Corporate Finance Transactions under German Law: Private and Capital Markets Transactions

Transcription

1 Corporate Finance Transactions under German Law: Private and Capital Markets Transactions Lectures, Lomonossov State University Moscow 7 11 November 2016 Prof. Dr. Dr. Jan-Hendrik Röver, LL.M. (LSE), FRSA 1

2 Introduction Part 1: Fundamentals of investment banking and corporate finance Part 2: Fundamentals of German law Part 3: Specific types of transactions 2

3 Introduction 1: Lecturer 3

4 Introduction 2 Course syllabus Part 1: Fundamentals of investment banking and corporate finance The notions of investment banking and corporate finance The story of investment banking and corporate finance Economic fundamentals of corporate finance General framework Legal sources Due diligence Part 2: Fundamentals of German law 4

5 Introduction 3 Part 3: Specific types of transactions Mergers & Acquisitions Private transactions Capital markets (public) transactions [Private Equity] Acquisition financing Bank financing Capital markets financing Project financing Bank financing Capital markets financing Securitisation 5

6 Introduction 4 Limitations So-called M&A- and corporate finance business, not capital markets business Mainly perspective of German law (partly perspective of English law) No tax issues Goal After the lecture series participants shall be able to analyse in legal terms the types of transactions discussed during the lectures Significant part of the work of large law firms, companies and financial institutions (notably banks) 6

7 Introduction 5 Investment banking is integral part of business studies So far it has received little attention in legal training Note study offers at law faculties: Augsburg University English law at the University of London (King s College / Queen Mary College) 7

8 Introduction 6 Legal understanding of investment banking complicated by two issues: Economic terminology (e.g. junk bonds, mezzanine financing) Adaptation of Anglo-American legal thinking und terminology (e.g. sale and purchase agreement) Teaching approach Systematic approach (not just adaptation of terms used in practice) Clear distinction between contractual and proprietary issues in the context of a sale of companies (as required by German law) Comparative law approach: may help to improve understanding of Russian law! Implementation in practice Economic background taken into account 8

9 Introduction 7 Lecture materials will be shared via the homepage Print 2 slides per page! 9

10 Introduction 8 Lecture times: 7 November until 10 November 2016 Monday, 7 November 2.45 pm pm (room 214B) 4.30 pm pm (room 314B) Tuesday, 8 November am am (room 125B) am pm (room 125B) Wednesday, 9 November 9.00 am pm (room 225B) am pm (room 225B) Thursday, 10 November 9.00 am am (room 110B) am pm (room 110B) 10

11 Bibliography 1: Legal sources Schönfelder, Deutsche Gesetze. Sammlung des Zivil-, Straf- und Verfahrensrechts, Munich (lose-leaf) For English translations e.g. of BGB see the website of the German Federal Ministry of Justice and Consumer Protection ( Beck-Texte im dtv, Bankrecht (with an introduction by Franz Häuser), 42th ed. (Munich 2015) Sir Roy Goode, Herbert Kronke, Ewan McKendrick and Jeffrey Wool (eds.), Transnational Commercial Law. International Instruments and Commentary, 2nd ed. (Oxford 2012) See also collection of legal instruments without commentary (Oxford 2007) 11

12 Bibliography 2: German banking law 1 Ann-Kristin Achleitner (ed.), Handbuch Investment Banking, 3rd ed. (Wiesbaden 2002) Ann-Kristin Achleitner and Georg F. Thoma (eds.), Handbuch Corporate Finance: Konzepte, Strategien und Praxiswissen, 2nd ed. (Cologne 2002) Stephan Eilers, Nils M. Koffka and Marcus Mackensen (eds.), Private Equity. Unternehmenskauf - Finanzierung - Restrukturierung Exitstrategien, 2nd ed. (Munich 2012) Bernd Fahrholz, Neue Formen der Unternehmensfinanzierung. Unternehmensübernahmen, Big ticket-leasing, Asset Backed- und Projektfinanzierungen (Munich 1998) Announced for 2017: Fahrholz, Röver and Meissner, Formen des Unternehmenskaufs und der Unternehmensfinanzierung, 2nd ed. (Munich) 12

13 Bibliography 3: German banking law 2 Thorwald Hellner and Stephan Steuer (eds.), Bankrecht und Bankpraxis (BuB), 5 vols., Cologne (lose-leaf) Formerly: Bankgeschäftliches Formularbuch edited by Erich Trost I.a. Andreas Früh/Constanze Müller-Arends Heinz-Josef Hockmann and Friedrich Thießen (eds.), Investmentbanking, 3rd ed. (Stuttgart 2012) Jörg Risse, Florian Kästle and Olaf Gebler, M & A und Corporate Finance von A-Z (Munich 2006) Jan-Hendrik Röver, Vergleichende Prinzipien dinglicher Sicherheiten. Eine Studie zur Methode der Rechtsvergleichung (Munich 1999) Jan-Hendrik Röver, Secured Lending in Eastern Europe (Oxford 2007) 13

14 Bibliography 4: German banking law 3 Jan-Hendrik Röver, Kreditfinanzierung, in: Ulf R. Siebel, Jan-Hendrik Röver and Christian Knütel (eds.), Rechtshandbuch Projektfinanzierung und PPP, 2nd ed. (Cologen, Munich 2008), pp Jan-Hendrik Röver, Realsicherheiten und Direktvereinbarungen, in: ibid., pp Herbert Schimansky, Hermann-Josef Bunte and Hans-Jürgen Lwowski (eds.), Bankrechts-Handbuch, 2 vols., 4th ed. (Munich 2011) Excellent für banking law issues; less illuminating for corporate finance business Hans-Peter Schwintowski (ed.), Bankrecht. Commercial Banking Investment Banking, 4th ed. (Cologne, Berlin, Bonn and Munich 2014) Klaus Spremann and Pascal Gantenbein, Finanzmärkte, 3rd ed. (Constance, Munich 2014) Economic introduction to financial markets 14

15 Bibliography 5: Model contracts 1 Beck sches Formularbuch Bürgerliches, Handels- und Wirtschaftsrecht (edited by Michael Hoffmann-Becking and Alexander Gebele), 12th ed. (Munich 2015) Florian Kästle and Dirk Oberbracht, Unternehmenskauf - Share Purchase Agreement (Beck sche Musterverträge vol. 49) (Munich 2005) Klaus J. Hopt (ed.), Vertrags- und Formularbuch zum Handels-, Gesellschafts- und Bankrecht, 4th ed. (Munich 2013) 15

16 Bibliography 6: Model contracts 2 Münchener Vertrags-Handbuch (edited by Rolf A. Schütze and Lutz Weipert), vols. 2-4: Wirtschaftsrecht I-III, 6th ed. (Munich ); Münchener Vertrags-Handbuch (edited by Gerrit Langenfeld), vols. 5-6: Bürgerliches Recht I, II, 6th ed. (Munich 2007) Wolfgang A. Münchow, Andreas Striegel and Thomas A. Jesch, Management Buy-Out (MBO) (Beck sche Musterverträge vol. 59), (Munich 2008) Christoph H. Seibt (ed.), Beck sches Formularbuch Mergers & Acquisitions, 2nd ed. (Munich 2011) Carl Wurm, Hermann Wagner and Hugo Zartmann (ed.), Das Rechtsformularbuch, 17th ed. (Cologne 2015) 16

17 Bibliography 7: International business law Wolfgang Fikentscher, Wirtschaftsrecht, vol. I: Weltwirtschaftsrecht, Europäisches Wirtschaftsrecht, vol. II: Deutsches Wirtschaftsrecht (Munich 1983) Herbert Kronke, Werner Melis and Hans Kuhn (eds.), Handbuch Internationales Wirtschaftsrecht, 2nd ed. (Munich 2016) Patrick Ostendorf and Peter Kluth (eds.), Internationale Wirtschaftsverträge, 2nd ed. (Munich 2016) 17

18 Bibliography 8: English banking law 1 David Adams, Banking and Capital Markets 2015 (CLP Legal Practice Guides) (Guildford 2015) Anu Arora, Banking Law (Harlow 2014) Colin Bamford, Principles of International Financial Law, 2nd ed. (Oxford 2015) Joanna Benjamin, Financial Law (Oxford 2008) Allen N. Berger, Philip Molyneux and John O. Wilson (eds.), The Oxford Handbook of Banking (Oxford 2015) Christoph Graf von Bernstorff, Einführung in das englische Recht (Munich 2011) Jan Hendrik Dalhuisen, Dalhuisen on Transnational, Comparative Commercial, Financial and Trade Law, 3 vols., 5th ed. (Oxford, Portland/Oregon 2013) 18

19 Bibliography 9: English banking law 2 E.P. Ellinger, E. Lomnicka and C. Hare, Ellinger's Modern Banking Law (Oxford 2010) Eilis Ferran and Look Chan Ho, Principles of Corporate Finance Law, 2nd ed. (Oxford 2014) Geoffrey Fuller, The Law and Practice of International Capital Markets, 3rd ed. (Edinburg 2012) Louise Gullifer and Jennifer Payne, Corporate Finance Law. Principles and Policy, 2nd ed. (Oxford, Portland/Oregon 2015) Andrew Haynes, The Law Relating to International Banking. Law and Practice (Hayward Heath 2010) Ewan McKendrick, Goode on Commercial Law, 4th ed. (London 2010) Joan Wadsley and Graham A. Penn, Law and Practice of Domestic Banking, 2th ed. (London 2000) 19

20 Bibliography 10: English banking law 3 Graham Penn and Andrew Haynes, Law and Practice of International Banking, 2nd ed. (London 2002) See also Andrew Haynes Mark Hapgood (ed.), Paget's Law of Banking, 14th ed. (London 2014) Alastair Hudson, The Law of Finance, 2nd ed. (London 2013) Andrew McKnight, The Law of International Finance (Oxford 2008) Colin Paul and Gerald Montagu, Banking and Capital Markets Companion, 6th ed. (Oxford 2014) Dan Prentice and Arad Reisberg (eds.), Corporate Finance Law in the UK and EU (Oxford 2011) Charles Proctor, The Law and Practice of International Banking, 2nd ed. (Oxford 2015) Ravi Tennekoon, The Law and Regulation of International Finance (London 1991) 20

21 Bibliography 11: English banking law 4 Volker Triebel, Martin Illmer, Wolf-Georg Ringe, Stefan Vogenauer and Katja Ziegler, Englisches Handel- und Wirtschaftsrecht, 3rd ed. (Heidelberg 2012) Volker Triebel and Stefan Vogenauer, Englisch als Vertragssprache (Cologne 2015) Philip R. Wood, Law and Practice of International Finance (London 1980) Philip R. Wood, International Finance, 7 Bde., 2. Aufl., London rd ed. announced for See also: The Law and Practice of International Finance. University Edition, London 2007 (one volume) Philip R. Wood, Maps of World Financial Law, 6th ed. (London 2008) Richard Wight, Warren Cooke and Richard Gray, The LSTA's Complete Credit Agreement Guide (New York etc. 2009) 21

22 Bibliography 12: European banking law 1 Sue Wright, The Handbook of International Loan Documentation, 2nd ed. (Houndmills 2014) Robert Baldwin, Martin Lodge and Martin Cave (eds.), The Oxford Handbook of Regulation (Oxford 2012) Jens-Hinrich Binder and Christos Gortsos, The European Banking Union. A Compendium (Munich 2015) Giuseppe Boccuzzi, The European Banking Union. Supervision and Resolution (Houndmills 2015) Danny Busch and Guido Ferrarini (eds.), European Banking Union (Oxford 2015) Juan E. Castañeda, David G. Mayes and Geoffrey Wood (eds.), European Banking Union. Prospects and Challenges (London 2015) Ross Cranston, Principles of Banking Law, 2nd ed. (Oxford 2002) 3rd ed. has been announced for some time 22

23 Bibliography 13: European banking law 2 Peter Derleder, Kai-Oliver Knops and Heinz Georg Bamberger (eds.), Handbuch zum deutschen und europäischen Bankrecht, 2nd ed. (Berlin, Heidelberg 2008) Horst Eidenmüller, Mathias Habersack and Lars Klöhn, European Banking Regulation (Munich) Announced for March 2017 Eilis Ferran, Niamh Moloney and Jennifer Payne (eds.), The Oxford Handbook of Financial Regulation (Oxford 2015) Matthias Haentjens and Pierre de Gioia-Carabellese, European Banking and Financial Law (London 2015) Matthias Herdegen, Bankenaufsicht im Europäischen Verbund/Banking Supervision Within the European Union (Berlin, New York 2010) Niamh Moloney, EU Securities and Financial Markets Regulation, 3rd ed. (Oxford 2016) 23

24 Bibliography 14: European banking law 3 Christoph Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (Munich 2014) Thomas Martin Pflock, Europäische Bankenregulierung und das Too big to fail-dilemma (Berlin 2014) Anton K. Schnyder, Europäisches Banken- und Versicherungsrecht (Heidelberg 2005) 24

25 Introduction Part 1: Fundamentals of corporate finance 1. The notions of investment banking and corporate finance 2. The story of corporate finance 3. Economic fundamentals of corporate finance 4. General framework 5. Legal sources 6. Due diligence Part 2: Fundamentals of German law Part 3: Specific types of transactions 25

26 Layman s view of investment banking Gordon Gekko, Wall Street (actor: Michael Douglas, real life model: Ivan Boesky) 26

27 Terminology 1 Institutional notion of investment banking: type of bank Investment banking (US) or merchant banking (UK) US-American investment bank: traditionally only advisory of corporates British merchant bank: Corporate advisory and corporate finance-, other investment banking, portfolio management and several other bank services Commercial Banking (US) or Clearing Banks (UK) provide general banking services such as payment services and lending In Germany traditionally universal bank principle 27

28 Terminology 2 Investment bank (US) Issuer/ Borrower Capital demand Bank and capital market Investor Capital offering Lender Saver Commercial bank 28

29 Terminology 4 Functional notion of investment banking: term on function Today the notion of investment banking covers Specific types of advisory services to companies (e.g. sell-side or buy-side M&A) All types of structured financings of corporates (i.e. special types of financings of corporates in contrast to traditional financings of corporates) and Structured capital markets products (which may ultimately also be offered to private clients) 29

30 Investment banking transactions 1 M&A Financing Capital markets (sales & trading) Risk management Advice on acquisition and sale of companies Advice in defence Measures Structured Financing, in particular - Acquisition financing - Project financing Equity capital markets Debt capital markets Derivatives Research - Equity - Fixed income (debt) 30

31 Hierarchy in investment banks Managing Director Executive Director/ Director/Senior Vice President Associate Director/Vice President 3 years Associate 3 years Analyst 3 years Titles vary from institution to institution 31

32 Economic functions of investment banking 1 Investment banking achieves financial intermediation Financial intermediaries have Function of capital collection Traditional US investment banks used to arrange only collection of capital without providing capital themselves Function of capital distribution Financial sector is a truth mechanism of society (Christian von Weizsäcker) Function of risk distribution 32

33 Economic functions of investment banking 2 Global financing has important functions Financing of large companies By way of capital collected At relatively low costs Facilitates distribution of risks Empirical proof Countries with large financial industries in 1960 grew in the following three decades more quickly than those without Cf. Martin Wolf, Fixing Global Finance (New Haven 2008) This relationship should not be falsified even following the financial crisis of

34 Financial system in modern market economies: Commercial bank and other financial intermediaries Capital allocation in market economies largely by financial intermediaries (credit institutions and shadow banks ), in particular Credit institution (bank), 1 (1) 2 No. 2 KWG = most investment banks Financial service institute = capital market services, 1 Ia KWG Financial companies (Finanzunternehmen) = financial transactions, 1 (3) KWG (Life)Insurance companies, Insurance Supervision Act (VAG) Investment funds, KAG* VC-/Private equity funds, 1 (3) sentence 1 No. 1 KWG Pension funds, 112 (2) VAG Endowments (e.g. US university endowments), Endowment Acts of Federal States Hedge funds, 1 (3) sentence 1 No. 5 KWG, 283 KAG Sovereign wealth funds (e.g. Norway, Russia, Singapore) (Single oder Multi) Family offices 34

36 Leading international investment banks 1 Barclays Capital (GB) Bear Sterns (USA) (2008 acquired by JP Morgan) Citigroup (nicht: Citibank = former brand of Citigroup s German private customer business) (Salomon Smith Barney) (USA) Credit Suisse (formerly CSFB) (CH) Deutsche Bank (GER) Donaldson, Lufkin & Jenrette Inc. (USA) Dresdner Kleinwort Wasserstein (GER), since 2008 part of Commerzbank group Goldman Sachs (USA) (in 2008 became bank holding company) Hambros (GB) (today part of Société Générale) JP Morgan Chase (USA) JP Morgan Cazenove (GB) 36

37 Leading international investment banks 2 Lazard (F) Lehman Brothers (USA) (2008 insolvency protection pursuant to Chapter 11; parts aquired by Barclays and Nomura) Merrill Lynch (USA) (2008 acquired by Bank of America) Morgan Stanley Dean Witter (USA) (in 2008 became bank holding company) N M Rothschild and Sons (GB) Nomura International (J) Sal. Oppenheim (GER) (since 2009 part of Deutsche Bank group) Schroders (GB) (today part of Citigroup) UBS Warburg (CH) Note group of so-called bulge bracket banks: largest investment banks 37

