General Procedure for M&A Transactions in Germany

General Procedure for M&A
Transactions in Germany
The life of an M&A transaction at a glance
Current trends of the German M&A market
Managing risks in M&A transactions
Types of acquisitions
M&A transaction at a glance
The life of an M&A transaction: Preparatory phase
The life of an M&A transaction: Pre due diligence phase
Deep dive: Confidentiality / non-disclosure agreement
Deep dive: Release and reliance letters
The life of an M&A transaction: Due diligence phase
Deep dive: Due diligence
Deep dive: Letter of intent
The life of an M&A transaction: Negotiation & signing phase
Deep dive: SPA – deal structure, MAC and purchase price
Purchase price in SPAs
Deep dive: SPA – representations and warranties
Deep dive: SPA – remedies / limitation of liabilities
Deep dive: SPA – indemnities and closing conditions
Deep dive: SPA – covenants and other provisions
The life of an M&A transaction: Closing and post-closing
Deep dive: Post-closing
The life of an M&A transaction at a glance
The M&A process is not a “one size fits all” process and the amount of work and the
time required for the individual steps may vary substantially. Also the level of
involvement of different advisors (legal, financial, strategic etc) depends on the phase
of the transaction and on the particular deal. Furthermore, the steps to be taken by the
companies involved depend on whether one is acting as a buyer or as a seller and
whether there is a structured auction process or a one-to-one sale.
The preparatory phase of an M&A Transaction involves, inter alia, the selection of a potential target or a potential buyer, the evaluation
of different options and strategies, the analysis of possible synergies, the selection of teams of advisors, informal talks with potential
counterparts (often facilitated by the investment banks involved). The preparatory phase also encompasses a pre-due diligence phase,
with preliminary structuring considerations, and, on the seller side, often also the preparation of an information memorandum, the setup of a data room and potentially also a review of the target through a vendor due diligence exercise. In this phase, there may also be
some preliminary negotiations between the parties, which usually lead to the conclusion of a confidentiality agreement.
The next step is the due diligence phase, during which the potential purchaser may conduct an investigation of the target business so
that a decision can be made whether (and under which conditions) or not to proceed with the acquisition. The findings are generally
summarised in a due diligence report. Although the seller sometimes may have undertaken a vendor due diligence and it may release
its report to the buyer, usually within the parameters set forth by release and reliance letters, most due diligence processes are
conducted from a buyer’s perspective. The due diligence phase also encompasses a Q&A process and management and expert
meetings and it generally ends with the submission of a final bid.
After the submission of the final bid, the seller and the prospective buyer enter into a negotiation phase, which may involve two or more
bidders for a certain time. The negotiation phase ends with the signing of the sale and purchase agreements (SPA). After the signing,
the preparation for closing begins, which generally includes collecting the necessary statutory and transaction-specific approvals.
Upon closing, there is often some restructuring work to do, which finally leads to the “integration” of buyer and target.
Current trends of the German M&A market
New challenges
n Valuation
n Financing
n Deliverability
Material Adverse Change (MAC)
Clauses / Break-up fees
n Sellers continue to reject MAC
Clauses in favour of deal
n Risk management
n Break-up fees are still an
Auction processes are less
rigorously executed
n Greater opportunities for preemptive bids
Bridging the gap in valuation
n “Cherry-picking” assets, leaving
behind difficult-to-value /
onerous assets
eliminating valuation challenges
n Late entrants to a sale process
are possible
n Bidders that act quickly and
deliver certainty have a clear
n “Asset carve-out light”:
Acquisition of specific intellectual
property, R&D, distribution and
customers, leaving behind
assets, such as the production
site; seller engages in interim
manufacturing until the buyer’s
production is fully operational
Joint ventures / minority stakes
n Increased interest in joint
n Increased interest in taking a
minority stake
n Family-controlled companies are
willing to take on minority
Regulatory challenges
n Sellers have become more wary
of execution risks
n Strategic buyers volunteer to be
responsible for the antitrust
analysis and offer to provide
undertakings to make necessary
divestitures early in the process
n Bidders that are believed to
bring material antitrust risks are
n Earn-out clauses to bridge the
valuation gap, however
buyers and sellers are wary of
the challenges of such clauses
Managing risks in M&A transactions
As the requirements on corporate governance and compliance grow, the risks
associated with non-compliance issues increase. In particular, buyers have to be aware
that M&A can be risky and they must engage in all necessary measures and steps to
reduce and manage potential risks.
