirrors the investment and shareholders agreement, is crucial. I've also published templates with explanations through venture capital and business angel associations to help clients understand how a German deal runs.

It's beneficial for clients to understand the deal to accelerate negotiations. In Germany, term sheets often include an attachment showing the capitalization table pre- and post-deal. This helps me as a lawyer to understand the numbers and the influence of each party on the deal.

Transparency in Germany

When you're taking over 100%, you can see who the old investors were and decide to take them all. From the registry, you can download the shareholders' list to see the quotas between shareholders. However, you might not see the dilution from convertible loans and other instruments.

If you're looking to buy a company in Germany, you can check the registry to see the shareholder breakdown. This is quite useful for any private business. For a typical GmbH, which is the common form for private businesses in Germany, you can download the shareholder list and view the structure. This provides a transparent and powerful tool for understanding the ownership.

Regulatory issues in Germany

Under certain thresholds, I always ask my colleagues to get the current numbers, as they sometimes change. If you cross certain numbers, such as the size of the business or if it's a direct competitor, you have to look at market shares. If there is a risk that the deal could be denied by the authorities, you must file for release from the competition authority.

Another important aspect is FDI regulations for indirect investments, which are constantly changing and becoming stricter. This is a worldwide development due to global situations like wars. 

Ensuring the deal is secure is crucial, as authorities could invalidate it even five years later if not properly filed. Foreign investors need to be particularly cautious when investing in areas of high importance to Germany, such as energy.

It's essential to make these checks upfront to understand the deal structure and determine if you need a release before closing. Otherwise, the deal might not be possible to close or could be invalidated in the future.

Laying off people in Germany

You can’t just fire people. The bigger the company, the more you need to take care of employment structures. For example, is there a Betriebsrat, which is a body that represents the employees? 

If a company has over 500 employees, there is an obligation to have employee representatives on the board. One-third of the board must represent the employees, and major decisions must be agreed upon by these representatives.

This is different from the U.S., where the concept of "employment at will" is more common. In Germany, if a company has over 2,000 employees, there are additional obligations. It's essential to have a qualified German lawyer to navigate these complexities. 

Checking for these requirements is crucial as they can impact the deal structure and negotiations, including informing the employees about the changes. This is a significant difference compared to the U.S.

Biggest risk when doing deals in Germany

Data protection is a significant concern in the EU and Germany. You must follow these principles, especially with tech companies and when dealing with customers who are private individuals. Additionally, employee data protection is crucial. Conducting detailed diligence is essential, as failing to comply can result in substantial penalties.

Experience are important, but once you've done it a few times, you get used to it because it is based on codified laws. Many regulations are effective across various branches, so experience with three to five deals helps you understand the process. A German lawyer prefers having someone from the client who is deeply involved in the details and dedicated to the deal.

German lawyers are usually more direct and focused, unlike U.S. lawyers, who are often more convenient and service-oriented.

M&A culture in Germany

It depends on the Americans. Some investors want to get things done quickly and easily. This is a challenge for us because we have so many regulations and details to deal with. 

For example, I'm working on a restructuring where a branch needs to be registered. In Germany, the branch must be established first before it can be registered. This concept is hard to explain to Americans who prefer to register first and then establish.

From a logical perspective, it makes sense to them, but in Germany, it works the other way around. This difference can be challenging from a cultural perspective, but I enjoy it because it provides insight into how things are done in other countries. I work with Mexico and other jurisdictions, and it's fascinating to see their different approaches.

Sometimes, I forget these differences because I've been doing this for 15 years. It's hard to remember what might be confusing for a U.S. client. I need to get a feel for what they need me to explain to grasp the deal.

Dealing with people from Germany

I always start with small talk, like asking, "How are you?" In Germany, we're educated to do this to get a good entry into discussions. However, with German clients, we usually get straight to the details, discussing what's going on and the questions at hand.

Sometimes small talk happens at the end, like asking if everything is all right at home. When you need to get things done, it's more direct. In America, you might spend about five minutes on small talk before getting straight into business. I sometimes feel that small talk wastes time, and you end up rushing at the end of the call.

The relationship between a client and an attorney is based on trust, so understanding how the other party thinks and feels is important. I always observe how my colleagues lead clients through deals, as it's very convenient for client service. 

I try to emulate this, but it's not always easy when you're in a rush. I'm impressed by how U.S. attorneys take care of clients, and even German clients appreciate this level of service. We can learn from each other on both ends.

M&A process in Germany

In some cases, it is over-engineered, depending on the deal size. For smaller investments, it can be overly complicated with many pages and higher transaction costs. This complexity can make it difficult for startups to pay the fees, though they still need a qualified lawyer to ensure good contracts and proper documentation.

Overcomplicating things isn't always necessary, but it depends on the deal, its size, and the industry. Investing in regulatory businesses like energy, tech, or finance can be more complicated and time-consuming. This complexity is seen in other jurisdictions as well, acting as a protection for each country to safeguard important core businesses.

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