38 Leading international investment banks 3 38

39 International financial markets 1 Investment banking is international business It is based on deregulated financial markets Centralisation of international financial markets (and the main seats of investment banks) New York ( Wall Street ) London ( City of London ) Tokyo Hong Kong Singapore 39

40 International financial markets 2 In addition a number of regionally important financial markets Moscow Frankfurt Paris Zurich Mailand Shanghai 40

41 Investment legends 1 Investments Warren Buffett (Berkshire Hathaway) Pupil of Benjamin Graham Intrinsic value Bruce Wasserstein ( bid them up Bruce ) Investment funds Sir John Templeton (Templeton Growth Fund) Value strategy (developed by Benjamin Graham; applied by Warren Buffett) Peter Lynch (Fidelity Magellan Fund since 1975) Growth strategy 41

42 Investment legends 2 Bond funds Bill Gross (Pimco Total Return Fund) Private equity funds Stephen Schwarzman (Blackstone) Sir Ronald Cohen (Apax) 42

43 Investment legends 3 Hedge funds George Soros (Quantum Fund 1969) John Alfred Paulson (Paulson & Co. Inc.) Portfolio composition David Swensen (Chief Investment Officer Yale University) 43

44 Bibliography 1 General books Jonathan Barron Baskin and Paul J. Miranti Jr., A History of Corporate Finance (Cambridge 1999) Niall C. Ferguson, The Cash Nexus. Money and Power in the Modern World (London 2001) Niall C. Ferguson, The Ascent of Money. A Financial History of the World (London 2008) Fritz Stern, Gold and Iron. Bismarck, Bleichröder, and the Building of the German Empire (New York 1991) Daniel Yergin and Joseph Stanislaw, The Commanding Heights. The Battle Between Government and the Marketplace That Is Remaking the Modern World (New York 1998) 44

45 Bibliography 2 M&A Robert Slater, The Titans of Takeover (New York 1999) Bruce Wasserstein, Big Deal. Mergers and Acquisitions in the Digital Age (Boston 2001) Stanley Foster Reed, Alexandra Lajoux and H. Peter Nesvold, The Art of M&A. A Merger Acquisition Buyout Guide, 4th ed. (2007) Brett Cole, M&A Titans. How the Pioneers of Wall Street s Mergers and Acquisitions Industry Shaped the Corporate World (New York 2008) Robert F. Bruner, Applied Mergers and Acquisitions (New York 2004) Robert F. Bruner, Deals from Hell. M&A Lessons that Rise Above the Ashes (New York 2015) 45

46 Excesses and scandals of investment banking ( power s dark side ) 1 Speculation ( putting all one's eggs into one basket ) Junk Bonds (1980er): Michael Milken and Drexel Burnham Lambert junk is junk! The end of an investment bank (1990): Nick Leeson and Baring s Bank - US$ 1.2 billion loss on currency derivatives Yasuo Hamanaka, the king of copper trading (1996): US$ 2 billion loss 46

47 Excesses and scandals of investment banking ( power s dark side ) 2 The end of a hedge fund (1998): LTCM (Long-Term Capital Management, John Meriwether; directors included nobel price laureates Myron S. Scholes and Robert C. Merton) Jérôme Kerviel, Société Générale (Januar 2008): 4.9 billion loss - the all time winner for trading losses With a bank internal trading authorization for DAX futures contracts up to 150,000 contracts 47

48 Excesses and scandals of investment banking ( power s dark side ) 3 Georg Funke/Gerhard Bruckermann (HypoRealEstate/DePfa) (2008): the big refinancing gamble costs to tax payer of 19.1 billion until 2010 Kweku Mawuli Adoboli, UBS (2011): trading speculations led to a loss of US$ 2.3 billion 48

49 Excesses and scandals of investment banking ( power s dark side ) 4 Deception The stock market bubble and the role of technology analysts and IPO specialists (1990ies until 2000): Jack Benjamin Grubman (Salomon Smith Barney/ Citigroup) and Frank Quattrone (CSFB) how to create value where there is none! Jordan Belfort, Stratton Oakmont (1998) Investment fraud Film adaptation as Wolf of Wall Street Now working as motivational trainer! Enron (2001): Andrew Fastow and his bankers (Citigroup) and accountants (Arthur Andersen) how to hide your debt! 49

50 Excesses and scandals of investment banking ( power s dark side ) 5 WorldCom (2002): Bernard ( Bernie ) Ebbers how to inflate your sales and to create growth! Bernard ( Bernie ) L. Madoff, Madoff Investment Securities LLC the largest Ponzi-scheme of all times (2008) US$ 50 billion estimated investor losses Failure of supervisory bodies 50

51 Excesses and scandals of investment banking ( power s dark side ) 6 Insider trading Ivan Boesky, Ivan F. Boesky & Company Insider trading Model for Gordon Gekko from the film Wall Street Raj Rajaratnam, Galleon Group insider trading of a hedge fund (2009) Previously one of the largest hedge funds in the world (US$ 7 billion) Sentencing of Raj Rajaratnam to a prison sentence in

52 Excesses and scandals of investment banking ( power s dark side ) 7 Risk cumulation and system failure US-American mortgage loans (more precisely: loans secured by land mortgages) of low quality ( sub-prime mortgages ) and the global transfer of risks via mortgage-backed securities, MBS Global market deterioration since 2007 which amounted to a full-scale financial crisis 52

53 Bibliography 1 Geraint Anderson, Cityboy. Beer and Loathing in the Square Mile (London 2008) Alexander Hagelüken and Harald Freiberger, Die großen Spekulanten. Märchenhafte Gewinne und gigantische Verluste (Munich 2009) Michael Lewis, Liar s Poker. Rising Through the Wreckage on Wall Street (London 1990) Frank Partnoy, F.I.A.S.C.O. The Inside Story of a Wall Street Trader (London 1998) Hans-Werner Sinn, Kasino-Kapitalismus. Wie es zur Finanzkrise kam, und was jetzt zu tun ist (Düsseldorf, Vienna, New York 2009) 53

54 Bibliography 2 Specifially on financial crises: John Kenneth Galbraith, A Short History of Financial Euphoria (London 1990) Charles P. Kindleberger and Robert Z. Aliber, Maniacs, Panics, and Crashes. A History of Financial Crises, 6th ed. (New York, Chichester, Brisbane, Toronto, Singapore 2011) Carmen M. Reinhart and Kenneth S. Rogoff, This Time is Different. Eight Centuries of Financial Folly (New Yersey 2009) Note for the psychological foundations of misjudgements: Dietrich Dörner, Die Logik des Misslingens. Strategisches Denken in komplexen Situationen (Reinbek 1989) 54

56 Foundations of modern investment banking Three fundamental developments Financial mathematics Investors Financial techniques 56

57 Regulatory system 1: Levels of supervisory bodies and fora International fora European fora National (e.g. German) fora and public authorities (UK) / agencies (US) 57

58 NGO Regulatory system 2: International financial markets supervision G8 (formerly G6 and G7) / G20 Not: United Nations / WTO Joint Forum, Basel (at BIS) International Monetary Fund (IMF), Washington D.C. Managing Director: Christine Lagarde Macroeconomic studies (e.g. Global Financial Stability Report) Bank for International Settlements (BIS), Basel General Manager: Jaime Caruana Basel Committee on Banking Supervision, BCBS, Basel (at BIS) Proposals for banking supervision (capital adequacy, liquidity) Chairman: Stefan Ingves International Organization of Securities Commissions, (IOSCO), Madrid International Association of Insurance Supervisors (IAIS), Basel (at BIS) Financial Stability Board (FSB, 2009), Basel (at BIS) (formerly Financial Stability Forum [FSF, 1999]); members are supervisory agencies; prepares proposals Committee on the Global Financial System (CGFS), Basel (at BIS) Committee on Payment and Settlement Systems (CPSS), Basel (at BIS) Institute of International Finance (IIF) Securities Industry and Financial Markets Association (SIFMA), New York International Swaps and Derivatives Association, Inc. (ISDA), New York Eurofi (think tank), Paris/ Brussels International Accounting Standards Board (IASB), London 58

59 Regulatory system 3: European financial markets supervision (previous institutions) European Council Economic and Financial Committee (ECOFIN): Ministers (UK: Secretaries) of Economy and Finance of the Member States Financial Stability Table of ECOFIN: larger group Commission (Jean-Claude Juncker, Luxembourg) Pierre Moscovici, Michel Barnier, France France Directorate General (DG) Internal Market and Services Directorate General (DG) Economic and Financial Affairs Margrethe Vestager, Denmark Directorate General (DG) Competition Europeans System of Central Banks (ESCB): Banking Supervision Committee (BSC) European Banking Committee (EBC) (formerly Banking Advisory Committee) at the European Commission in Brussels Committee of European Banking Supervisors (CEBS), London Committee of European Securities Regulators (CESR), Paris Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS), Frankfurt Note also Committee on Economic and Monetary Affairs (ECON) of the European Parliament European Central Bank (ECB), Frankfurt 59

60 Regulatory system 4: European financial markets supervision (new institutions since ab 2010/2011) European Banking Committee (EBC) (formerly Banking Advisory Committee) at the European Commission in Brussels European Systemic Risk Board (ESRB), at ECB in Frankfurt European System of Financial Supervisors (ESFS) at ECB in Frankfurt Steering committee European Banking Authority (EBA), London (successor of CEBS) European Securities Authority (ESA), Paris (successor of CESR) also supervision of rating agencies European Insurance and Occupational Pensions Authority (EIOPA), Frankfurt (successor or CEIOPS) European System of Central Banks (ESCB): Banking Supervision Committee (BSC) European Central Bank (ECB), Frankfurt Uniform application of EU financial markets regulation in EU Mediation between national supervisory agencies Implementation until end 2010 Note also Committee on Economic and Monetary Affairs (ECON) of the European Parliament 60

61 Regulatory system 5: German financial markets supervision (Note: so far no European or global banking supervision) Federal Ministry of Finance (BMF) * Federal Financial Supervisory Authority (BAFin), Bonn/Frankfurt Official measures of banking supervision Banking supervision German Federal Bank (Deutsche Bundesbank), Frankfurt Operational banking supervision Allocation of competences pursuant to 7 KWG and 2002 Agreement and EU-Supervisory Regulation and German Supervisory Regulation 2013 It was agreed in coalition negotiations 2009 that banking supervision shall be done exclusively by the German Federal Bank in future ECB Advice Promotion of cooperation (with ESCB Banking Supervision Committee) Advice on financial market stability Promotion of payment systems, 127 (2) AEUV Artt. 127 (4), (5) AEUV, 25.1 ESCB Articles Deposit guarantee fund (Einlagensicherungsfonds), Berlin Reviews financials of members Credit institutions (banks) / Financial services institutes / Financial institutes * Legal and substantive supervision, 2 FinDAG Competition control European agencies and courts: Commission (Directorate General Competition) General Court (formerly Court of First Instance) Court of Justice of the European Union German agencies and courts: BKartA LG OLG BGH 61

62 Bibliography 1 General books Peter L. Bernstein, Capital Ideas. The Improbable Origins of Modern Wall Street (New York 1993) Peter L. Bernstein, Against the Gods. The Remarkable Story of Risk (New York 1996) Peter L. Bernstein, Capital Ideas Evolving: The Improbable Origins of Modern Wall Street, 2nd ed. (New York 2007) Burton G. Malkiel, A Random Walk down Wall Street. The Time- Tested Strategy for Successful Investing, 11th ed. (New York 2016) 62

63 Bibliography 2 Behavioural economics George A. Akerlof and Robert J. Shiller, Animal Spirits (Princeton, Oxford 2009) Pete Lunn, Basic Instincts. Human Behaviour and the New Economics (London 2010) Critical with respect to inherent paternalism: Gilles Saint-Paul, The Tyranny of Utility (Princeton, Oxford 2011); supportive: Cass R. Sunstein, Why Nudge? The Politics of Libertarian Paternalism (New Haven 2014) 63

65 Issues of investment banking covered in the lecture: shareholding, assets and corporate finance Shareholder Shares Share deal Assets Liabilities Current assets Fixed assets Financial liabilities - Bank liabilities - Provisions Equity Asset deal Loan 65

67 Legal sources 1 International conventions United Nations Convention on Contracts for the International Sale of Goods (CISG, 1980) Always contracted out in practice Cf. Sir Roy Goode, Herbert Kronke, Ewan McKendrick and Jeffrey Wool (eds.), Transnational Commercial Law. International Instruments and Commentary, 2nd ed. (Oxford 2012) National (e.g. German) law, in particular Contract law Property law Company law Conflict of laws rules 67

68 Legal sources 2 Model agreements Model agreements of the Loan Market Association (LMA) for agreements under English law which have been drafted by the British Bankers Association, the Association of Corporate Treasurers und several law firms Leveraged Term Sheet Senior Multicurrency Term and Revolving Facilities Agreement Users Guide to Form of Facility Agreement for Leveraged Finance Transactions There are now also model agreements for other European laws (e.g. German and French law) Model agreements of the US-American Loan Syndications and Trading Association (LSTA) for contracts pursuant to the law of New York 68

69 Abbreviations / Glossary of terms 1 BGB = Bürgerliches Gesetzbuch (Civil Code) GmbHG = Gesetz betreffend die Gesellschaften mit beschränkter Haftung (Act on Private Limited Liability Companies) GWB = Gesetz gegen Wettbewerbsbeschränkungen (Competition Act) HGB = Handelsgesetzbuch (Commercial Code) InsO = Insolvenzordnung (Insolveny Act) KAG = Kapitalanlagegesetzbuch (Investment Act) KWG = Kreditwesengesetz (Banking Act) 69

70 Abbreviations / Glossary of terms 2 UmwG = Umwandlungsgesetz (Reorganisation Act) VAG = Versicherungsaufsichtsgesetz (Insurance Supervision Act) ZPO = Zivilprozessordnung (Act on Civil Procedure) For English translations e.g. of BGB see the website of the German Federal Ministry of Justice and Consumer Protection ( 70

71 Introduction Part 1: Fundamentals of investment banking and corporate finance 1. The notions of investment banking and corporate finance 2. The story of corporate finance 3. Economic fundamentals of corporate finance 4. General framework 5. Legal sources 6. Due diligence 6.1 Business due diligence and company valuation Functions of due diligence Types of due diligence Documents for financial due diligence Documents for other types of due diligence Company valuation Financial ratio analysis 6.2 Legal due diligence and agreement drafting 71

72 Functions of due diligence Collection of information prior to a transaction Valuation of a company Financing of a company Identification of risks and weaknesses of a transaction May be mitigated by conditions precedent, warranties, indemnities, guarantees and other types of security Transparency and documenting a transaction for the purposes of providing evidence Contract party cannot claim it has not been advised of existing facts and risks in a sufficient manner May be relevant for civil liability E.g. disclosure letter containing a limitation of liability 72

73 Types of due diligence 1 Due diligence with different interests, e.g. Seller (vendor s due diligence): identification of factors which may lower valuation, increase of investor interest Buyer (buyer s due diligence) Strategic buyers Due diligence focused on opportunities and risks Financial buyers Due diligence focused on opportunities and risks but also potential for later sale (exit) Financing banks Focus on risks Practical rule: first due diligence then contract drafting In practice often not taken into account 73

74 Types of due diligence 2 Specific types of due diligence Commercial / market due diligence = market situation (in particular market, competition, business model, differentiation [unique selling proposition = USP]) Financial due diligence = financial situation of the company (based on the company s bookkeeping) Legal due diligence = legal situation of the company E.g. licences Integrity / compliance due diligence = uncovering criminal and corrupt structures Tax due diligence = tax situation of the company 74

75 Types of due diligence 3 Environmental due diligence = environmental situation of the company Insurance due diligence = risk protection of the company Management due diligence = qualification of top management Particular cases Technical due diligence = e.g. status of equipment Geological due diligence = e.g. reserves of a natural resources company 75

76 Documents for financial due diligence 1 Analysis of past Financial statements (in particular balance sheets and profit and loss accounts) together with auditors reports covering the last three business years Single financial statement and, where applicable, group financial statement Financial statements of subsidiaries (>50% of shares) and affiliates (<50% of shares) Interim management reports Financing of the company (equity and debt) Overview of revenues for the past three business years split into main product groups and main clients Cost calculation of the company (structure of operational costs [OpEx], structure of capital costs [CapEx]) 76

77 Documents for financial due diligence 2 Working capital List of bank accounts Summary of rental and leasing contracts on commercial assets and equipment, in particular term (start and end) and payment obligations Analysis of future Business plan Key for understanding company value 77

78 Documents for other types of due diligence (without legal due diligence) 1 Tax due diligence Last tax audit report (Betriebsprüfungsbericht) by tax authorities Environmental due diligence Past use of real estate with a particular focus on prior industrial use List of all environmental hazardous substances in the company 78