Mapping & Assessing
Covering & Preventing
Addressing & Remedying
Quality of
Related Party
Complex Ownership
Legal / IP /
Tax Exposures
Weak Internal
Controls / Systems
Local Market /
n Conduct an appropriate level of due diligence in connection with transactions
n Incorporate a risk-based level of compliance due diligence (risk profile, key personnel interviews, review)
n Identify, address and resolve “red flags”
n Adjust transaction structure if necessary
n Obtain robust representation, warranties, indemnities and covenants; ensure appropriate remedies in case of breaches and
provide for adequate substance (e.g. escrow)
n Ensure any prior misconduct shall be remedied post-transaction
n Implement any required policies, procedures and internal controls to ensure strong corporate governance and compliance
Types of acquisitions
One potential buyer
Classical acquisition
Private Equity
Venture Capital
Business Angels
M&A transaction at a glance
Decision and
definition of
Looking for
targets / buyers
and approaching
Draft teaser and
set up data room;
vendor DD
Release vendor
DD reports on
the basis of
release (and
reliance) letter
1st phase due
Letter of intent
Q&As /
meetings / confirmatory DD
Binding offer /
final bid
& signing
SPA, in
particular reps
& warranties
purchase price
agreements may
be needed (eg.
agreement, etc.)
Signing: Notarial
recording may
be necessary
for signing
closing &
Fulfilment of
Closing: Transfer
of shares / assets
prepare filings /
prepare transfers /
obtain funds
The life of an M&A transaction: Preparatory phase
Decision and
definition of scope
Looking for targets /
buyers and
approaching parties
n M&A processes are generally steered by the M&A or Business Development department
n Involvement of investment bank / strategic advisors / consultants
n Legal advisors are generally not involved (at least not in-depth) in the preparatory phase
Seller side
Buyer side
n Decision to sell and preparation of the transaction
n Evaluating the business objectives – decision to buy
n Choosing advisors and deciding which type of deal is
envisaged (asset or share deal)
n Choosing advisors
n Identifying and approaching potential buyers to be
invited for the process (if transaction is not buyer-driven)
n Identifying and approaching potential targets (if
transaction is not seller-driven)
The life of an M&A transaction: Pre-due diligence phase
Draft teaser and
set up data room;
vendor DD
Release /
reliance letter
for vendor due
diligence report
n Latest point in time to involve legal advisors
n The steps taken in the pre due diligence phase depend to a great extent on whether the process is seller-driven or buyer-driven
and whether the M&A transaction takes place as a one-to-one transaction or is carried out in the form of a structured auction
n Seller-driven processes require more preparation and demand a higher degree of legal advice as of the start
Seller side
n Prepare teaser and information memorandum, generally with the assistance of an investment bank; assistance of legal advisors
advisable to avoid legal risks
n Set up data room (and index) – process is usually lengthy; legal and financial advisors are usually involved
n Decide on the form of data room; trend: electronic data room coordinated either by investment bank or law firm
n If appropriate, set up due diligence team and carry out vendor due diligence
n Decide which documents are going to be released to buyer(s) – in which form (blackening of confidential issues) and in which
due diligence phase; establish ‘red’ data room
n Prepare confidentiality agreements
n Prepare process letter and data room rules for due diligence
n Release information memorandum and data room index
n If appropriate, release vendor due diligence report on the basis of a release (and potentially also reliance) letter
Buyer side
n Sign confidentiality agreements
n Review teaser and information memorandum as a first basis to decide whether to proceed with the transaction
n Set up due diligence team
n Determine material thresholds for upcoming due diligence exercise
n Buyer may submit to seller a due diligence check list (or request list), listing the documents which it would ideally like to review in
the due diligence phase. The submission of such request lists prior to the due diligence exercise is however becoming more rare
Deep dive: Confidentiality / non-disclosure agreement (NDA)
n Secure seller’s / target’s interest in business secrets / confidential
n Avoid publication of intention to sell target
n Listed companies: Avoid disclosure requirements under capital markets
Typical Content
n Obligation to maintain confidentiality of disclosed information
n Limit use of confidential information to a specific purpose (evaluation of
the target)
n Specify terms of permitted disclosure to third parties and responsibility
– Co-investors, banks and other finance providers
– Advisors and boards (also of parent companies)
– Regulators, courts and other disclosure required by law or stock
exchange rules
n Listed companies: Stand-still arrangements
n Non-solicitation of seller’s / target’s directors and employees (not
Penalty / damage clauses
n Unusual
n Good market practice to avoid
Standstill arrangements for listed companies
n Usual
Non-solicitation of seller’s / target’s directors
and employees
n Usually included in NDAs but not enforceable
under German law
Back-to-back with banks / advisors / other
third parties
n Usually required
n Certain professions being obliged to maintain
confidentiality (e.g. lawyers) were formerly
excluded but are nowadays generally required
to counter-sign
n Unclear or very broad definition of “Confidential Information” (scope of
confidentiality agreement)
n Loopholes through permitted disclosure without defined responsibility
n Onerous back-to-back requirements with banks, advisors and other third parties
n Stand-still arrangements (in particular for banks and larger groups)
n Exclusivity / commission obligations towards brokers
Deep dive: Release and reliance letters
Advisors prepare due diligence reports for the beneficiaries only. Generally, the
beneficiaries are the clients. It is also not uncommon to address the reports to a third
party, such as the financing bank, so that this third party is treated as beneficiary of the
report and may rely on it. In all other cases, if the beneficiary wants to pass the report
on to a third party, a release letter will have to be issued. By signing a release letter, the
recipient commits to not disclose any information contained in the report to third parties
and to use the report solely for the purpose of assessing the relevant transaction.
Release Letters
n Permit one party (usually the client of the report provider) to disclose the
report to another party, e.g. a seller to disclose the vendor due diligence
report to a bidder and at the same time impose confidentiality and non
disclosure obligations to further third parties
n Exclude any liability of the report provider to the other party (non-reliance
Reliance Letters
In addition, the advisors of the party passing the report on to a third party
may also issue a reliance letter conferring the new recipient the right to rely
on the facts presented in the report (under certain conditions).
n Permit a third party (a beneficiary) to rely on the due diligence report
Release letters
n Typically with exclusion of liability of report
provider towards third party
Reliance letters
n Market practice is divided between providing
and not providing reliance letters (Clifford
Chance provides reliance letters)
n Usually only for successful bidders
n Limited aggregate liability of report provider
towards client and all further beneficiaries
n Create liability of the report provider towards the third party for the
content of the report
n Scope of due diligence: Remains as agreed between the client and the report provider
n Oblige the other party to not further disclose the report to third parties
n Usually contain a limitation of the report provider’s aggregate liability to the client and to all beneficiaries
n Exclude obligation of report provider to update the report
report may be outdated
n Need to carefully assess the actual value of relying on a report prepared for a third party
The life of an M&A transaction: Due diligence phase
1st phase due
diligence /
Letter of intent
Q&As /
meetings /
confirmatory DD
Binding offer /
final bid
n The due diligence phase generally demands considerable advisory efforts and is rather intensive in terms of time
n Generally, the seller sends the potential buyer(s) a first draft of an SPA in the course of this phase, often shortly before the
submission of a final bid by the potential buyer(s)
the request to include a first buyer mark-up in the final bid documentation
has became common
Seller side
Buyer side
n Open data room for buyer(s) with first set of documents
(more confidential documents are often released in a
second phase)
n Review first set of documents
n Review questions – generally the process is coordinated by
the investment bank – and provide answers to the extent
possible and decide on whether to provide further
documentation prior to the submission of a letter of intent
involving legal advisors in the Q&A process may avoid
n Review letters of intent submitted and, as the case may be,
short-list bidders
n Release second round of documents and, if appropriate,
red data room
n Discuss findings and ascertain which information is
required for submitting a letter of intent; potentially also
request for clarification of open issues (ask questions and
request documents)
n Advisors to prepare a preliminary report with findings
n Submission of a letter of intent
n Confirmatory due diligence
n Discuss findings and ascertain which information is required
going forward; if necessary, request for clarification of open
issues (ask questions and request documents)
n Participate in management meetings
n Organize management meetings
n Advisors often review report with findings
n Circulate draft SPA
n Decide which bidder(s) stays in the process
n Decision on whether to submit a final bid and as the case
may be, submission of final bid, potentially also including
a first mark-up of the SPA and in certain cases asking for
n Consider any employee information issues
n Consider any employee information issues
n Review final bids
Deep dive: Due diligence
n Assessing the value of the target and identifying risks
n Developing a custom-tailored catalogue of representations and
warranties to mitigate potential risks that result from defects of the target
Electronic data rooms
n Currently standard
n Most documents not printable
n Developed from the rule of “caveat emptor” under US law, under which
the buyer could not recover from the seller for defects in the property
that rendered the property unfit for ordinary purposes
n Separate due diligence for different areas (legal, tax / financial,
environmental, commercial, insurance)
n Legal due diligence generally referred to as legal review
non-legal matters such as environmental, accounting, financial,
insurance, etc.