79 Documents for other types of due diligence (without legal due diligence) 2 Environmental damage and its removal documented by Offical decrees and reports including environmental audits which have already been conducted and Corporate environmental management systems Personnel due diligence Employees including top management (age, entry date, function and salary) Technical due diligence Technical report on use and functional capability of machinery, vehicles, IT and other plant and equipment 79

80 Due diligence materials provided by investment offeree Investment summary Either in anonymised form (blind teaser) or With identification of investment opportunity (executive summary) Information memorandum Documents on vendor s due diligence Management presentation / bankers meeting Data room Data room declaration is unilateral obligation, 241 (1) sentence 1 BGB Physical data room Virtual data room (CD-ROM, internet access) Site visits, meetings with management, employees and clients Structuring of this process is one of the main tasks of an investment bank/a corporate finance adviser 80

81 Deriving company valuation, company ratios and financial ratios 1 Economic analysis is based on four accounting tools: Calculation at a certain point in time Balance sheet = calculation of assets Profit and loss account (P&L) = calculation of economic success Calculation over a period of time Cash flow statement of a financial statement = movement of financial funds Based on P&L numbers (accruals) 81

82 Deriving company valuation, company ratios and financial ratios 2 Calculation at a certain point in time for a number of points in time Cash flow calculation = calculation of liquidity for the purposes of company valuation and financing Different from cash flow statement of a financial statement calculated at a certain point in time Based on real cash flows 82

83 Deriving company valuation, company ratios and financial ratios 4 Items of a balance sheet: Assets Current assets - Property, plant and equipment - Accounts receivables Fixed assets Liabilities Liabilities - Accounts payable - Financial liabilities Provisions Equity Other liabilities 83

84 Deriving company valuation, company ratios and financial ratios 5 Items of a profit and loss account/income statement: Revenues + /./. Other revenues / expenses from business activities./. Depreciation Earnings before interest, taxes, depreciation and amortisation (EBITDA) Operating profit before interest / operating profit before interest and taxes (EBIT)./. / + Financing expenses / financing income Operating profit before taxes (EBT) + /./. Other revenues / expenses Profit before taxes./. Taxes from revenues and profit Profit after taxes Note: no capital expenditures in profit and loss accounts! For loans only interest but no repayment is shown in the profit and loss account! 84

85 Deriving company valuation, company ratios and financial ratios 6 Items of cash flow statement and calculation: Income./. Operating expenditures (OpEx)./. Taxes Cash flow from operations./. Capital expenditures (CapEx) Cash flow from investments./. / + Interest payments / drawdowns./. / + capital repayments / capital increases Cash Flow from financing Sum: positive / negative total cash flow (net cash flow) Note: cash flow statement and calculation contains - different from the P+L no depreciation (no liquidity effect) but capital expenditures Capital repayments and interest payments have a liquidity effect 85

86 Ratio analysis 1: Overview of ratios Types of ratios Company ratios Return ratios investor Financial ratios lender 86

87 Ratio analysis 2: Company ratios Balance sheet ratios Equity ratio/ debt ratio Working capital Liquidity Current ratio (Pure) liquidity 87

88 Ratio analysis 3: Company ratios P&L ratios Margins Interest cover(age) ratio Personnel intensity Material intensity EBIT/ EBIT margin EBITDA/ EBITDA margin Profit/ profit margin 88

89 Ratio analysis 4: Company ratios Cash flow ratios Renturn ratios Free cash flow (derived from P&L) Net cash flow (derived from cash flow calculation) Equity return Return on capital employed (ROCE) 89

90 Ratio analysis 5: Return ratios for an investment Return ratios for equity investment Strategic investors Financial investors Capital market Net present value Internal rate of return Equity multiple P&L multiple 90

91 Ratio analysis 6: Financial ratios Financial ratios Acquisition financing Project financing Repayment Interest Equity Debt service Repayment Equity 91

92 Company valuation 1: Terminology Assets Balance sheet perspective Liabilities Valuation perspective Current assets - Property, plant and equipment - Accounts receivables Fixed assets Liabilities - Accounts payable - Financial liabilities Provisions Equity (book values!) Hidden reserves / liabilities with book values pursuant to German Commercial Code (HGB) = goodwill / badwill Enterprise value, but: - Instead of book values market values of assets are used Note: Terminology not unified Company valuation most often not derived from balance sheet but based on discounted cash flow (DCF)method Equity value, but: - Instead of book values market values of assets are used - Instead of deduction of debt deduction of net debt = debt./. cash and cash equivalents 92

93 Company valuation 2: So-called equity bridge Discounted cash flow (discounted at weighted cost of equity and debt) enterprise value interest bearing debt cash & cash equivalents net debt equity value Equity value provides orientation for purchase price of 100% of the assets/the shares (without purchase price adjustment) 1 Enterprise value; cash and debt free 2./. Interest bearing debt * I.a. oans * I.a. pension liabilities 3 + Liquid assets (cash, account balances and securities [cash and cash equivalents]) 4 = Net debt 5 = Equity value Thereafter: positive or negative deviation of net working capital 93 93

94 Bibliography 1: Due diligence Wolfgang Berens, Hans U. Brauner and Joachim Strauch (eds.), Due Diligence bei Unternehmensakquisitionen, 6th ed. (Stuttgart 2011) 94

95 Bibliography 2: Financial statements and analysis Adolf G. Coenenberg, Axel Haller and Wolfgang Schultze, Jahresabschluss und Jahresabschlussanalyse, 22th ed. (Stuttgart 2012) The Economist, Guide to Analysing Companies, 4th ed. (London 2005) Chris Higson, Financial Statements: Economic Analysis and Interpretation, 2nd ed. (London 2012) Terry Smith, Accounting for Growth. Stripping the Camouflage from Company Accounts, 2nd ed. (London 1996) Jay Taparia, Understanding Financial Statements. A Journalist s Guide (Oak Park 2004) Ulrich Wiehle, Michael Diegelmann, Henryk Dieter, Peter Noel Schömig and Michael Rolf, Kennzahlen für Investor Relations (Wiesbaden 2004) 95

96 Bibliography 3: Financial mathematics The Economist, Numbers Guide. The essentials of business numeracy, 5th ed. (London 2003) Michael Blastland and Andrew Dilnot, The Tiger That Isn t. Seeing Through a World of Numbers (London 2007) Karl Bosch, Finanzmathematik, 7th ed. (Munich 2007) Thomas Heidorn, Finanzmathematik in der Bankpraxis. Vom Zins zur Option, 4th ed. (Wiesbaden 2002) John C. Hull, Options, Futures and Other Derivatives, 5th ed. (New York 2002) Lutz Kruschwitz, Finanzmathematik. Lehrbuch der Zins-, Renten-, Tilgungs-, Kurs- und Renditerechnung, 5th ed. (Munich 2010) 96

97 Bibliography 4: Cash flow modelling Simon Benninga, Financial Modeling, 4th ed. (Cambridge/Mass. 2014) Edward Bodmer, Corporate and Project Finance Modeling: Theory and Practice (Hoboken/New Yersey 2015) Willis E. Eayrs, Dietmar Ernst and Sebastian Prexl, Corporate Finance Training. Planung, Bewertung und Finanzierung von Unternehmen, 2nd ed. (Stuttgart 2011) Paul Pignataro, Financial Modeling and Valuation: A Practical Guide to Investment Banking and Private Equity (Hoboken/New Jersey 2013) Sebastian Prexl, Michael Bloss, Dietmar Ernst, Christoph Haas, Joachim Häcker and Bernhard Röck, Financial Modeling (Stuttgart 2010) Joshua Rosenbaum/Joshua Pearl, Investment Banking. Valuation, Leveraged Buyouts, and Mergers & Acquisitions, 2nd ed. (Hoboken/New Jersey 2013) 97

98 Bibliography 5: Cash flow modelling Jan-Hendrik Röver, Cash-Flow-Modell, in: in: Ulf R. Siebel, Jan-Hendrik Röver and Christian Knütel (eds.), Rechtshandbuch Projektfinanzierung und PPP, Cologne, 2nd ed. (München 2008), pp (with further references) John Tennent and Graham Friend, The Economist Guide to Business Modelling, 2nd ed. (London 2005) 98

99 Bibliography 6: Company valuation Thomas E. Copeland, Tim Koller and Jack Murrin, Valuation. Measuring and Managing the Value of Companies, 3rd ed. (New York 2000) Thomas E. Copeland, Tim Koller and Jack Murrin, Unternehmenswert. Methoden und Strategien für eine wertorientierte Unternehmensführung, 2nd ed. (Frankfurt am Main 2002) Aswath Damodaran, Damodaran on Valuation. Security Analysis for Investment and Corporate Finance, 2nd ed. (London 2006) Aswath Damodaran, The Dark Side of Valuation. Valuing Young, Distressed, and Complex Businesses, 2nd ed. (New York 2009) Duff & Phelps, 2015 Valuation Handbook. Guide to Cost of Capital (Hoboken/New Jersey 2015) Until 2013: Ibbotson Stocks, Bonds, Bills and Inflation (SBBI) Valuation Yearbook Duff & Phelps, 2015 Valuation Handbook Industry Cost of Capital (Hoboken/New Jersey 2015) 99

100 Bibliography 7: Company valuation Duff & Phelps, 2015 International Valuation Handbook Guide to Cost of Capital (Hoboken/New Jersey 2015) Duff & Phelps, Valuation Handbook Risk Premium ToolKit (web-based model) Jochen Drukarczyk and Andreas Schüler, Unternehmensbewertung, 6th ed. (Munich 2009) Willis E. Eayrs, Dietmar Ernst and Sebastian Prexl, Corporate Finance Training. Planung, Bewertung und Finanzierung von Unternehmen, 2nd ed. (Stuttgart 2011) Holger Fleischer and Rainer Hüttemann (eds.), Rechtshandbuch Unternehmensbewertung (Cologne 2015) Joshua Rosenbaum and Joshua Pearl, Investment Banking. Valuation, Leveraged Buyouts, and Mergers & Acquisitions, 2nd ed. (Hoboken/New Jersey 2013) 100

101 Bibliography 8: Investing Klaus Spremann and Dietmar Ernst, Unternehmensbewertung. Grundlagen und Praxis, 2nd ed. (Munich 2010) Benjamin Graham and David Dodd, Security Analysis (preface by Warren Buffett), 6th ed. (New York 2008) Benjamin Graham, The Intelligent Investor (updated with new commentary by Jason Zweig) (New York 2006) David F. Swensen, Pioneering Portfolio Management. An Unconventional Approach to Institutional Investment (New York 2000) 101

102 Bibliography 9: Corporate Finance Jonathan Berk and Peter DeMarzo, Corporate Finance, 3rd ed. (Harlow 2013) Christian Bleis, Grundlagen Investition und Finanzierung. Lehr- und Arbeitsbuch, 3rd ed. (Munich 2011) Richard A. Brealey and Stewart C. Myers, Principles of Corporate Finance, 11th ed. (New York 2013) Richard A. Brealey, Stewart C. Myers and Alan J. Marcus, Fundamentals of Corporate Finance, 7th ed. (New York 2011) Aswath Damodaran, Applied Corporate Finance, 3rd ed. (New York 2010) Jochen Drukarzcyk and Sebastian Lobe, Finanzierung. Eine Einführung, 11th ed. (Stuttgart 2014) 102

103 Bibliography 10: Corporate Finance Justin Fox, The Myth of the Rational Market (New York 2009) Chris Higson, Business Finance, 2nd ed. (London, Dublin, Edinburgh 1995) Louis Perridon, Manfred Steiner and Andreas Rathgeber, Finanzwirtschaft der Unternehmung, 16th ed. (Munich 2012) Klaus Spremann, Finance, 4th ed. (Munich 2010) Stephen Valdez and Philip Molyneux, An Introduction to Global Financial Markets, 7th ed. (2012) Günter Wöhe, Jürgen Bilstein, Dietmar Ernst and Joachim Häcker, Grundzüge der Unternehmensfinanzierung, 11th ed. (Munich 2013) 103

104 Introduction Part 1: Fundamentals of investment banking and corporate finance 1. The notions of investment banking and corporate finance 2. The story of corporate finance 3. Economic fundamentals of corporate finance 4. General framework 5. Legal sources 6. Due diligence 6.1 Business due diligence and company valuation Functions of due diligence Types of due diligence Documents for financial due diligence Documents for other types of due diligence Company valuation Financial ratio analysis 6.2 Legal due diligence and agreement drafting Documents for legal due diligence Key issues of legal due diligence 104

105 Documents for legal due diligence 1 Individual examination Overview of issues for company acquisition Corporate governance Financial statements Assets Also of importance for legal due diligence! Real estate Mobile equipment Intellectual property rights (in particular industrial property rights such as patents) 105

106 Documents for legal due diligence 2 Contracts Obligations Business relationships Risk mitigation Labour law Public law, environmental issues Litigation risks 106

107 Introduction Part 1: Fundamentals of corporate finance Part 2: Fundamentals of German law 7. Overview German legal methodology 8. Types of methodological arguments 9. Transfer of a legal position (e.g. ownership) 10. Corporate governance of private limited liability companies an public limited liability companies 11. Structure of a lawsuit and a claim (including proprietary claims) Part 3: Specific types of transactions 107

108 Overview German legal methodology Application of law (Anwendung) Interpretation of law (Auslegung) Further development of the law (Rechtsfortbildung) - Within the act (praeter legem) - Beyond the act (contra legem) 108

109 Types of methodological arguments 1 Legal nature of logic and jurisprudence (legal methodology) Norms of customary law Robert Alexy: related ( zugeordnete ) norms For laws of thought (de lege lata and de lege ferenda) Law of identity: a word needs to have the same meaning within one argument Law of non-contradiction: two or more contradictory statements cannot both be true in the same sense at the same time; one is necessarily false Law of the excluded middle (tertium non datur): for every proposition either its positive or negative form is true Principle of sufficient reason: everything must have a reason or a cause 109

110 Types of methodological arguments 2 Reasoning with laws of thought (logical conclusion) Argumentum ad absurdum/reductio ad absurdum Proof by contradiction; it shows that a statement is true because its denial leads to a false or absurd result Follows from the law of non-contradiction Incorrect conclusions (de lege lata and de lege ferenda) Fallacy of four terms/shift in terminology (quaternio terminorum) Occurs when a syllogism has four (or more) terms rather than the requisite three Whether this fallacy is given in law is a matter of value judgement; it depends on whether rather the relativity of legal notions or the unity of the legal system is underlined Violation of the law of identity 110

111 Types of methodological arguments 3 Circular argument (petitio principii): The reasoner begins with what he is trying to end with Circular argument in particular if a mere deduction from notions is done (example: jurisprudence of notions [Begriffsjurisprudenz]) Violation of the principle of sufficient reason 111

112 Types of methodological arguments 4 Reasoning de lege lata Legal source and (complete or incomplete) legal norm Applicability of a norm In particular competing legal provisions (Konkurrenzen) Application of methodological rules Note multitude of national, foreign and international methodological rules Applicability is rarely stated explicitely! 112

113 Types of methodological arguments 5 Application of law Application of law in general Begriffsbildung (i.a. type [Typus]) and definition Rules: subsumtion Principles: balancing Particular norm structures (indeterminate legal notion [unbestimmter Rechtsgriff], blanket clause [Generalklauseln], flexible system [bewegliches System], framework rights [Rahmenrechte]) Interpretation of law Purpose of interpretation Interpretation of the wording Systematic interpretation 113

114 Types of methodological arguments 6 Historical interpretation Teleological interpretation Interpretation in accordance with the constitution (grundrechtskonforme Auslegung im engeren Sinne) Interpretation in accordance with European law (europarechtskonforme Auslegung im engeren Sinne) Primary law Secondary law Other methods of interpretation Economic analysis of law? Influence of factual consequences? Interpretation in accordance with comparative law Auslegung [= reasoning]? Ranking of methods of interpretation? 114

115 Types of methodological arguments 7 Further development of the law Further development of the law within the act (praeter legem) Legitimacy/legality der gesetzesimmanenten Rechtsfortbildung Analogy Teleological reduction Teleological extension Other forms of teleological transformation Interpretation in accordance with the constitution (grundrechtskonforme Auslegung im weiteren Sinne) Interpretation in accordance with European law (europarechtskonforme Auslegung im weiteren Sinne)» Primary law» Secondary law 115

116 Types of methodological arguments 8 Further development of the law beyond the act (contra legem) Legitimacy/legality of further development of law beyond the act Innovation (legal theories and legal discoveries) Following the examination of a complete norm: application of other norms (as defined by legal doctrine), i.e. start again at the beginning of argumentation de lege lata Reasoning de lege ferenda Economic analysis of law Influence of factual consequences Reasoning with comparative law Innovation (legal theories and legal discoveries) 116

117 Transfer of a legal position (e.g. ownership) English law No distinction between personal contractual relationship and contract on transfer of title Seller Contract of sale Buyer German law Distinction between personal contractual relationship and contract on transfer of title Defences against contractual relationship have no influence on legal validity of contract on transfer of title Seller Contract of sale ( 433 BGB) Contract on transfer of title (e.g. 929 BGB) Buyer 117

118 Corporate governance of private limited liability companies and public limited liability companies English law One tier/unitary/monistic system: board of directors Executive members Non-executive members German law Two tiers/dualistic system: Board of executive directors (managing board) (Vorstand) Supervisory Board (Aufsichtsrat) 118