n Examining the documents in the data room
n Questions and answers
n Preparing the due diligence report (legal review report)
n Discussing the results of the due diligence
Depth of review
n Spot check
n Exhaustive due diligence of all documents (rather rare)
Documents with sensitive data
n Usually disclosed in data rooms with sensitive
data blacked out
Particular sensitive documents (red data
n Later disclosure in the second due diligence
phase, generally to a limited group of people
n Highly confidential matters (state affairs,
documents subject to bank secrecy, etc.) may
need to be held in trust
Material threshold for review
n Material threshold of usually 0,1% to 0,5% of
company value
Limitation of liability of law firm
n Standard in reports
n Limitation to the value of the transaction (max.
EUR 100,000,000)
Format for reports
n Red flag / by exception reports are nowadays the most common although some clients still prefer full summaries of certain or all of
the documents reviewed
n Table format with action points and recommendations is common
Deep dive: Letter of intent (LoI)
n Documentation of a basic understanding or intent to
– express and confirm one’s interest to the other party
– reduce the risk of misunderstandings
– avoid either party stepping back on key elements later on
– define a process for the transaction and allocate responsibilities
– (sometimes) grant exclusivity, preferred bidder status or cost coverage
Legal effect
n Usually non-binding declarations of “intent” or documentation of
preliminary agreement but legal effect depends on the wording – no rule
of law
LoI in a structured auction process
n Structured auction processes often without
letter of intent
LoI in a traditional sale process
n In traditional sales processes LoIs are more
Binding effect
n Depends on wording and form
n Should expressly and clearly specify legal effect of individual elements
n Exclusivity clause often drafted as a binding
n Form requirements to be observed, if binding, preliminary agreement is
Break Fees
n Very unusual in Germany
n Drafting needs to be careful and precise
n Specific provisions may be drafted so that they are binding, e.g.
confidentiality, exclusivity / preferred bidder status for a certain period or
cost coverage
Legal consequences
n Binding obligations can be enforced by the other party
n Breach of binding provisions can result in liability for damages
n Unclear or “wrongful” statements may result in liability for damages
The life of an M&A transaction: Negotiations & signing phase
& signing
SPA, in particular
reps & warranties
purchase price
agreements may
be needed (e.g.
agreement, etc.)
Signing: Notarial
recording may
be necessary for
Prepare filings /
transfers /
obtain funds
n The negotiation / signing phase also includes certain measures which take place immediately after signing and which generally
start being prepared long prior to signing. These include not only efforts to obtain sufficient funds for payment of the purchase
price (which generally occurs at closing) but also the necessary steps for the actual transfer in rem as well as the preparation
of statutory / regulatory filings (see also pre-closing phase)
n The transfer of shares in German limited liability companies as well as the transfer of certain assets, such as real estate, need
to be recorded by a notary
notary fees are usually borne by the buyer. The use of cheaper Swiss notaries is no longer
recommended due to current jurisprudence
Seller side
Buyer side
n Seller generally provides the first draft of the SPA with very
limited representations and warranties
n Buyer generally starts working on the basis of the draft
SPA provided by seller
n Seller typically wishes to prepare general disclosure
schedules (e.g. the full content of the data room) against
precise representations and warranties in the SPA
n Extension of draft representations and warranties to
provide sufficient comfort taking into account the findings
of the due diligence exercise
n Employee notification duties
n Buyer generally prefers to work with vast set of
representations & warranties and generally wishes to
accept only specific information contained in specific
disclosure schedules against the representations and
Key issues in the negotiation phase
n Deal structure: Asset deal vs. share deal vs. merger (consider also particular employment law issues in connection with asset deals)
n Defining and structuring acquisition vehicle
n Pre-signing restructuring measures, such as carve-outs and pre-signing consents
n Negotiation of representations and warranties, indemnities, purchase price, closing conditions, etc.
n Duty to remedy defects prior to / after closing
Deep dive: SPA – deal structure, MAC and purchase price
Scope of the transfer
n Decision whether to structure a transaction as a share deal, asset deal or
as a merger depends on a number of different factors, such as
organisation and size of target and buyer, tax implications, employees’
structure of the target, etc.