119 Legal drafting technique 1 Legal positions Claim [Anspruchsgrundlage] (wording: can claim [ kann verlangen ], is liable [ ist verpflichtet ]) Personal claims Proprietary (in rem) claims (Proprietary) enforcement right (Verwertungsrecht) Right to influence a legal relationship by unilateral declaration (Gestaltungsrecht) ( 119 (1), (2), 120, 123 (1) BGB) 119

120 Legal drafting technique 2 Counter-positions: defences (Einwendungen) Invalidating defence Terminating defence Refusing defence Legal definitions Fully written out Definition in brackets 120

121 Legal drafting technique 3 Rules of interpretation (interpretation of contractual declarations) Statutory Customary/judge made law Legal references ( applies mutatis mutandis [analogously] ; gilt entsprechend ) To other provisions, e.g (1) BGB To other claims Only consequence of the claim (normal case!) All requirements of the claim (e.g. 951 (1) sentence 1 in connection with 812 et seqq. BGB) 121

122 Legal drafting technique 4 To individual requirements of a norm or to consequences of a norm, e.g. good faith in 932 (1) sentence 1 BGB Note: mutatis mutandis = analogous application Legal fictions/irrebuttable presumptions (assume what in reality is not the case) Always irrebuttable/irrefutable (unwiderleglich), e.g. 142 (1) (ex tunc!), 892 (1) sentence 1, 1138 case 1 BGB 122

123 Structure of a lawsuit and a claim (including proprietary claims) Admissability of a law suit (Zulässigkeit einer Klage) Justification of a law suit (Begründetheit einer Klage) Claim(s) Creation of claim Applicability of norm Norm requirements Invalidating defence Termination of claim: terminating defences Enforceability claim: refusing defences Legal consequences 123

124 Introduction Part 1: Fundamentals of corporate finance Part 2: Fundamentals of German law Part 3: Specific types of transactions 12. Mergers & Acquisitions 12.1 Private transactions 12.2 Capital markets transactions [13. Private Equity] 14. Acquisition financing 14.1 Bank financing 14.2 Capital markets financing 15. Project financing 15.1 Bank financing 15.2 Capital markets financing 16. Securitisation 124

125 Part 3: Specific types of transactions 12. Mergers & Acquisitions 12.1 Business considerations General business considerations Negotiation techniques for asset or share deals Transaction management 12.2 Pre-deal negotiations Pre-deal arrangements Legal consequences of pre-contractual obligation breaches Contract drafting 12.3 Legal issues of asset and share deal Introduction Asset deal Share deal Final issues Appendix: Bibliography 125

126 Business considerations 1 Different types of buyers with different investment goals Strategic investors, management (management buy out = MBO) / employees Long-term investment goal Financial investors in a larger sense (private equity funds, hedge funds, institutional investors) Note also capital market with its focus on shareholder value 126

127 Business considerations 2 Value oriented growth strategy for company sales Strategic investors, management, employees Horizontal (= same level of the value chain) integration Synergies Vertical (= different levels of the value chain) integration Diversification Financial investors 127

128 Business considerations 3 Divestment strategy Strategic investors, management, employees Sale of assets Sale of a business area Sale of the whole enterprise Financial investors Sale as for other types of investors (mostly the whole enterprise) as implementation of the intended exit Division of a company in separate business areas and subsequent sale ( raider strategy ) 128

129 Business considerations 5 Value creation by financial strategy (structure of the liability side of the balance sheet) Increase of leverage Sale of shares by shareholder withouth capital increase (to strategic investor, management, financial investor or other investors) Participation by way of capital increase In practice only ca. 50% of acquisitions lead to value creation for the acquiring company 129

130 Negotiation techniques for asset or share deals Individual negotiations (trade sale) Traditional process Auction Limited auction Unlimited auction Competition between several potential investors influences price finding process more than the results of a prior company valuation Public takeover Note economic auction theory! Process pursuant to German Securities Acquisitions and Takeover Act (WpÜG) (public takeover offer) 130

131 Transaction management Mostly very tight time table (which neccessarily lead to compromise with respect to buyer s due diligence) 131

132 Part 3: Specific types of transactions 12. Mergers & Acquisitions 12.1 Business considerations 12.2 Pre-deal negotiations Pre-deal arrangements Legal consequences of pre-contractual obligation breaches Contract drafting 12.3 Legal issues of asset and share deal Introduction Asset deal Share deal Final issues Appendix: Bibliography 132

133 Pre-deal arrangements 1 Mandate agreement Confidentiality agreement Exclusivity agreement Letter of intent Term sheet 133

134 Pre-deal arrangements 2 Mandate agreements with M&A advisers, investment banks, legal and tax advisers etc. Legal nature Agency agreement focused on services (auf Dienstleistung gerichteter Geschäftsbesorgungsvertrag), 675, 611 et seqq. BGB 134

135 Pre-deal arrangements 3 Confidentiality/non-disclosure agreement), 311 (1) BGB Purpose Protection of seller against Intention to sell to become known and Use of information gained by potential buyer Contents Obligation to keep information confidential Definition of confidential Informationen In practice mostly no precise definition Definition of persons who have to keep confidentiality 135

136 Pre-deal arrangements 4 Exceptions Information already known by recipient Publicly available informationen Request by court or administrative authority Auditor of the information recipient Written confirmation by disclosing party 136

137 Pre-deal arrangements 5 Documenting material which shall be kept confidential Obligation of potential buyer to return or delete information received upon request Penalty clause for the case of a violation by the potential buyer, 339 BGB Relationship with obligation to keep confidentiality (Erfüllungsanspruch) or claim in damages, 280 (1) BGB has to be clarified Note: no penalty clauses under English law! (liquidated damages) Without time limit / with time limit, 163, 158 BGB Typically 1-2 years 137

138 Pre-deal arrangements 6 Confidentiality agreement may be contained in other contractual documents (e.g. mandate agreement) Provides only limited protection, in particular if unprotected know how or internal business secrets (e.g. margins) are disclosed to a potential buyer who is a competitor In practice disclosure in several steps Diligent selection of potential buyers, possibly exclusion of certain competitors Teaser Investment memorandum Data room Initial (non-binding) offer 138

139 Pre-deal arrangements 7 Full due diligence Final ( binding ) offer Sometimes confirmatory due diligence Contract negotiations and signing Contact of buyer to suppliers and clients 139

140 Pre-deal arrangements 8 Exclusivity agreement, 311 (1) BGB Purpose: Transaction protection for the benefit of the potential buyer (also with a view to transaction costs) Contents Exclusivity obligation of the seller = negotations and agreements with third parties not to be undertaken Potential buyer obligated not to make contact with directors and not to poach top management during contract negotations Sometimes remuneration for seller in return for exclusivity 140

141 Pre-deal arrangements 9 Sometimes remuneration for potential buyer if contract negotiations collapse (break-up fee) Penalty clause for the case of a violation, 339 BGB Confidentiality agreement may be contained in other contractual documents Offers the beneficiary in case of breach only limited protection since proof is difficult 141

142 Pre-deal arrangements 10 Letter of intent / letter of interest / LoI, not 311 (1) BGB, only 311 (2) No. 2 BGB Declaration of the potential buyer, to have the serious intention to negotiate with a view to sign an agreement Often indication of enterprise value/equity value/purchase price Sometimes further details on transaction process (e.g. internal approvals of potential buyer) Provisos of potential buyer 142

143 Pre-deal arrangements 11 Legal effects No legally binding contract because intention to be bound (Rechtsbindungswille) is excluded Creation of a special legal relationship (Sonderverbindung; relationship of trust [Vertrauensverhältnis]) by initiation of contract negotiations (Vertragsanbahnung), 311 (2) No. 2 BGB Breach of duty by buyer if contract negotations are terminated without an objective reason Therefore, claim in damages be seller pursuant to 280 (1), 311 (2) No. 1, 241 (2) BGB (culpa in contrahendo) 143

144 Pre-deal arrangements 12 Whether the border to a legally binding contract (intention to be bound; Rechtsbindungswille) has been passed has to be determined by interpretation of the parties declarations In practice no legally binding contract because intention to be bound (Rechtsbindungswille) is excluded explicitely 144

145 Pre-deal arrangements 13 Term sheet, not 311 (1) BGB, only 311 (2) No. 2 BGB For complex transactions the transaction structure is agreed for the key points before specific agreements are negotiated Practical principle: first structure (the term sheet) than the contract No legally binding contract Intention to be bound (Rechtsbindungswille) is excluded explicitely in the term sheet To avoid doubts about the legal nature of the term sheet (in particular if there are deviations between term sheet and main contract) the relationship should be clarified in the main contract 145

146 Legal consequences of pre-contractual obligation breaches 1 Insufficient information by the seller Wrong information Incomplete information or Omitted information despite duty of disclosure of the buyer ( concealment ) about the quality of the company of the sold shares Which are relevant for the signing and the contents of the sale and purchase agreement 146

147 Legal consequences of pre-contractual obligation breaches 2 Contract / quasi-contract Tort Primary claims seller./. buyer Secondary claims Käufer./. Verkäufer Claim to payment of purchase price, 453 (1) case 1 or 2, 433 (2) case 1 BGB / sale agreement Defence: Avoidance, 142 (1), 123 (1) case 1 BGB Defence: Rescission, 437 No. 2 case 1 I.a. claim in damages, 453 (1) case 1 or 2, 437 No. 3 case 1, 434 (1), 280 (3), 281 (1), (2), 280 (1), 440 BGB Claim in damages (c.i.c.), 280 (1), 311 (2) No. 2, 241 (2) BGB Claim in damages, 823 (2) sentence 1 in connection with 263 StGB Claim in damages, 826 BGB 147

148 Legal consequences of pre-contractual obligation breaches 3 Pre-contractual phase Conclusion sale agreement, 433 BGB Transfer of risk, 453, 446 = transfer date under sale agreement Prevailing opinion in principle: [Initiation of contract negotiations (Vertragsanbahnung), 311 (2) No. 1 BGB] Contract negotiations (Vertragsverhandlung), 311 (2) No. 2 BGB Claim in damages for breach of pre-contractual obligations (c.i.c.), 280 (1), 311 (2) No. 2, 241 (2) Claim in damages for breach of contract, 280 (1) Claim in damages for breach of warranty, 453 (1) case 1 or 2, 437 No. 3 case 1, 434 (1), 280 (3), 281 (1), (2), 280 (1), Exceptions: No quality deficit (Beschaffenheitsmangel) Intent (Arglist and Vorsatz) Duties to provide advice Claim in damages for breach of pre-contractual obligations (c.i.c.), 280 (1), 311 (2) No. 2, 241 (2) 148

149 Contract drafting 1 Contract drafting builds on the results of the due diligence In particular financial and legal due diligence Diagramme of contractual relationships Idea summary ; economic and legal analysis of interests Development of a negotiation strategy, e.g. negotiation packages Development of a term sheet Focus on key points which are economically of importance to the parties spend relatively more time for thinking through these points! 149

150 Contract drafting 2 Wording of contract Focus on key points which are economically of importance to the parties spend relatively more time for thinking through these points! Development of a complete contract on the basis of publically available model contracts or internally developed master agreements For international financings pursuant to English law recourse to model contracts of the British Loan Market Association (LMA) For international financings pursuant to the law of New York recourse to the model contracts of the US American Loan Syndications and Trading Association (LSTA) 150

151 Bibliography 1: Negotiation tactics Robert Fisher, William Ury and Bruce Patton, Getting to Yes. Negotiating Agreement Without Giving In, 2nd ed. (New York 1992) ( Harvard method ) Mark H. McCormack, What They Don t Teach You at Harvard Business School (London 1994) Mark H. McCormack, What They Didn t Teach Me at Yale Law School. The Terrible Truth About Lawyers (Glasgow 1988) Mark H. McCormack, What They Still Don t Teach You at Harvard Business School (New York 2001) Howard Raiffa, The Art and Science of Negotiation. How to Resolve Conflicts and Get the Best Out of Bargaining (Cambridge MA 1982) 151

152 Bibliography 2: Game theory Michael Bitz, Entscheidungstheorie (Munich 1981) Adam M. Brandenburger and Barry J. Nalebuff, Co-Opetition (1998) Strategy textbook on the basis of game theory Avinash K. Dixit and Barry J. Nalebuff, Thinking strategically (New York 1993) = Spieltheorie für Einsteiger (1997) Introduction to game theory 152

153 Bibliography 3: Contract drafting 1 (Germany) Benno Heussen and Gerhard Pischel (eds.), Handbuch Vertragsverhandlung und Vertragsmanagement. Planung, Verhandlung, Design und Durchführung von Verträgen, 4th ed. (Cologne 2014) Abbo Junker and Sudabeh Kamanabrou, Vertragsgestaltung (Munich 2002) Gerrit Langenfeld, Einführung in die Vertragsgestaltung (Munich 2001) Gerrit Langenfeld, Vertragsgestaltung, 2nd ed. (Munich 1997) Eckard Rehbinder, Die Rolle der Vertragsgestaltung im zivilrechtlichen Lehrsystem, in: AcP vol. 174 (1974), pp Gerald Rittershaus and Christoph Teichmann, Anwaltliche Vertragsgestaltung. Methodische Anleitung zur Fallbearbeitung im Studium, 2nd ed. (Heidelberg 2003) Christoph Teichmann, Vertragsgestaltung durch den Rechtsanwalt - Grundzüge einer Methodik der zivilrechtlichen Fallbearbeitung, in: JuS 2001, pp. 870 et seqq., 973 et seqq., 1078 et seqq., 1181 et seqq., JuS 2002, pp. 40 et seqq. 153

154 Bibliography 4: Contract drafting 2 (England & Wales) Stuart G. Bugg, Contracts in English: an introductory guide to understanding, using and developing 'Anglo-American' style contracts, 2nd ed. (Munich 2013) Bryan A. Garner, The Elements of Legal Style, 2nd ed. (Oxford, New York 2002) Rupert Haigh, Legal English, 3rd ed. (London 2012) Gerhard Pischel, Vertragsenglisch für Management und Berater (Cologne 2013) Alison Riley, English for Law, 2nd ed. (Harlow 1995) Alison Riley/Patricia Sours, Common Law Legal English and Grammar. A Contextual Approach, 2nd ed. (Oxford 2014) David Riley, Check Your English Vocabulary for Law, 3rd ed. (London 2006) 154

156 Types of sale 1 Asset deal Acquisition of assets (so-called asset deal ) without the legal entity Legal nature In contrast to acquisition of single things or rights (einzelgegenständlichen Sach- und Rechtskauf) a multitude of assets is acquired Sale (Kauf) of other objects ( sonstige Gegenstände ), 453 (1) case 2 BGB No combination of a sale of things and rights In proprietary terms singular succession Note principle of specifity in (German) property law = specific transfers of all assets which belong to the company Note unit of things (example: encyclopedia, stamp collection) Often assumption of liabilities by purchaser 156

157 Types of sale 2 A (shareholder) Shareholding A GmbH (seller) 453 (1) case 2, , 925 / 929 / 398 / 413, 398 usw. B (buyer) 157

158 Types of sale 3 Share sale Acquisition of shares (so-called share deal ) with legal entity Legal nature Sale of rights, 453 (1) case 1 BGB Issue: acquisition of all or nearly all shares ( company acquisition by way of share deal ) Canaris: sale (Kauf) of other assets, 453 (1) case 2 BGB MüKo HGB/Lieb: sale of rights, 453 (1) case 1 BGB In any event for statutory warranty liability the legal provisions on warranty liability for an asset deal are applied 158

159 Types of sale 4 A (shareholder) Shareholding 453 (1) case 1/2, 433 BGB, 15 (4) sentence 1 GmbHG 413, 398 BGB, 15 (3) GmbHG B (buyer) A GmbH Note however: termination rights (Kündigungsrechte) in case of change of shareholder (change of control) 159

160 Types of sale 5 Legal liability for breach of warranty Share deal Asset deal Simple share sale Sale of all or nearly all shares Effect on the company Single asset Sale of rights, 453 (1) case 1 No (direct) liability for defects in the company Source: Stephan Lorenz Company sale, 453 (1) case 1 / 2 BGB Defect in the quality ( 434 BGB) of the company: 437 BGB Violation of information obligations (other circumstances than defect in the quality): 280 (1), 241 (1), 311 (2) BGB Sale of things, 433 BGB No (direct) liability for defects in the company 160

161 Types of sale 6 Advantages asset deal Selection of assets Selection of liabilities E.g. in principle asset deal if insolvent company is acquired In exceptional cases asset deal used to transfer business to rescue company (Auffanggesellschaft); subsequently share deal with respect to shares in rescue company However, Liability risks if firm (= company name) is continued ( 25 HGB) Legal transfer of employment agreements ( employees ) ( 613a BGB) 161

162 Types of sale 7 Advantages share deal Documentation and transfer more simple In principle no effect on the company s contracts Exceptions: change of control clauses Loss carry forwards of the company previously remained intact Meanwhile termination of loss carry forward if share deal is undertaken, 8c KStG Approvals which are provided to the holder are kept intact In practice most common form 162