Structure: signing and closing
n Usually staggered
in between parties fulfil closing conditions (statutory /
regulatory and other transaction-specific conditions)
n In rem transfer occurs at closing
Asset vs. share deal
n Most transactions structured as share deals
n Asset deals demand detailed description of
assets in the SPA and give more room for
“cherry picking”
MAC clauses
n In approx. 1/5 of SPAs
Material adverse change (MAC) clauses
n MAC refers basically to an event that may cause a significant diminution
in the value of a business
n There is a very broad range of MAC definitions and substantial attention
must be paid to the drafting, in particular also to carve-outs from the
n MACs are buyer-friendly and strongly rejected by sellers as they in effect often give the buyer an opportunity to renegotiate the
purchase price
Purchase price
n The purchase price in SPAs may be structured as a fixed price based on the financial accounts at a certain point in time (locked
box mechanism) or it can be subject to adjustments on the basis of the closing date balance sheet
n There are several mechanisms to adjust the purchase price, such as cash free / debt free models and working capital adjustments
n While the seller typically used to prefer the locked box model and the buyer a mechanism providing for subsequent adjustment,
locked box models are nowadays regarded to be advantageous also to buyers due to the certainty they offer and due to the
reduced post-closing efforts
The current trend is towards an increase of the locked box approach
Purchase price in SPAs
Fixed price vs. price adjustments
Locked box
n Purchase price calculated on the basis of the last audited annual accounts or of interim accounts
locked box date
n Risks as well as opportunities resulting from potential positive or negative developments are transferred to buyer as of the
locked box date
MAC clauses and covenants can mitigate such risks
n Maximum certainty due to fixed purchase price
n Accrual of interest on the purchase price until closing may be agreed, if a positive cash flow is expected
n Debt / cash and working capital adjustments have already been included in the calculation of the purchase price on the basis of
the accounts and as of the accounts date; no subsequent adjustment efforts, no closing date balance sheet
n Risk of adverse developments and chances economically transfers to buyer on signing
n Extensive due diligence required from a buyer’s perspective
n Requires tight pre-closing covenants to avoid “leakage” of cash or other value to the seller (no leakage covenant
to be securely locked)
box needs
Adjustment based on closing date balance sheet
n Purchase price calculated generally on the basis of the last audited annual accounts, whereby potential adjustments pursuant to
certain reference values / milestones are taken into account. In case of subsequent deviations, the purchase price is adjusted
Working capital
Debt free / cash free
n Risks as well as opportunities resulting from potential positive or negative developments remain with the seller until closing
n Debt free / cash free concept: Purchase price = equity value: Applying a debt free / cash free mechanism means that the
net financial liabilities are to be deducted from the purchase price
n Major difficulty is the definition of debt as it is not defined by law and needs to be precisely specified in the SPA. Particular
attention is to be paid to “debt-like items”
n Debt free / cash free mechanism does not provide full protection from changes in balance sheet positions. Therefore,
working capital adjustments are often combined with the debt free / cash free mechanism
n Working capital adjustment models are based on an agreed target working capital amount as of closing. Upon closing,
the buyer determines within a certain period of time the actual working capital, which may lead to a purchase price
reduction or increase (deviation must exceed a certain agreed percentage)
n Working capital adjustment is used to compensate the respective party for growth or decline in working capital as measured
at closing relative to an agreed balance and serves as a protection against manipulation of cash items by the seller
n Although there is an usual definition of working capital, it is always subject to agreement in the SPA. When defining
working capital, any payables and receivables towards affiliated companies with working capital character should be
taken into account
Deep dive: SPA – representations & warranties
Representations & warranties
n Under German civil law, sellers are obliged to provide the sold “object”
without “defects” (Sach- und Rechtsmängel)
This German statutory
regime of “defects” is not suitable for M&A transactions
– Thus SPAs provide for representations and warranties in substitution
of the general statutory regime
n Representations and warranties typically depend on the scope of the due
diligence, which may be unreliable and generally cannot cover each
aspect of the business relevant for the buyer
Reference date for reps & warranties
n Bring-down to closing in 60% to 70% of the
De minimis for reps & warranties
n In approx. 50% of SPAs; number is increasing
– Ownership of shares and IP cannot be verified
Baskets for reps & warranties
n In approx. 50% of SPAs