163 Types of sale 8 Possibly preparation of asset or share deal Asset deal Share deal Isolation of a business area into separable part of business operations (Teilbetrieb) Separation of a company pursuant to company law; creation of a new company ( spin-off, carve out) Overview Split-up (Aufspaltung), 123 (1) UmwG Split-off (Abspaltung), 123 (2) UmwG Hive down (Ausgliederung), 123 (3) UmwG 163

164 Types of sale 9 Split-up (Aufspaltung), 123 (1) UmwG Prior to split-up Post split-up Shareholder A Shareholder B Shareholder A Shareholder B Company X Company Y Company Z 164

165 Types of sale 10 Split-off (Abspaltung), 123 (2) UmwG Prior to split-off Post split-off Shareholder A Shareholder B Shareholder A Shareholder B Company Y Company Y Company Z 165

166 Types of sale 11 Hive down (Ausgliederung), 123 (3) UmwG Prior to hive down Post hive down Shareholder A Shareholder A Company X Company X Company Y 166

167 Terminology: company sale In German notion Unternehmens kauf (as generic term for asset deal and share deal) covers mostly both contractual and proprietary agreements of a sale as well as other agreements This is influenced by the missing distinction between contractual and proprietary agreements in Anglo-American laws ( sale ) In German it would be better to speak about Unternehmens erwerb or -veräußerung ; these notions cover both contractual and proprietary issues However, the notion Unternehmens kauf is now well established in German 167

168 Legal levels and considerations 1 Legal levels Pre-deal arrangements (in particular LoI and term sheet) sometimes option/binding agreement to conclude a sales contract (Vorvertrag auf Abschluss eines Kaufvertrags), 311 (1) BGB Company sale agreement Asset deal: asset purchase agreement (APA) Share deal: share sale and purchase agreement (SPA) Under German law: proprietary transfer contracts or legal transfer General transfer (Gesamtübertragung) of a company s assets is not possible under German law Note: also under English law acts required to perform a proprietary transfer are required (but no proprietary agreement separate from the sale and purchase agreement) 168

169 Legal levels and considerations 2 Sometimes other agreements, e.g. Warranty & Indemnity Insurance Tax Indemnity Insurance Litigation Buyout Insurance Legal considerations, i.a. Substantive law General part of the BGB Law of obligations, possibly of different countries (comparative law!) Property law, possibly of different countries (comparative law!) Company law Intellectual property law Conflict of laws rules International private law 169

170 Legal levels and considerations 3 Procedural law Public law National and possibly international law of civil procedure Arbitration National and possibly international insolvency law Competition law (US: antitrust law) National and possibly international tax law National and possibly international administrative law (in particular environmental law, construction law, immission control law, trade law, foreign trade law) Supervisory law (banking supervision law, insurance supervision law etc.) Complex company sales are undertaken by interdisciplinary legal teams 170

171 Legal levels and considerations 4 Company as object of a company sale Typically company (Kapitalgesellschaft) Private limited liability company (Gesellschaft mit begrenzter Haftung, GmbH) Public limited liability company (Aktiengesellschaft, AG) Societas Europaea (Europäische Gesellschaft, SE) Partnership (Personengesellschaft) General partnership (offene Handelsgesellschaft, OHG) Limited partnership (Kommanditgesellschaft, KG) Sole trader/merchant (Einzelkaufmann) Does not exist under English law! (no Commercial Code) 171

173 Analysis method sale agreement for asset deal - overview Claims Buyer Seller Structure Claims to delivery and transfer of ownership/title, 453 (1) case 2, 433 (1) sentence 1 case 1, 2 BGB (or sale agreement) Claims to purchase price payment and acceptance, 453 (1) case 2, 433 (2) case 1, 2 BGB (or sale agreement) Applicability Creation Termination Enforceability 173

174 Asset deal basics 1 The asset sale [as well as the share sale] are among the most difficult tasks of contract drafting. The (optional) legal provisions of the law of sales [in the Civil Code] are drafted with a view to the sale if individual assets and consumer protection. Walter Günther, Unternehmenskauf, in: Münchener Vertrags- Handbuch Below it is assumed that the assets of a private limited liability company (GmbH) are acquired 174

175 Asset deal basics 2 Various purposes of sale, e.g. Continuation of a business This is is assumed below Closing of a company by a competitor Acquisition of specific business assets E.g. assumption of order backlog only of a distressed company 175

176 Asset deal overview 1 Key topics Main obligations seller/buyer Ancillary obligations Seller s warranties & indemnities Other issues 176

177 Asset deal overview 2 Main components of obligations of sale and purchase agreement (for asset deal called asset purchase agreement = APA) (Kaufvertrag pursuant to German law) Contract parties Transaction purpose Main obligations Seller: [delivery and] transfer of ownership/title of assets Object of sale Inventory taking Support for interpretation of contract with respect to object of sale: independent warranty guarantees (selbständige Garantien)» Or quality declarations (Verkäufer- Beschaffenheitserklärungen) 177

178 Asset deal overview 3 Transfer date under sale agreement (kaufvertraglicher Übergangsstichtag) Buyer: Payment of purchase price [and acceptance of transaction object] Purchase price Determination of purchase price Ancillary obligations (obligations to act and to omit), e.g. Non-compete clause (prohibition on competition by seller) Notices 178

179 Asset deal overview 4 Seller s warranties (Verkäufer-Gewährleistung) Independent warranty guarantees (selbständige Garantien) Or quality declarations (Verkäufer- Beschaffenheitserklärungen) with respect to business (more precisely: its individual assets) Legal consequences Other provisions Provisions on limitation period (Verjährung) Costs 179

180 Asset deal overview 5 General provisions Signatures Annexes Choice of law Arbitration clause (Schiedsklausel) and/or jurisdiction clause (Gerichtsstandsklausel) Clause requiring written form (Schriftformklausel) Safeguarding and severability clause (salvatorische Klausel), 139 BGB Sometimes in additional initialling of all pages with the exception of signature page 180

181 Asset deal agreement object of sale ( assets ) 1 Assets on balance sheet, 90 Things Rights Assets Other assets not on balance sheet (without know how), e.g. depreciated assets Liabilities Liabilities Liabilities not on balance sheet, e.g. guarantees Legal relationships (receivables, other rights (e.g. right to influence a legal relationship by unilateral declaration), obligations) Relations (Umweltbeziehungen) Company s financials (financial statement etc.) Client base Company reputation Brand recognition Approvals Know-how without intellectual property rights protection Note: proprietary transfer rarely possible (but warranty guarantees) 181

182 Asset deal agreement object of sale ( assets ) 2 Certainty (Bestimmtheit) of the description of the object of sale in the sale and purchase agreement and the proprietary transfer contract Object of sale is essential part of the contract on which there must be agreement between the parties for there to be a contract Principle of certainty in (German) law of property Because of combination of sale and purchase agreement and proprietary transfer contract in most cases in one deed certainty also for sale and purchase agreement In addition preparation of proprietary transfer by detailed definition in sale and purchase agreement (Kaufvertrag) 182

183 Asset deal agreement transfer date under sale agreement Company is subject to dynamic changes Note sequence of events: Entering in sale and purchase agreement ( signing ) Transfer date under sale agreement (kaufvertraglicher Übergangsstichtag) ( effective date ) Often time of purchase price payment, in rem transfer ( closing ) = effective date Rarely closing effective date Signing of sale and purchase agreement Transfer Application > Competition process > Clearing t Preparation closing accounts Signing Rarely: effective date prior to closing Typically: closing = effective date -Purchase price payment -In rem transfer 183

184 Asset deal agreement purchase price 1 Purchase price is matter of negotiations Is based on company valuation Also a function of competition for company acquisition Purchase price arrangements Fixed purchase price, possibly in instalments or deferred payment (see below due date) Rare for large transactions However, negative purchase price which is paid by the seller in restructuring cases Purchase price formula (normal case) Cf. over (next slide) 184

185 Asset deal agreement purchase price 2 Discounted cash flow (discounted at weighted cost of equity and debt) enterprise value interest bearing debt cash & cash equivalents net debt equity value Equity value provides orientation for purchase price of 100% of the assets/the shares (without purchase price adjustment) 1 Enterprise value; cash and debt free 2./. Interest bearing debt * I.a. loans * I.a. pension liabilities 3 + Liquid assets (cash, account balances and securities [cash and cash equivalents]) 4 5 = Net debt = Equity value Thereafter: positive or negative deviation of net working capital

186 Asset deal agreement purchase price 3 Variable purchase price, i.e. Sometimes purchase price payment under condition precedent ( 158 (1) BGB) or different due dates, 271 (2) BGB Basic models Success-oriented improvement of purchase price (earn out) Warranty retention in trust account (Treuhandkonto) Purchase price improvement (earn out) Part of the purchase price is paid depending on future company success (typically in ordinary course of business) 186

187 Asset deal agreement purchase price 4 Vendor s loan, 488 BGB Can economically also be provided by payment of purchase price in instalments (= initial deferral [anfängliche Stundung], 311 (1) BGB of the purchase price payment) 187

188 Asset deal agreement purchase price 5 Possibly payment of money combined with provision of shares in buyer company Purchase price can only be paid in money pursuant to 453 (1) case 2, 433 (2) case 1 BGB If assets other than money are performed the transaction is (partly) barter (Tausch), 480, 433 BGB Possibly (partly) performance of assets (asset swap) Not sale but barter, 480, 433 BGB 188

189 Asset deal and statutory warranty liability overview 1 Breach of contract (e.g. information at contract formation) Pre-contractual breach of contract: c.i.c., 280 (1), 311 (2) No. 2, 241 (2) Breach of contract post contract formation Prior to transfer of risk: 280 (1) Post transfer of risk: 453 (1) case 2, 437/

190 Asset deal and statutory warranty liability overview 2 Pre-contractual phase Conclusion sale agreement, 433 BGB Transfer of risk, 453, 446 = transfer date under sale agreement Prevailing opinion in principle: [Initiation of contract negotiations (Vertragsanbahnung), 311 (2) No. 1 BGB] Contract negotiations (Vertragsverhandlung), 311 (2) No. 2 BGB Claim in damages for breach of pre-contractual obligations (c.i.c.), 280 (1), 311 (2) No. 2, 241 (2) Claim in damages for breach of contract, 280 (1) Claim in damages for breach of warranty, 453 (1) case 1 or 2, 437 No. 3 case 1, 434 (1), 280 (3), 281 (1), (2), 280 (1), Exceptions: No quality deficit (Beschaffenheitsmangel) Intent (Arglist and Vorsatz) Duties to provide advice Claim in damages for breach of pre-contractual obligations (c.i.c.), 280 (1), 311 (2) No. 2, 241 (2) 190

191 Asset deal and statutory warranty liability overview 3 Supplementary performance, 453 (1) case 2, 437 No. 1, 439 case 1 BGB (removal of deficit or delivery of object of sale without defect) Rescission, 453 (1) case 2, 437 No. 2 case 1, 440, 323, 326 (5) BGB, if defect is material ( 323 (5) sentence 2 BGB) or or or Reduction of purchase price, 453 (1) case 2, 437 No. 2 case 2, 441 (4) BGB Claim in damages, 453 (1) case 2, 437 No. 3 case 1, 280 (1), 440/ 281 (1), (2), 283, 311a BGB Reimbursement of expenses, 453 (1) case 2, 437 No. 3 case 2, 284 BGB and or Restitution (Rückabwicklung), 346 et seqq. BGB Claim in damages, 325, 280 et seqq. BGB ( Large ) claim in damages instead of performance for deficit damages, 280 (3), 281, 280 (1), 440 BGB, if deficit is material ( 281 (1) sentence 3 BGB) ( Small ) claim In damages for deficit damages, 280 III, 281, 280 I, 440 BGB, if defect is not material ( 281 I 3 BGB) Possibly claim in damages for related or consequential deficit damages (Mangelfolgeschäden), 280 I BGB / 823 I BGB 191

192 Asset deal and statutory warranty liability overview 4 Asset deal Effect on the company Single asset Company sale, 453 (1) case 2 BGB Defect in the quality ( 434 BGB) of the company: 437 BGB Source: Stephan Lorenz Violation of information obligations (other circumstances than defect in the quality): 280 (1), 241 (1), 311 (2) BGB Sale of things (Sachkauf), 433 No (direct) liability for defects in the company 192

193 Asset deal and statutory warranty liability assessment scheme 5 Applicability Issue: Applicability warranty liability to company sale (asset deal), 453 (1) case 2 BGB Minority opinion: (-) with company sale; rather culpa in contrahendo, 280 (1), 311 (2) No. 1, 241 (2) BGB In contradiction to wording of 453 BGB; in contradiction government justification; requires teleological reduction of 453 (1) case 2 BGB for which there is no lacuna in the act (Canaris, Handelsrecht, 8 n. 23) Prevailing opinion: company sale is sale of other assets (sonstiger Gegenstände), 453 (1) case 2 BGB Company and parts of the company (more precisely: the contained assets) can be other assets (sonstige Gegenstände) of the sale pursuant to 453 (1) case 2 BGB Sale law is in principle exclusively applicable from the time of transfer of risk, 434 BGB 193

194 Asset deal and statutory warranty liability 6 Uncertainties of statutory warranty liability Application of provisions to company sale by courts is not yet certain Regulatory differences between c.i.c., 280 (1) BGB and statutory warranty liability not major any longer with respect to statute of limitation (mostly 2 or 3 years) However: pursuant to c.i.c. no liability for unknown deficits (unerkannte Mängel) since seller does not act with fault (Vertretenmüssen) pursuant to 280 (1) BGB Uncertainty with respect to all relations of the company (Umweltbeziehungen) (indirect qualities of the company) Criterion to define warranty liability company as such (Unternehmen als solches) imprecise 194

195 Asset deal and statutory warranty liability 7 Fault for claim in damages if damage beyond performance (Schadensersatz neben der Leistung (i.a. related and consequential damages [Begleit- und Folgeschäden]) Many company sales can lead to quality or legal deficit and thus to legal consequences from 453 (1) case 2, 437 BGB Instruments are, however, not suited to company sale (in particular restitution (Rückabwicklung) of the company sale or damages instead of performance) Note: legislator opined positively on suitability of sales law following the reform; practice feels quite differently 195

196 Asset deal and seller s contractual warranty liability 1 Statutory warranty liability is replaced by contractual warranty system because the former is not appropriate; therefore, Exclusion of statutory claims and replacement by contractual liability system Quality and legal deficits, 453 (1) case 2, 437 BGB Breaches of duty Pre-contractual, 280 (1), 311 (2), (3), 241 (2) BGB Post formation of contract, before transfer of risk, 280 (1) BGB (non or bad performance) 196

197 Asset deal and seller s contractual warranty liability 2 Disruption of the foundation of the contract (Geschäftsgrundlage, clausula rebus sic stantibus), 313 BGB Statutory provisions related to rescission or termination of contract in another way, , 346 et seqq. BGB 197

198 Asset deal and seller s contractual warranty liability 3 Limitations of liability exclusion: Deception with intent (arglistige Täuschung), 123 BGB/ 453 (1) case 2, 444 case 1 BGB Damage with intent (vorsätzliche Schädigungen), 826, 823 (2) sentence 1 BGB in connection with 263 StGB Exclusion of liability pursuant to 453 (1) case 2, 444 case 2 BGB Legal nature: counter-defence of buyer Pursuant to 444 case 2 BGB the seller cannot raise a contratual liability exclusion to the extent that [ ] a quality guarantee has been assumed by the seller 198

199 Asset deal and seller s contractual warranty liability 4 Warranty declarations Quality/warranty guarantees, 453 (1) case 2, 443 Seller s quality declarations (Beschaffenheitserklärungen), 453 (1) case 2, 434 (1) sentences 1, 2 case 1; partly contractual legal consequences defined different from the act Independent guarantee (formerly 311 I) Non-independent guarantee (extension of seller s liability) 199

200 Asset deal and ancillary obligations (covenants) 1 Duties to act or omit (Handlungs- und Unterlassungspflichten), e.g. to terminate certain agreements or to enter into new agreements only with approval of the buyer Cases No notice to existing employees/employment of new employees Adjustments following transfer date under sale agreement Payments to the seller or buyer: payment to be made Liability of the seller or buyer: indemnity (Freistellung) (= claim) If the legal situation is unclear (e.g. potential tax liabilities which are not yet determined by a tax audit) Payment of expenses for the benefit of the buyer 200

201 Asset deal and ancillary obligations (covenants) 2 Obligation of the seller not to change or to bring about the company s quality until the transfer date under sale agreement Consequence of a breach: liability system agreed in the sale and purchase agreement Notices (continuation of company s name [Firma], notice to commercial register etc.) Public announcements (e.g. press announcement) Consequences of a breach: In principle liability system agreed in the sale and purchase agreement Penalty clause (Vertragsstrafe, 339 BGB) 201

202 Overview: company sale and value changes 1 Options to deal with legal and economic risks which may lead to value changes Fundamental principle: the general company risk arising from the business activity of the company is borne by the respective economic owner and holder of control, i.e. the seller for the past before and the buyer for the future after the transfer date under sale agreement (Walter Günther, Unternehmenskauf, in: Münchener Vertrags-Handbuch) 202