– Compliance issues such as data protection, anti-corruption or money
n Basket amounts in 50% of the cases to > 1%
of the purchase price
n Seller usually wants to disclose as much as possible against
representations and warranties, i.e. not give warranties in relation to all
aspects disclosed to buyer in the bidding process
may have adverse
effect on overall bid valuation
n Reps and warranties are typically subject to a time limit which
generally varies between 6 and 24 months. Title, tax and
environmental matters are often excluded from the limitation period or
have a longer limitation period
n Qualifications
– Knowledge qualifier: To the seller’s best knowledge / positive
knowledge / no qualifier
– Disclosure: “Except as stated in Schedule XX”
n When basket is agreed, recovery is on a first
Euro basis in approx. two thirds of the cases
Cap on reps & warranties
n Most SPAs with reps & warranties contain
liability caps
n In approx. half of the SPAs with caps on reps &
warranties, the liability cap amounts to > 50%
of the purchase price
Carve-outs from liability caps
n Often exclusion of title, tax and less often,
environmental issues
Insurance of reps & warranties
n Is getting more common
Deep dive: SPA – remedies / limitation of liabilities
Remedies for breach of warranties
n Primary remedy: Seller has to establish such condition of the sold business as described in the relevant representation or warranty
n Secondary remedy: Compensation in money usually considered as a reduction of the purchase price
n Buyer’s knowledge usually excludes seller’s liability. Thus seller’s best defense is proper disclosure prior to signing. Whether
“deemed knowledge” due to disclosure in the course of due diligence excludes liability depends on the agreement reached. In any
case, buyer’s knowledge is usually limited to the knowledge of certain individuals
No double counting
n Double counting is to be avoided, in particular from a seller’s perspective. Thus, links between liability for breach of
representations and warranties and purchase price adjustment (debt, working capital), indemnities and other SPA provisions, risks
already included in the purchase price calculation (known risks) and recovery from third parties, e.g. insurance or contractors,
should be taken into account
De minimis, thresholds, caps
n De minimis: Individual claim needs to exceed a certain value before being eligible for compensation
n Thresholds: Aggregate claims need to exceed a certain threshold before buyer can raise claims against the seller. May be in the
form of a deductible (seller only has to compensate amounts exceeding threshold) or on a “first Euro” basis (seller has to
compensate full damage including threshold amount)
n Cap: Overall limitation of seller’s liability. Typically not structured in the same way for all warranties / under the SPA
Buyer is obliged to mitigate damages
n Obligation to mitigate is a general duty under German law
n Specific duties in respect of certain liabilities can be addressed in the SPA
Process for claims
n Buyer is usually required to notify seller of claims in writing without undue delay
n The parties are obliged to adhere to the formalities and processes agreed in the SPA; the legal consequences of a breach of such
formalities are usually extensively discussed by the parties
n Seller usually retains control over defense against third party claims
Deep dive: SPA – indemnities and closing conditions
n Indemnities are more buyer friendly than warranties: Whereas a warranty
is a contractual declaration of the existence of a particular state of affairs,
an indemnity is a contractual promise to reimburse the other party for a
particular type of liability, in case such liability arises
n Indemnities protect against risks and contingent liabilities which have not
been taken into account in the calculation of the purchase price but
which have yet been identified as potential risks
n Typical indemnities
De minimis and thresholds in indemnity
n Often not subject to thresholds or de minimis
Cap on indemnity clauses
n Often uncapped
– Taxes relating to pre-closing periods (but resulting from tax
assessments post-closing)
– Pending litigation
– Continuing liability from contracts with third parties with limited or no benefit to the buyer
– Environmental liability
n Mostly tailor made, no market standards except for tax indemnities
– Specific and clear definition of scope (particular events, liabilities, claims)
– Specifically address buyer’s cooperation and mitigation duties
– Seller usually retains right to defend against third party claims
Closing Conditions
n Closing is typically subject to certain closing conditions, which may be transaction-specific and / or such as required by law
n Statutory / regulatory conditions are in particular merger control approvals, regulatory approvals in particular in the financial sector
etc. Furthermore, the acquisition of at least 25% of the shares in German companies by non-EU / EFTA buyers is also subject to
clearance by the German Ministry of Economics and Technology
n Transaction-specific conditions may be third party waivers of rights to terminate material contracts for change of control (share
deal), third party consents to the transfer of material contracts or assets (asset deal), completion of material preparation actions by
the seller etc.