203 Overview: company sale and value changes 2 Due diligence Seller s most important tool! Condition subsequent to/covenant in the sale and purchase agreement, 158 (1) BGB: duty perform subsequent improvement (Nachbesserungsverpflichtung) for identified risks Purchase price Subsequent reduction of purchase price (separate subsequent calculation) Occurence of deficit and amount can be determined with certainty Variable purchase price, i.e. Success-oriented improvement of purchase price (earn out) Warranty retention in trust account (Treuhandkonto) 203

204 Overview: company sale and value changes 3 Warranty guarantees, 453 (1) case 2, 443 (1) case 1 BGB or seller s quality declarations (Verkäufer-Beschaffenheitserklärungen), 453 (1) case 2, 434 (1) sentences 1, 2 case 1 BGB create responsibility of the seller for non-existance or non-realisation of a risk (negative declarations; Negativerklärungen); consequence of a breach is either a contractual guarantee liability (Garantiehaftung) or a statutory warranty liability (Gewährleistungshaftung) Occurence of deficit possible, timing is not yet determined Indemnities (Freistellungsregelungen), 311 (1) BGB with respect to claims of third parties vis-à-vis the seller Indemnity of the buyer: occurence of the deficit is not certain Ultimately: assumption of risk by the buyer 204

205 Asset deal and other and general provisions 1 Other provisions Provisions on time limit (Verjährung) Contractual time limit Rescission (Rücktritt): short preclusion period (Ausschlussfrist) All claims: unitary time limit and in partciular clear definition of final date of time limit ( 163, 158 (2) BGB) Note: no shortening of statute of limitation in advance for intentional breach of duty (vorsätzliche Pflichtverletzung), 202 (1) BGB 205

206 Asset deal and other and general provisions 2 General provisions Possibly clarification of relationship with general terms and conditions (allgemeine Geschäftsbedingungen = AGB) Exclusion of pre-contractual arrangements Possibly choice of law (Art. 3 Rom I-VO, previously Art. 27 EGBGB old version) Note: national court applies always its own conflict of laws rules Certain shield can be achieved by arbitration clause since arbitration courts usually apply the law chosen by the parties 206

207 Asset deal and other and general provisions 3 Jurisdiction clause (Gerichtsstandsklausel), 38 ZPO or arbitration clause (Schiedsklausel) (also possible directly in sale and purchase agreement, 1029 (2) case 2 ZPO) Ad-hoc arbitration: Establishment without assistance of an external body Procedural law: ICC Rules, UNCITRAL Arbitration Rules Institutional arbitration Deutsche Institution für Schiedsgerichtsbarkeit (DIS), Cologne International Chamber of Commerce (ICC), Paris London Court of International Arbitration (LCIA) American Arbitration Association (AAA), New York City 207

208 Asset deal and other and general provisions 4 Clause on written form (Schriftformklausel) Safeguarding clause (salvatorische Klausel) Agreement remains valid even if it is partly not valid (Teilnichtigkeit), 139 BGB Replacement provisions (Ersetzungsregelung) for invalid contractual provisions Signatures (sometimes initialling of other pages) Annexes 208

209 In rem transfer of rights and asset deal Principle of specificity (Spezialitätsprinzip) Each asset is transferred by a separate agreement and thus transaction! Each type of asset follows its respective rules on transfer Movable thing, 929 et seqq. BGB Immovable thing, 873 (1) first half the sentence case 1, 925 BGB Receivable, 398 sentence 1 BGB Other rights, insb. 413, 398 sentence 1 BGB Receivables, rights and duties (see below) 209

210 Assessment scheme for proprietary transactions (dingliche Rechtsgeschäfte) Analysis method for transfers (Verfügungsaufbau) Analysis method for defences (Einwendungsaufbau) Extension of the analysis method for transfers Agreement (Einigung) Making public (Publizität): transfer of possession, substitute for transfer of possession, registration (not just filing) Still in agreement at time of completion of making public (Einigsein) (cf. 929 sentence 1 BGB/ 873 (2) BGB) Power (Berechtigung) Ownership Power of disposition (Verfügungsmacht) Possibly good faith acquisition Invalidating defences against in rem right Analysis method for transfers (requirements for acquisition, without invalidating defences) + No loss of in rem right + Defences against in rem right Invalidating defence Terminating defence Refusing defence 210

211 Assumption of liabilities 1: overview Liberating assumption of debt (befreiende [privative] Schuldübernahme), 414 et seq. BGB Assumption of contract (Vertragsübernahme), customary law (further development of the law beyond the act [gesetzübersteigende Rechtsfortbildung]) Assumption of performance (Erfüllungsübernahme) (so-called pseudocontract for the benefit of third persons [unechter Vertrag zugunsten Dritter]), 329, 415 (3) BGB Rule of interpretation (Auslegungsregel) 415 (3) BGB Indemnity [Freistellung] of buyer from debts as between the parties (Innenverhältnis), 311 (1) BGB If legal situation is ambiguous (e.g. potential tax liabilities which have not yet been determined by a tax audit [Betriebsprüfung]) 211

212 Assumption of liabilities 2: overview If indemnity is agreed contractually the term is indemnity (Freistellung) and not release (Befreiung); in the context of legal claims the term is often release (Befreiungsansprüche) (vgl. 257 BGB) Also indemnity of seller, 311 (1) BGB Contractual accession to agreement (rechtsgeschäftlicher Vertragsbeitritt), 311 (1) BGB Contractual accession to debt by buyer (rechtsgeschäftlicher [kumulativer] Schuldbeitritt [Schuldmitübernahme] des Käufers), 311 (1) BGB 212

213 Assumption of liabilities 3: Liberating assumption of debt, 414 et seq. BGB Case 1: Agreement between creditor and transferee (Übernehmer), 414 BGB Contract (Schuldvertrag) company Buyer of Seller of 453, 433 Contractual company assets = partner = creditor assets = debtor transferee Assumption of debt, 414 Case 2: Agreement between debtor and transferee (Übernehmer), 415 BGB Contract (Schuld- Vertrag) Seller of company assets = debtor 453, 433 Assumption of debt, 415 Buyer of company assets = transferee Contractual partner = creditor Approval creditor to debt assumption, 415 (1) sentence 1 213

214 Assumption of contract and asset deal: transfer of receivables, rights and obligations 1 Case 1: Tri-party agreement on assumption of contract (Vertragsübernahmevertrag) Buyer of Seller of 453, 433 Contract company Contract company partner assets = assets transferee Assumption of contract between contract partner, seller of company and buyer of company Case 2: Bi-party agreement on assumption of contract (Vertragsübernahmevertrag) Contract Seller of company assets 453, 433 Assumption of contract Buyer of company assets = transferee Contract partner Approval of contract partner to assumption of contract, 415 (1) sentence 1 by way of analogy 214

215 Assumption of performance, 329, 415 (3) BGB 1 Contract partner Contract Seller of company assets 453, 433 Assumption of performance, 329, 415 (3) Buyer of company assets = performance transferee Situation: No liberating assumption of debt (befreiende Schuldübernahme), no contractual assumption of contract (rechtsgeschäftliche Vertragsübernahme) Hence, no change in the contractual parties 215

216 Indemnity of buyer from debts 1 Contract partner = creditor Contract Seller of company assets = debtor = person indemnifying (Freistellender) 453, 433 Assumption of debt/contract, 415 Indemnity agreement (Freistellungsvereinbarung), 311 (1) Buyer of company assets = indemnified person (Freigestellter) Constellation if buyer is indemnified: Buyer has assumed liabilities (Verbindlichkeiten) from seller (i.e. liberating assumption of debt [befreiende Schuldübernahme] or contractual assumption of contract [rechtsgeschäftliche Vertragsübernahme]) If legal situation is unclear (e.g. potential tax liabilities which are not yet determined by a tax audit [Betriebsprüfung]) Hence, change of contract parties Under English law an indemnity is a promise made by the seller to reimburse the buyer in respect of a specific liability, should it arise 216

217 Contractual accession to agreement, 311 (1) BGB 1 Case 1: Agreement between initial and acceeding contract partner Contract partner Contract Seller of company assets = initial contract partner 453, 433 Accession to agreement (Vertragsbeitritt), 311 (1) Buyer of company assets = acceeding person = new contract partner Case 2: Agreement between acceeding person and contract partner Contract partner Contract Seller of company assets = initial contract partner 453, 433 Buyer of company assets = acceeding person = new contract partner Accession to agreement (Vertragsbeitritt), 311 (1) 217

218 Contractual accession to debt by buyer, 311 (1) BGB 1 Case 1: Agreement between initial debtor and acceeding debtor Contract partner = creditor Contract Seller of company assets = initial debtor 453, 433 Accession to debt (Schuldbeitritt), 311 (1) Buyer of company assets = acceeding person = new debtor Case 2: Agreement between acceeding debtor and creditor Contract partner = creditor Contract Seller of company assets = initial debtor 453, 433 Buyer of company assets = acceeding person = new debtor Accession to debt (Schuldbeitritt), 311 (1) 218

219 Statutory transfer/assumption of an employment agreement ( 613a BGB) 1 Employee (Arbeitnehmer) Employment agreement (Arbeitsvertrag), 611 Seller of company assets = company 453, 433 Buyer of company assets = assuming person Statutory assumption of employment agreement (gesetzlicher Vertrags- Übergang), 613a 219

220 Statutory transfer/assumption of an employment agreement ( 613a BGB) 2 [E.g. claim to salary (Arbeitslohn), 611 BGB, 615, 613a (1) sentence 1 BGB] Liability (Haftung) Creation (e.g. existing employment agreement) Termination Enforceability 220

221 Statutory transfer/assumption of an employment agreement ( 613a BGB) 3 Transfer of liability (Haftungsüberleitung) Purpose: protection of employment agreement (Bestandsschutz) combined with protection against dismissal (Kündigung) pursuant to 613a (4) BGB Requirements Applicability: is it possible to exclude 613a BGB contractually? (-), since 613a (1), (2), (4) sentence 1 mandatory (zwingendes) law (teleological interpretation of law) Employment agreement, 611 BGB Business (Betrieb) Transfer (Übergang) of the business By way of contract (durch Rechtsgeschäft) 221

222 Statutory transfer/assumption of an employment agreement ( 613a BGB) 4 Legal consequences Legal transfer of the rights and obligations under the employment agreement (statutory transfer/assumption of an employment agreement; wording in company sale contract: assumes [tritt ein]), 613a (1) sentence 1 BGB Collective bargaining agreements (Tarifverträge) are not transferred pursuant to 613a BGB Counter-defence (Gegeneinwendung) of the employee against dismissal (Kündigung) by the employer, 613a (4) sentence 1 BGB (Kündigungsverbot) Information (Unterrichtung) of all employees affected by the transfer, 613a (5) BGB Right to object (Widerspruchsrecht) if the information has been deficient, 613a (6) BGB 222

223 Statutory transfer/assumption of an employment agreement ( 613a BGB) 5 Political assessment 613a BGB is seen as problematic in the context of a company s insolvency since the transfer of employees may render the acquisition of a company unattractive Note: unitary provision in European Union (regulation!) Note further: employment and qualification companies (Beschäftigungs- und Qualifizierungsgesellschaften, BQG) for restructuring prior to insolvency, rescue company (Auffanggesellschaften) following insolvency 223

224 Participation of workers council Transfer of business (Betriebsübergang) pursuant 613a BGB does not have to be approved by workers council (Betriebsrat) Information and approval of the workers council are, however, necessary if there is a change of business (Betriebsänderung) pursuant to 111 sentence 1 BetrVG, if Extensive dismissals on operational grounds (betriebsbedingte Kündigungen) by the buyer Separations (Spaltungen) pursuant to UmwG Split-up (Aufspaltung), 123 (1) UmwG Split-off (Abspaltung), 123 (2) UmwG Hive down (Ausgliederung), 123 (3) UmwG 224

225 Purchaser s liability under 25 HGB 25 (1) sentence 1 HGB 25 (1) sentence 2 HGB Situation: creditor has receivable against company (old) and claims against company (new) Solution: Extension of liability (Haftungserweiterung) by statutory accession to debt (gesetzlicher Schuldbeitritt) by company (new), 25 (1) sentence 1 HGB In practice excluded by notice in commercial register Situation: debtor has debt against company (old), performs, however, to company (new) Solution: performance ( 362 (1) sentence 1 BGB) due to legal fiction/ irrebuttable presumption (Fiktion) of power to receive performance (Forderungszuständigkeit) of company (new), 25 (1) sentence 2 HGB In practice excluded by notice in commercial register 225

226 Merger control and asset deal 1 Three pillars of competition law (UK)/antitrust law (US): Prohibition of horizontal and vertical agreements (Kartellverbot) (Art. 81 EG; 1 GWB) Horizontal: prohibition of practices which restrict competition between competitors at same level of value chain Vertical: prohibition of practices which restrict competition between non-competitors (e.g. manufacturer/trader) Prohibition of abuse of a dominant position (Art. 82 EG; GWB) Requirement is i.a. the dominant market position Purpose: Protection of purchasers (Abnehmer) and competitors from abuse of a dominant market position Merger control (Zusammenschlusskontrolle) (Art. 2 Merger Regulation [Fusionskontrollverordnung = FKVO]; 36 GWB) 226

227 Merger control and asset deal 2 German merger control ( GWB) Purpose: protection from the creation or reinforcement of a dominant market position or from the material decrease of competition through mergers Applicability Merger not subject to EU merger control Merger requirements (Zusammenschlusstatbestand), 37 GWB [Acquisition of at least 25% of the shares (equity or voting rights) or] Acquisition of all the assets or a substantial part of the assets of a company, 37 (1) sentence 1 No. 1 GWB or The direct or indirect control or An influence on another company which is material from a competition point of view 227

228 Merger control and asset deal 3 Hence: not only for mergers (Zusammenschlüssen/Fusionen) in a narrow sense Notice requirement (Anmeldepflicht) if revenue limits are exceeded, 35 GWB Company s total global revenues are > 500 million and At least one of the companies has revenues in Germany of > 25 million, 35 (1), 39 GWB No notice requirement if An independent company with global revenues of less than 10 million merges with another company (de minimis clause, 35 (2) No. 1 GWB) or The market concerned had a volume of less than 15 million for the past 5 years (market de minimis clause, 35 (2) No. 2 GWB) 228

229 Merger control and asset deal 4 The merger is noticeable (spürbar) in the German market Legal consequences Invalidating defence against proprietary transaction: invalidity because of prohibition on implementation pursuant to competition law, 41 (1) sentence 2 GWB Fine (Bußgeld), 81 (1) No. 7 GWB 229

230 Merger control and asset deal 5 European merger control (Fusionskontrolle) (Merger Regulation [Fusionskontrollverordnung, FusKontrVO]) Merger (Zusammenschluss): acquisition of [indirect or] direct control by acquisition of assets, Art. 3 (1) lit. b case 2 Merger Regulation Hence: not only for mergers (Zusammenschlüssen/Fusionen) in a narrow sense Obligation to notify (Anmeldepflicht) if Companies global revenues > 5 billion and EU wide revenues of at least two companies each > 250 million, Art. 1 (2) Merger Regulation 230

231 Merger control and asset deal 6 Also obligation to notify if Companies global revenues > 2.5 billion and Total revenues in at least three EU Member States each > 100 million and Revenues of at least two companies in the three EU Member States each more than 25 million and EU wide revenues of at least two companies each > 100 million, Art. 1 (3) Merger Regulation 231

232 Merger control and asset deal 7 Legal consequences Invalidating defence proprietary transaction: invalidity because of prohibition on implementation pursuant to competition law, Art. 7 (1) Merger Regulation Fines (Bußgelder), Art. 14 Merger Regulation, EU Commission Guidelines on Fines (Bußgeldleitlinien der EU-Kommission) 232

234 Type of sale: share deal 1 (repetition) Acquisition of shares (so-called share deal ) with legal entity Legal nature In principle (pure) sale of rights, 453 (1) case 1 BGB Issue: acquisition of all or nearly all shares ( company acquisition by way of share deal ) Courts: almost all shares = in any event from acquisition of 75% of the shares Canaris: Sale of other assets (sonstiger Gegenstände), 453 (1) case 2 BGB MüKo HGB/Lieb: sale of rights, 453 (1) case 1 BGB 234

235 Type of sale: share deal 2 (repetition) A (shareholder) Shareholding 453 (1) case 1/2, 433 BGB, 15 (4) sentence 1 GmbHG 413, 398 BGB, 15 (3) GmbHG B (buyer) A GmbH Note however: termination rights (Kündigungsrechte) in case of change of shareholder (change of control) 235

236 Analysis method sale agreement for share deal 1 Claim to transfer of ownership/title, 453 (1) case 1/2, 433 (1) sentence 1 case 2 BGB (or sale agreement) / Claims to purchase price payment and acceptance, 453 (1) case 1/2, 433 (2) case 1, 2 BGB (or sale agreement) Applicability Sale of rights, 453 (1) case 1 BGB or sale of other assets (sonstiger Gegenstände), 453 (1) case 2 BGB Creation Termination Enforceability 236