Deep dive: SPA – covenants and other provisions
n A covenant is an undertaking of a party to perform or refrain from performing
an action during the period between signing and closing (pre-closing
covenants) or for a certain time after closing (post-closing covenants)
n Pre-closing covenants: After signing, the buyer is obliged to acquire the
business at closing. The buyer therefore has an interest in protecting the sold
business against material changes. Thus, the seller often undertakes to run the
sold business in the ordinary course and in accordance with past practice.
Typical measures requiring buyer’s prior consent
– Change of articles of association
Post-closing covenants
n Relatively common
Non-compete covenant
n In approx. half of the SPAs
Non-solicitation covenant
n Common but not enforceable under
German law
– Conclusion of company agreements
– Reorganisation or liquidation of companies
– Sale or purchase of material assets
– Capital expenditures above a certain threshold
– Conclusion of high-volume or long-term agreements
– Entering into new financial debt positions
– Changes to the practice of collecting trade receivables or paying trade payables
– Changes to employment terms and conditions, shop agreements, pension arrangements
– Changes to accounting practice
– Further covenants required for locked-box concept (no leakage)
n Too tight covenants should be avoided as they could violate antitrust laws
n Typical post-closing covenants are the non-compete and non-solicitation clauses
– Seller undertakes to refrain from engaging in a similar business for a specified period of time
– Seller undertakes to refrain from soliciting seller’s / target’s directors and employees for a specific period of time; such covenant
is common but not enforceable under German law
Responsibilities, long stop date, break fees
n Right to withdraw if conditions are not fulfiled on a defined long stop date
n Break-up fee / compensation in case of withdrawal depending on responsibility still an exception
Governing law
n Litigation or Alternative Dispute Resolution
The life of an M&A transaction: Closing and post-closing
closing &
Fulfilment of
Closing: Transfer
of shares / assets
n In the period between signing and closing the parties procure the fulfilment of the closing conditions necessary for the transfer
of the business to become effective
n Upon closing, the newly acquired company will need to be integrated into the corporate structure of the buyer group. Thus,
the corporate restructuring will almost always be inevitable
Seller side
Buyer side
n Compliance with any post-signing covenants previously
agreed with the buyer; seller usually has to run the
business in accordance with past practice and is generally
dependent on buyer’s consent for certain transactions
n Cooperation with seller regarding compliance with postsigning covenants (e.g. consent for transactions should
not be unreasonably withheld)
n Whereas buyer is typically responsible for statutory and
regulatory filings necessary for clearance, both, seller and
buyer, may be responsible for the fulfillment of any
transaction-related conditions
n Procure fulfillment of transaction related closing conditions
(jointly with seller)
n Receipt of purchase price and delivering confirmation
n Effect transfer agreements (notarisation may be necessary)
n Compliance with any post-closing covenants
n Follow up on potential purchase price adjustments
n Statutory and regulatory filings required for closing
n (Finalising) establishing acquisition vehicle
n Payment of purchase price
n Effect transfer agreements (notarisation may be
n Tackle any restructuring and integration measures that
may be necessary – the end is also the beginning
n Drafting balance sheets as of the effective date if
applicable and follow up on potential purchase price
n Be aware of limitation periods for representations and
warranties and indemnities
Deep dive: Post-closing
What needs to be done
n Strategic integration: The newly acquired company will need to be
integrated into the corporate structure of the buyer group. Hence,
corporate restructuring will almost always be inevitable. Corporate
restructuring is frequently driven by tax considerations and will usually be
required to achieve the synergy effects targeted by the acquisition. The
goal may, for example, be to optimise the financing structure or to
reorganise group companies to simplify the overall group structure.