237 Share sale agreement overview 1 Key topics Main obligations seller/buyer Ancillary obligations Seller s warranties & indemnities Other issues 237

238 Share deal agreement object of sale Provisions on obligations on two levels: Shareholding in the legal subject (GmbH) combined with the rights and duties connected with the shareholder position Object of sale in the sense of 433 BGB Assets of the company (cf. explanations on asset deal agreement above) Economic object of sale 238

239 Share deal agreement transfer date under sale agreement Company is subject to dynamic changes Note sequence of events: Entering in sale and purchase agreement ( signing ) Transfer date under sale agreement (kaufvertraglicher Übergangsstichtag) ( effective date ) Often time of purchase price payment, in rem transfer ( closing ) = effective date Rarely closing effective date Signing of sale and purchase agreement Transfer Application > Competition process > Clearing t Preparation closing accounts Signing Rarely: effective date prior to closing Typically: closing = effective date -Purchase price payment -In rem transfer 239

240 Share deal agreement purchase price 1 Purchase price is matter of negotiations Is based on company valuation Also a function of competition for company acquisition Purchase price arrangements Fixed purchase price, possibly in instalments or deferred payment (see below due date) Rare for large transactions However, negative purchase price which is paid by the seller in restructuring cases 240

241 Share deal agreement purchase price 2 Purchase price formula (normal case) Calculation ( equity bridge ): Enterprise value + Liquid assets./. Interest bearing liabilities (in particular financial liabilities, tax liabilities) = Result: equity value; do not mix up with balance sheet equity + /./. NWC (net working capital) adjustment (difference between working capital at time closing from average working capital during past [12] months) working capital = current assets short-term debt = Purchase price 241

242 Share deal and statutory warranty liability overview 1 Breach of contract (e.g. information at contract formation) Pre-contractual breach of contract: c.i.c., 280 (1), 311 (2) No. 2, 241 (2) Breach of contract post contract formation Prior to transfer of risk: 280 (1) Post transfer of risk: 453 (1) case 2, 437/

243 Share deal and statutory warranty liability overview 2 Pre-contractual phase Conclusion sale agreement, 433 BGB Transfer of risk, 453, 446 = transfer date under sale agreement Prevailing opinion in principle: [Initiation of contract negotiations (Vertragsanbahnung), 311 (2) No. 1 BGB] Contract negotiations (Vertragsverhandlung), 311 (2) No. 2 BGB Claim in damages for breach of pre-contractual obligations (c.i.c.), 280 (1), 311 (2) No. 2, 241 (2) Claim in damages for breach of contract, 280 (1) Claim in damages for breach of warranty, 453 (1) case 1 or 2, 437 No. 3 case 1, 434 (1), 280 (3), 281 (1), (2), 280 (1), Exceptions: No quality deficit (Beschaffenheitsmangel) Intent (Arglist and Vorsatz) Duties to provide advice Claim in damages for breach of pre-contractual obligations (c.i.c.), 280 (1), 311 (2) No. 2, 241 (2) 243

244 Share deal and statutory warranty liability overview 3 Supplementary performance, 453 (1) case 2, 437 No. 1, 439 case 1 BGB (removal of deficit or delivery of object of sale without defect) Rescission, 453 (1) case 2, 437 No. 2 case 1, 440, 323, 326 (5) BGB, if defect is material ( 323 (5) sentence 2 BGB) or or or Reduction of purchase price, 453 (1) case 2, 437 No. 2 case 2, 441 (4) BGB Claim in damages, 453 (1) case 2, 437 No. 3 case 1, 280 (1), 440/ 281 (1), (2), 283, 311a BGB Reimbursement of expenses, 453 (1) case 2, 437 No. 3 case 2, 284 BGB and or Claim in damages, 325, 280 et seqq. BGB Restitution (Rückabwicklung), 346 et seqq. BGB ( Large ) claim in damages instead of performance for deficit damages, 280 (3), 281, 280 (1), 440 BGB, if deficit is material ( 281 (1) sentence 3 BGB) ( Small ) claim In damages for deficit damages, 280 III, 281, 280 I, 440 BGB, if defect is not material ( 281 I 3 BGB) Possibly claim in damages for related or consequential deficit damages (Mangelfolgeschäden), 280 I BGB / 823 I BGB 244

245 Share deal and statutory warranty liability overview 4 Share deal Simple share sale Sale of all or nearly all shares Source: Stephan Lorenz Sale of rights, 453 (1) case 1 No (direct) liability for defects in the company Company sale, 453 (1) case 1 / 2 BGB Defect in the quality ( 434 BGB) of the company: 437 BGB Violation of information obligations (other circumstances than defect in the quality): 280 (1), 241 (1), 311 (2) BGB 245

246 Share deal and statutory warranty liability assessment scheme Applicability Issue: Applicability warranty liability to share sale (share deal) In principle (pure) sale of rights, 453 (1) case 1 BGB Acquisition of all or nearly all shares ( company acquisition by way of share deal ; Unternehmenskauf mit Beteiligungskauf) Sale of rights, 453 (1) case 1 BGB or sale of other assets, 453 I Fall 2 BGB? Courts: almost all shares = in any event from acquisition of 75% of the shares Canaris: sale of other assets (sonstiger Gegenstände), 453 (1) case 2 BGB 246

247 Share deal and seller s contractual warranty liability 1 Statutory warranty liability is replaced by contractual warranty system because the former is not appropriate; therefore, Exclusion of statutory claims and replacement by contractual liability system Quality and legal deficits (Sach- und Rechtsmängel), 453 (1) case 2, 437 BGB Breaches of duty (Pflichtverletzungen) Pre-contractual, 280 (1), 311 (2), (3), 241 (2) BGB Post formation of contract, before transfer of risk, 280 (1) BGB (non or bad performance) 247

248 Share deal and seller s contractual warranty liability 2 Disruption of the foundation of the contract (Geschäftsgrundlage, clausula rebus sic stantibus), 313 BGB Statutory provisions related to rescission or termination of contract in another way, , 346 et seqq. BGB 248

249 Share deal and seller s contractual warranty liability 3 Limitations of liability exclusion: Deception with intent (arglistige Täuschung), 123 BGB/ 453 (1) case 1/2, 444 case 1 BGB Damage with intent (vorsätzliche Schädigungen), 826, 823 (2) sentence 1 BGB in connection with 263 StGB Exclusion of liability pursuant to 453 (1) case 1/2, 444 case 2 BGB Legal nature: counter-defence (Gegeneinwendung) of buyer Pursuant to 444 case 2 BGB the seller cannot raise a contratual liability exclusion to the extent that [ ] a quality guarantee has been assumed by the seller 249

250 Share deal and seller s contractual warranty liability 4 Warranty declarations Independent guarantee (formerly 311 I) Quality/warranty guarantees, 453 (1) case 1/2, 443 Non-independent guarantee (extension of seller s liability) Seller s quality declarations (Beschaffenheitserklärungen), 453 (1) case 1/2, 434 (1) sentences 1, 2 case 1; partly contractual legal consequences defined different from the act 250

251 Share deal and ancillary obligations (covenants) Duties to act or omit (Handlungs- und Unterlassungspflichten), e.g. to terminate certain agreements or to enter into new agreements only with approval of the buyer Cases Non-compete clause 251

252 Special features for listed companies 3% 5% 10% 15% 20% 25% 30% 50% 75% Voting rights 95% 100% German Securities Trading Act (WpHG) Disclosure thresholds [1] ; any passing or falling below has to be publicly announced German Securities Acquisitions and Takeover Act (WpÜG) Acquisition of at least 30% of voting rights triggers a mandatory public tender offer German Foreign Trade Regulations (Außenwirtschaftsverordnung) Acquisition of at least 25% of voting rights requires approval by German Federal Ministry of Economics and Technology Merger Control Acquisition of at least 25% of the capital or of the voting rights triggers German Merger Control 5% 25% 50% 75% 95% Voting rights [Listed companies] 6 Financial investment 5 Minority with board representation 4 Blocking minority 25%+1 share 3 Simple majority >50% 2 75% Holding 1 Delisting & full integration [1] Percentage of voting rights Sources: Außenwirtschaftsverordnung, WpHG, WpÜG

253 Excursus: Public take-over offer (öffentliches Erwerbsangebot) 1 Applicability Takeover Act (Wertpapiererwerbs- und Übernahmegesetz, WpÜG), 1 et seq. WpÜG Offer for the acquisition of shares or other securities Target company is a public limited liability company (AG), an SE or a public limited partnership (KGaA) Corporate seat (Sitz) in Germany Shares (Aktien) or other securities are admitted for trade in an organised market (official market [amtlicher Markt] or regulated market [geregelter Markt], 2 (7) WpÜG) within the European Economic Area (Europäischen Wirtschaftsraum) 253

254 Excursus: Public take-over offer (öffentliches Erwerbsangebot) 2 Regulated market (EU regulated market) official market, BörsG Open Market (Freiverkehr) (exchange regulated market) regulated market, BörsG Prime Standard Entry Standard General Standard (General) Open Market, 57 BörsG Example: market segments of the Frankfurt Stock Exchange Cf

255 Excursus: Public take-over offer (öffentliches Erwerbsangebot) 3 Public offer (öffentliches Angebot) Voluntary (freiwilliges) (Squeeze-Out: 327a-327f AktG, 39a-c WpÜG) or mandatory (gesetzlich) (Pflichtangebot, 35 et seqq. WpÜG) offer Special case: take-over offer (Übernahmeangebot), WpÜG Voluntary public offer Aimed at control Public sale or barter offer» Control is 30% voting rights For the purpose of acquiring shares in a target company, 2 WpÜG 255

256 Excursus: Public take-over offer (öffentliches Erwerbsangebot) 4 Publication of decision to make an offer, 10 WpÜG Transfer of an offer document (Angebotsunterlage) to the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht = BaFin), 11, 14 et seq. WpÜG Publication of an offer document, 14 (2), (3) WpÜG Acceptance (Annahme) of the offer by shareholders Legal consequences if publication duties for mandatory offer (Pflichtangebot) pursuant to 35 WpÜG are breached 256

257 Assessment scheme transfer of shares in private limited liability company and share deal 1 413, 398 sentence 1 BGB, 15 (3) GmbHG [Subject of transfer: shares in private limited liability company (GmbH- Geschäftsanteile)] Agreement (Einigung) between owner and purchaser (proprietary contract) Valid representation (Vertretung) of the seller e.g. by director of private limited liability company (GmbH-Geschäftsführer), 35, 36 sentence 1 GmbHG Invalidating defence: invalidity based on defect in form (Formnichtigkeit), 125 sentence 1 BGB Invalidity cannot be cured (keine Heilungsmöglichkeit) 257

258 Assessment scheme transfer of shares in private limited liability company and share deal 2 Invalidating defence: condition subsequent (aufschiebende Bedingung), 158 (1) BGB / time limit (Befristung), 163, 158 BGB (permissible; BGHZ 127, 133) Transferability (Übertragbarkeit) Exclusion or limitation (= approval [Zustimmung]) in articles of association (Satzung), 15 (5) GmbHG Power (Berechtigung) Owner (Inhaber) Power of disposition (Verfügungsmacht) Other defences against transfer of shares Invalidating defence: prohibition on implementation pursuant to competition law, 41 (1) sentence 2 GWB or Art. 7 (1) Merger Regulation (FusKontrVO) 258

259 Participation of economic council or workers council Economic council (Wirtschaftsausschuss) (= committee of workers council) Acquisition of a company if this is related to taking control, 106 (3) No. 9a BetrVG Other actions or plans which may materially influence the interest of the company s employees, 106 (3) No. 10 BetrVG I.a. sale of all shares of a private limited liability company Workers council for companies without economic council, 109a BetrVG In addition, information obligations towards workers council or employees pursuant to Securities Acquisitions and Takeover Act (Wertpapiererwerbs- und Übernahmegesetz = WpÜG) 259

260 Merger control and share deal 1 German merger control ( GWB) Merger (Zusammenschluss) Acquisition of at least 25% of the shares (equity or voting rights), 37 (1) sentence 1 No. 3 GWB Notice requirement (Anmeldepflicht) if revenue limits are exceeded, 35 GWB Company s total global revenues are > 500 million and At least one of the companies has revenues in Germany of > 25 million, 35 (1), 39 GWB 260

261 Merger control and share deal 2 Legal consequences Invalidating defence against proprietary transaction: invalidity because of prohibition on implementation pursuant to competition law, 41 (1) sentence 2 GWB Fine (Bußgeld), 81 (1) No. 7 GWB Up to , 81 (2) sentence 1 case 2 GWB Up to 10% of annual revenues, Announcement of Cartel Office (Bekanntmachung über die Festsetzung von Geldbußen nach 81 (4) sentence 2 GWB gegen Unternehmen und Unternehmensvereinigungen (Bußgeldleitlinien) vom ) 261

262 Merger control and share deal 3 European merger control (Fusionskontrolle) (Merger Regulation [Fusionskontrollverordnung, FusKontrVO]) Merger (Zusammenschluss): acquisition of indirect or direct control by acquisition of shares, Art. 3 (1) lit. b case 1 Merger Regulation Obligation to notify (Anmeldepflicht) if Companies global revenues > 5 billion and EU wide revenues of at least two companies each > 250 million, Art. 1 (2) Merger Regulation 262

263 Merger control and share deal 4 Also obligation to notify if Companies global revenues > 2.5 billion and Total revenues in at least three EU Member States each > 100 million and Revenues of at least two companies in the three EU Member States each more than 25 million and EU wide revenues of at least two companies each > 100 million, Art. 1 (3) Merger Regulation 263

264 Merger control and share deal 5 Legal consequences Invalidating defence proprietary transaction: invalidity because of prohibition on implementation pursuant to competition law, Art. 7 (1) Merger Regulation Fines (Bußgelder), Art. 14 Merger Regulation, EU Commission Guidelines on Fines (Bußgeldleitlinien der EU-Kommission) 264

266 Relationship between aquiring and acquired company 1 Acquisition of companies who remain independent and keep their identity ( acquisitions ) without transfer of assets (only with share deal) Group and holding structures (Konzern- und Holdingstrukturen): direct / indirect subsidiary (Tochtergesellschaft) Contractual group (Vertragskonzern) Purchaser De facto group (faktischer Konzern) Purchaser Shareholding Domination and profit transfer agreement (Beherrschungs- und Gewinnabführungsvertrag), for AG: 291 AktG* Shareholding >50% (equity/ voting rights) Target company Target company * Note also cash pooling agreement, 311 (1) BGB 266

267 Relationship between aquiring and acquired company 2 Acquisition of companies which loose their independence and identity Merger (Verschmelzung) of two legal subjects, UmwG Merger by inclusion (Aufnahme) (in existing company), 4-35 UmwG Prior to merger Post merger Shareholder A Shareholder B Shareholder A Shareholder B Company X Company Y Company X (which continues the business of former company Y) 267

268 Relationship between aquiring and acquired company 3 Special forms of merger by inclusion» Up-stream merger Prior to merger Post merger Company A Company A Company B NewCo (upstream company) receives assets of target company (subsidiary) 268

269 Relationship between aquiring and acquired company 4» Down-stream merger (rare in practice) Prior to merger Post merger Company A Company B Company B Target company (subsidiary) receives assets of NewCo (upstream company) 269

270 Relationship between aquiring and acquired company 5 Merger by way of new formation (Verschmelzung durch Neugründung) (transfer to new company), UmwG Prior to merger Post merger Shareholder A Shareholder B Shareholder A Shareholder B Company X Company Y Company Z (which continues the business of former company Y and former company X) 270

271 Relationship between aquiring and acquired company 6 Note terminology for mergers in English European merger : combination (Verschmelzung) of two legal subjects Merger in Anglo-American legal systems: aquisition of a majority shareholding in another company (hence share deal [Beteiligungskauf] in German terminology) Mergers and acquisitions : company sale in a wider sense 271

272 Relationship between aquiring and acquired company 7 Transfer of assets (Übertragung von Vermögensgegenständen) Separation of a company pursuant to company law; creation of a new company ( spin-off, carve out), UmwG Split-up (Aufspaltung), 123 (1) UmwG Split-off (Abspaltung), 123 (2) UmwG Hive down (Ausgliederung), 123 (3) UmwG Transfer of assets pursuant to UmwG, UmwG Rare in practice Change of legal form (Formwechsel), UmwG 272

273 Bibliography 1 Asset Capital Partners and Nörr, Stiefenhofer, Lutz (eds.), MD&A guide for the Russian oil & gas industry. Legal and tax issues of mergers, divestitures and acquisitions in the Russian oil & gas industry, Moskau 2006 (written by Jan-Hendrik Röver) Wilhelm Beisel and Hans-Hermann Klumpp, Der Unternehmenskauf. Gesamtdarstellung der zivil- und steuerrechtlichen Vorgänge, 6th ed. (Munich 2009) Claus-Wilhelm Canaris, Leistungsstörungen beim Unternehmenskauf, in: ZGR 1982, pp Claus-Wilhelm Canaris, Handelsrecht, 24th ed. (Munich 2006), 8 Outstanding discussion; highly recommended 273

274 Bibliography 2 Horst Eidenmüller, Rechtskauf und Unternehmenskauf, in: ZGS 08/2002, pp Jochen Ettinger and Henning Jaques (eds.), Beck sches Handbuch Unternehmenskauf im Mittelstand, 2nd ed. (Munich 2017) Bernd Fahrholz, Neue Formen der Unternehmensfinanzierung. Unternehmensübernahmen, Big ticket-leasing, Asset Backed- und Projektfinanzierungen (Munich 1998), pp , Unfortunately outdated! Announced for 2017: Fahrholz, Röver and Meissner, Formen des Unternehmenskaufs und der Unternehmensfinanzierung, 2nd ed., Munich Stefan Göthel (ed.), Grenzüberschreitende M&A-Transaktionen. Unternehmenskäufe, Umstrukturierungen, Joint Venture, SE, 4th ed. (Cologne 2015) 274

275 Bibliography 3 Walter Günther, Unternehmenskauf, in: Münchener Vertrags- Handbuch (hrsg. von Rolf A. Schütze und Lutz Weipert), vol. 2: Wirtschaftsrecht I, 5th ed. (Munich 2004), pp Model agreement with commentary Note: purchase price calculation not in confirmity with practice (where so-called equity bridge is used) Dieter Hoffmann, Der Unternehmenskauf und seine möglichen bürgerlich-rechtlichen Ansprüche (Hamburg 2009) Wolfgang Hölters (ed.), Handbuch Unternehmenskauf, 8th ed. (Köln 2015) Hans-Joachim Holzapfel and Reinhard Pöllath, Unternehmenskauf in Recht und Praxis. Rechtliche und steuerliche Aspekte, 15th ed. (Cologne 2016) 275

276 Bibliography 4 Florian Kästle and Dirk Oberbracht, Unternehmenskauf - Share Purchase Agreement (Beck sche Musterverträge Bd. 49) (Munich 2005) Share deal agreement in English language but under German law Hermann J. Knott (ed.), Unternehmenskauf, 5th ed. (Cologne 2016) Wolfgang A. Münchow, Andreas Striegel and Thomas A. Jesch, Management Buy-Out (MBO) (Beck sche Musterverträge Bd. 59) (Munich 2008) Jennifer Payne (ed.), Takeovers in English and German Law (Oxford 2002) Gerhard Picot (ed.), Unternehmenskauf und Restrukturierung. Handbuch zum Wirtschaftsrecht, 4th ed. (Munich 2013) Standard treatise on M&A Gerhard Picot (ed.), Handbuch Mergers & Acquisitions. Planung Durchführung Integration, 5th ed. (Stuttgart 2012) 276

277 Bibliography 5 Georg Rotthege and Bernd Wassermann, Unternehmenskauf bei der GmbH (Heidelberg 2011) Christoph H. Seibt (ed.), Beck sches Formularbuch Mergers & Acquisitions, 2nd ed. (Munich 2011) Wolfgang Meyer-Sparenberg/Christof Jäckle, Beck sches Handbuch Mergers & Acquisitions (Munich 2016) Not yet published Ralf Thaeter and Tim Oliver Brandi (eds.), Öffentliche Übernahmen. Recht und Praxis der Übernahme börsennotierter Unternehmen (Munich 2003) Volker Triebel (ed.), Mergers & Acquisitions. Strategie Steuern Recht (Heidelberg 2004) Wolfgang Weitnauer, Management Buy-Out. Handbuch für Recht und Praxis, 2nd ed. (Munich 2013) 277

278 Bibliography 6: Business aspects Donald M. DePamphilis, Mergers, Acquisitions and Other Restructuring Activities. An Integrated Approach to Process, Tools, Cases, and Solutions, 6th ed. (Amsterdam, Boston, Heidelberg etc. 2012) Maximilian Dreher and Dietmar Ernst, Mergers & Acquisitions. Grundlagen und Verkaufsprozess mittlerer und großer Unternehmen (Konstanz, Munich 2014) Kai Lucks (ed.), M&A-Projekte erfolgreich führen: Instrumente und Best Practices (Stuttgart 2013) See article Jan-Hendrik Röver, Transaktionsmanagement im großen Mittelstand Marianne Schramm and Ekkehart Hansmeyer (eds.), Transaktionen erfolgreich managen. Ein M&A-Handbuch für die Praxis (Munich 2010) Bernd W. Wirtz, Mergers & Acquisitions Management: Strategie und Organisation von Unternehmenszusammenschlüssen, 2nd ed. (2012) 278

280 14. Acquisition financing 14.1 Business considerations Financing of companies Definition of acquisition financing Parties of an acquisition financing Financial layers of an acquisition financing 14.2 Bank financing Pre-deal arrangements Loan agreement acquisition financing Mezzanine financing Security interests Other agreement Legal opinion 14.3 Capital markets financing 280

281 Financing of companies Financing Internal financing External financing Equity financing Mezzanine financing Debt financing Strategic investors/ management/ employees/ financial investors Capital markets Traditional company financing -Investments -Working capital Project financing in a narrow Acquisition sense financing in a narrow sense (LBO) 281

282 Definition of acquisition financing 6 In contract to traditional corporate loans acquisition financings are characterised in principle by five criteria: 1 Financing purposes Financing of a company sale 2 Borrower Legally and economically independent single purpose company (NewCo) 3 Service of acquisition loan (interest and repayment) from future cash flow of the acquired company and therefore the NewCo 4 Liability basis No or only limited liability of the purchaser Security by the single purpose company Security by the target company (Limited) security by the purchaser 5 Risk structuring 282

283 Parties of an acquisition financing (Economic) Purchaser 488 BGB 453 (1) case 1/2, 433 BGB 413, 398 BGB, 15 GmbHG Single purpose company (NewCo) 488 BGB Bank 1 Bank 2 Shareholders Target company 488 BGB Bank 283

284 Financial layers of an acquisition financing 1 NewCo Equity 15-25% Shareholders (i.a. investors, private equity fund) Mezzanine 10-20% Debt 60-70% Mezzanine financings (i.a. investors, bank, mezzanine financiers, funds) Acquisition loan (bank) - arranging - underwriting - participation possibly unitranche debt 284

285 14. Acquisition financing 14.1 Business considerations Financing of companies Definition of acquisition financing Parties of an acquisition financing Financial layers of an acquisition financing 14.2 Bank financing Pre-deal arrangements Loan agreement acquisition financing Mezzanine financing Security interests Other agreement Legal opinion 14.3 Capital markets financing 285

286 Contractual relationships for a loan 1 Prevailing opinion: loan opening agreement (Krediteröffnungsvertrag, Kreditzusage), 311 (1) BGB; 488 BGB by way of analogy; banks general terms and conditions (AGB Banken) Base and framework agreement Duty of the lender to provide and to disburse loan Duty of the borrower to pay commitment fee Prevailing opinion: drawdown (Abruf) by borrower Exercise of a right to influence a legal relationship by unilateral declaration (Gestaltungsrecht) 286

287 Contractual relationships for a loan 2 Individual loan agreement, 488 BGB Separation theory: must legally be separated from the loan opening agreement In practice both agreements contained in one deed Created by drawdown (Abruf) On the other hand unitary theory: loan agreement only substantiated (= konkretisiert) by way of drawdown Security rights/interests (Kreditsicherheiten) Distinguish for in rem/proprietary security rights Respective contractual security agreement (Sicherungsabrede), 311 I BGB Creation of proprietary security rights Consortium agreement 287

288 Loan agreement acquisition financing - basics 3 Key topics Main obligations Representations and warranties (Zusicherungen) Conditions precedent (Auszahlungsvoraussetzungen) Requirements of drawdown (Inanspruchnahmemodalitäten) Covenants Security agreements Rescission (Kündigung) Other issues 288

289 Loan agreement acquisition financing - basics 4 General legal consequences for breach of loan provisions With duty to act (Verhaltenspflicht) (covenant, security agreement): independent right to bring law suit Absence of condition precedent / requirement of drawdown Rescission right for extraordinary rescission Claim in damages, 280 (1) / 280 (1), 311 (2) No. 1, 241 (2) (c.i.c.) Contractual legal consequences Statutory legal consequences 289

290 Loan agreement acquisition financing security agreement 1 Contents of security agreement (Sicherungsabrede) Provisions in loan agreement deal with obligation to create personal and proprietary security Security purpose (Sicherungszweck) of secured transaction (i.e. secured debt [gesicherte Forderung]) So-called purpose agreement (Zweckabrede) (sufficient as legal foundation [Rechtsgrund] for 812 BGB) Possibly claim of security provider to re-transfer security (Rückübertragungsanspruch des Sicherungsgebers), e.g. for security transfer of ownership in movables (Sicherungsübereignung) 290

291 Loan agreement acquisition financing security agreement 2 Possibly provisions on enforcement of security right outside court (Verwertungsbestimmungen) Legal nature of security agreement Independent agreement, 311 (1) BGB In textbooks often treated as part of the covenants This is incorrect since the loan agreement is not legal foundation (Rechtsgrund) for proprietary security rights; this is security agreement which is therefore no covenant Also contractual legal foundation (schuldrechtliches Grundgeschäft, causa) of the respective proprietary security rights 291

292 Loan agreement acquisition financing security agreement 3 Contractual implementation Sometimes agreement of a general security agreement (generelle Sicherungsabrede), 311 (1) BGB in loan opening agreement/loan agreement This is typically further substantiated in a separate security agreement suited for the specific type of security Hence, legal foundation sometimes distributed over several deeds Creation of security is mentioned not only with security agreement but also in context of condition precedents (Auszahlungsvoraussetzung) 292

293 Loan agreement acquisition financing security agreement 4 Function of security Exclusive function of proprietary security Security (in structured financings) is a shield, not a sword (Philip Wood) In rem security prevents that third party creditors have access to assets of the borrower and get priority satisfaction; this shall enable restructuring of financing in case of financial difficulties Subsidiarily (subsidiär) enforcement function (Durchsetzungsfunktion) Ability to enforce security by way of out of court (außergerichtliche Verwertung) or in court enforcement (Zwangsvollstreckung) 293

294 Loan agreement acquisition financing security agreement 5 Specific security rights/interests (Sicherheiten) ( three layer model ) At the level of (economic) purchaser Pledge of shares of the purchaser in NewCo (Pfandrecht Geschäftsanteile), 1274 (1) sentence 1, 413, 398 sentence 1 BGB, 15 (3) GmbHG 294

295 Loan agreement acquisition financing security agreement 6 At the level of NewCo Pledge of shares NewCo in target company, 1274 (1) sentence 1, 413, 398 sentence 1 BGB, 15 (3) GmbHG Security assignment of NewCo claims against target company (e.g. under loans provided by target company to NewCo), 398 sentence 1 BGB Pledge of payment claims with respect to account balances of NewCo (account pledge, Kontopfändung), 1274 (1) sentence 1, 398 sentence 1, 1279 et seqq. (1280) BGB 295

296 Loan agreement acquisition financing security agreement 7 Security assignment of NewCo claims against seller under sale and purchase agreement, 398 sentence 1 BGB Security under 14 AGB Banken (pledge in securities and things in bank s possession and account balances) At the level of target company Note: so-called vertical split ; security in assets of target company only possible if this is permitted by its financing banks; therefore, in practice release of target company s financing banks by NewCo s banks to avoid structural subordination (strukturelle Nachrangigkeit) 296

297 Loan agreement acquisition financing security agreement 8 Pledge of payment claims with respect to account balances of target company (account pledge, Kontopfändung), 1274 (1) sentence 1, 398 sentence 1, 1279 et seqq. (1280) BGB Non-accessory real estate mortgages for security purposes (Sicherungsgrundschuld) First ranking, immediately enforceable non-accessory real estate mortgage, 873 (1), 1192 (1), 1113 et seqq. BGB, 794 (1) No. 5, 800 ZPO Second ranking, not immediately enforceable nonaccessory real estate mortgage, 873 (1), 1192 (1), 1113 et seqq. BGB, 879 (3) BGB 297

298 Loan agreement acquisition financing security agreement 9 Security transfers of ownership (Sicherungsübereignung) in equipment and machines, 929 sentence 1, 930 BGB (Raumsicherungsübereignung) Security assignments of receivables (Sicherungszession), 398 sentence 1 BGB of Supplies of goods and services Claims under insurance agreements Claim of disbursement of shareholder loan ( 488 (1) sentence 1 BGB) No (proprietary or quasi-proprietary) security in pool of assets (Gesamtsicherheiten) such as floating charge under English law or nantissement de fonds de commerce under French law 298

299 Loan agreement acquisition financing security agreement 10 Accessory guarantees (Bürgschaften), 765 BGB, non-accessory guarantees (Garantien), 311 (1) BGB or firm comfort letter (harte Patronatserklärungen), 311 (1) BGB Security purpose (= part of security agreement), 311 (1) BGB as legal foundation (Kausalverhältnis) of proprietary security rights Only part of security agreement; however, other typical elements of security agreement are absent Negative pledge clause (Negativklausel), 137 BGB Merely negative covenant No type of security; nevertheless sometimes called atypical security Note 1136 / 1192 (1), 1136 BGB: not in connection with real estate mortgage (Grundpfandrecht) 299

300 Several lenders Syndicated loan Sub-participation (Unterbeteiligung) Bank 1 Bank 2 Bank BGB 488 BGB Sub-particpation agreement (Partnership under Civil Code [BGB- Gesellschaft], 705 BGB) Bank 1 Borrower Loan, 488 BGB Borrower 300

301 Bibliography 1 Ulrich Ammelung and Jan-Hendrik Röver, Mezzaninefinanzierungen in der Praxis, in: Finanzbetrieb News 7-8/2006, pp. 2-6, 12/2006, pp. 2-7 Andreas Diem, Akquisitionsfinanzierungen. Kredite für Unternehmenskäufe. Mit internationalem Standardvertragsmuster, 3rd. ed. (Munich 2013) Currently most up-to-date and comprehensive discussion Stephan Eilers, Nils M. Koffka and Marcus Mackensen (eds.), Private Equity. Unternehmenskauf Finanzierung Restrukturierung Exitstrategien, 2nd ed. (Munich 2012) Bernd Fahrholz, Neue Formen der Unternehmensfinanzierung. Unternehmensübernahmen, Big ticket-leasing, Asset Backed- und Projektfinanzierungen (Munich 1998), pp

302 Bibliography 2 Andreas Früh and Constanze Müller-Arends, Kreditvertragsrecht, in: Thorwald Hellner and Stephan Steuer (eds.) (formerly Bankgeschäftliches Formularbuch edited by Erich Trost), Bankrecht und Bankpraxis (BuB), 5 vols. (Cologne loseleaf) Excellent dicussion of loan aspects; however, no focus on acquisition financing Wolfgang Hölters (ed.), Handbuch Unternehmenskauf, 8th ed. (Cologne 2015) 302

303 Bibliography 3 Jan-Hendrik Röver, Kreditfinanzierung, in: Ulf R. Siebel, Jan-Hendrik Röver and Christian Knütel (eds.), Rechtshandbuch Projektfinanzierung und PPP, 2nd ed. (Cologne, Munich 2008), pp Jan-Hendrik Röver, Realsicherheiten und Direktvereinbarungen, in: ibid., pp Sven Tischendorf (ed.), Strategies for Successful Acquisitions in Germany (London 2000) Ralf Thaeter and Tim Oliver Brandi (eds.), Öffentliche Übernahmen. Recht und Praxis der Übernahme börsennotierter Unternehmen (Munich 2003) Wolfgang Weitnauer, Management Buy-Out. Handbuch für Recht und Praxis, 2nd ed. (Munich 2013) 303

305 15. Project financing 15.1 Business considerations Financing of companies Definition of project financing Parties of a project financing Reasons for project financing Economic importance of project financing Financial layers of an acquisition financing Types of projects Geographical distribution of projects Risk analysis 305

306 Financing of companies Financing Internal financing External financing Equity financing Mezzanine financing Debt financing Strategic investors/ management/ employees/ financial investors Capital markets Traditional company financing -Investments -Working capital Acquisition financing in a narrow sense (LBO) Project financing in a narrow sense 306

307 Definition of project financing 1 In contract to traditional corporate loans project financings are characterised in principle by five criteria: 1 Financing purposes Financing of a single, defined project 2 Borrower Legally and economically independent project company 3 Service of project loan (interest and repayment) from future cash flow of the project company 4 Liability basis No or only limited liability of the sponsors Security by the project company (Limited) security by the sponsors 5 Risk structuring 307

308 Parties of a project financing Sponsor 1 (Carla S.A.) Sponsor 2 (Maria S.A.) Project company 488 BGB 488 BGB Bank 1 Bank 2 308

309 Financial layers of a project financing 1 Project company Eigenkapital 10-40% Mezzanine 0-10% Gesellschafter (u.a. Sponsoren, Private-Equity- Fonds) Mezzanine-Finanzierungen (u.a. Sponsoren, Bank, Mezzanine-Finanzierer, Fonds) Fremdkapital 60-90% Projektdarlehen (Bank) - arranging - underwriting - participation 309

310 Types of projects Energy Natural resources (mining) Water & renewable energy Oil & gas Telecommunications (?) Industrials Transportation & Public Private Partnerships 310