Typical post closing measures may be a merger, a change of the
corporate form, a delisting, a squeeze-out or the sale of a part of
the target.
n Operational: In the operational area, this is likely to extend beyond the
reorganisation of sales systems and logistic processes to include
relations with customers and suppliers.
Best practices
Restructuring and integration
n Provide for sufficient resources
n Ensure that integration team also comprises
members of the transaction team
n Ensure sufficient flow of information from deal
team to integration team
n Involve integration team during due diligence
exercise and contract negotiations
n Address and resolve any due diligence issues
during integration
n Due diligence findings: The period immediately after closing will also be
the obvious time to remedy any weaknesses that may have come to light
in the legal review process - such as standard agreements or terms and
conditions of the business that are invalid or inappropriate.
n IT: The integration of IT systems will also call for a comprehensive review of all the relevant licenses, maintenance and service
n Human resources: As regards human resources, the appointment of new managers, a realignment of organisational and
remuneration structures as well as a restructuring of the company’s pension scheme may be required.
n Regulatory issues: The period just after closing is also the right time to rectify any defects or gaps in regulatory permits and to
minimise any risk of existing pollution by actively engaging in environmental management.
Worldwide contact information
35* offices in 25 countries
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Clifford Chance
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Abu Dhabi
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1000 AG Amsterdam
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West Bay
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The Gate Precinct
Dubai International Financial
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40215 Düsseldorf
T +49 211 43 55-0
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60325 Frankfurt am Main
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Hong Kong
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Hong Kong
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80333 Munich
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NY 10019-6131
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CS 50018
75038 Paris Cedex 01
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T +65 6410 2200
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F +420 222 555 000
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No. 1 O’Connell Street
Sydney NSW 2000
T +612 8922 8000
F +612 8922 8088
(Co-operation agreement)
Al-Jadaan & Partners Law Firm
Building 15, The Business Gate
King Khalid International
Airport Road
Cordoba District, Riyadh, KSA.
P.O.Box: 3515, Riyadh 11481,
Kingdom of Saudi Arabia
T +966 11 250 6500
F +966 11 400 4201
Clifford Chance
Akasaka Tameike Tower
7th Floor
2-17-7, Akasaka
Tokyo 107-0052
T +81 3 5561 6600
F +81 3 5561 6699
Clifford Chance
Via Di Villa Sacchetti, 11
00197 Rome
T +39 06 422 911
F +39 06 422 91200
São Paulo
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04551-060 São Paulo-SP
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T +82 2 6353 8100
F +82 2 6353 8101
*Clifford Chance’s offices include a second office in London at 4 Coleman Street, London EC2R 5JJ. The Firm also has a co-operation agreement with Al-Jadaan & Partners Law Firm in Riyadh.
Clifford Chance
Norway House
ul.Lwowska 19
00-660 Warsaw
T +48 22 627 11 77
F +48 22 627 14 66
Washington, D.C.
Clifford Chance
2001 K Street NW
Washington, DC 20006 - 1001
T +1 202 912 5000
F +1 202 912 6000
Königsallee 59
40215 Düsseldorf
Tel: +49 211 4355 0
Fax: +49 211 4355 5600
© Clifford Chance Partnerschaftsgesellschaft von Rechtsanwälten,
Wirtschaftsprüfern, Steuerberatern und Solicitors
Frankfurt am Main, AG Frankfurt am Main PR 1000
Frankfurt am Main
Mainzer Landstraße 46
60325 Frankfurt am Main
Tel: +49 69 7199 01
Fax: +49 69 7199 4000
Theresienstraße 4-6
80333 Munich
Tel: +49 89 21632 0
Fax: +49 89 21632 8600
This Brochure does not necessarily deal with every important topic
or cover every aspect of the topics with which it deals. It is not
designed to provide legal or other advice.
Regulatory information pursuant to Sec. 5 TMG and 2, 3 DL-InfoV:
Abu Dhabi Amsterdam Bangkok Barcelona Beijing Brussels Bucharest Casablanca Doha Dubai Düsseldorf Frankfurt Hong Kong Istanbul Kyiv London Luxembourg Madrid
Milan Moscow Munich New York Paris Perth Prague Riyadh (co-operation agreement) Rome São Paulo Seoul Shanghai Singapore Sydney Tokyo Warsaw Washington, D.C.
Clifford Chance has a co-operation agreement with Al-Jadaan & Partners Law Firm in Riyadh