Codification of Corporate Acquisitions – Proposals and Developments

Proposal: A statutory definition of corporate acquisition, encompassing both the acquisition of assets (Asset Deal) and the acquisition of shares (Share Deal), should provide clarity and determine the scope of further regulations.

Currently, there is no uniform definition of corporate acquisition in German law. A clear definition would help to clarify the legal framework and avoid uncertainties. A uniform definition could also help to avoid valuation discrepancies between Asset and Share Deals and to standardize the application of warranty rights

Proposal: Where the obligation for notarization does not already arise from other statutory provisions (e.g. for the purchase and transfer of GmbH shares), the purchase of companies should be exempted from the scope of § 311b (3) German Civil Code (“BGB”).

The protection of § 311b (3) BGB is not necessary in the case of a company purchase, as the parties usually have sufficient commercial experience. Moreover, the notarization requirement generally causes significant transaction costs.

Proposal: Pre-contractual obligations, such as confidentiality and disclosure, should be specified to increase transparency and fairness in negotiations.

This can help to avoid misunderstandings and disputes and create a fair negotiation basis. A statutory specification could determine under which circumstances the seller fulfills his obligations by disclosing the relevant information in the data room or to what extent he can exempt himself from liability through corresponding contractual clauses.

Proposal: Introduction of statutory regulations for determining the purchase price and for the due date and interest on the purchase price when obtaining arbitration reports to minimize disputes.

Determining the purchase price is usually one of the major negotiating points in company acquisitions. A statutory regulation could define a basic purchase price mechanism. In complex transactions, however, the parties must still have the flexibility to make individual arrangements.

Proposal: The inclusion of obligations for the proper continuation of the business and cooperation in fulfilling closing conditions should facilitate the execution of the corporate acquisition agreement.

A significant period can elapse between the conclusion of the contract and its execution. Clear regulations on the obligations in this phase can help to make the transition smoother. The seller could be legally obliged to continue the business according to the principles of proper business conduct, and the parties could be obliged to perform agreed cooperation actions. 

Additionally, an extraordinary right of withdrawal in the event of significant changes in the company could be included. Of course, an attempt would have to be made to outline what is material in this sense.

Proposal: The adaptation of statutory warranty rights to the specifics of corporate acquisitions, including the restriction of the right of withdrawal after the transaction has been completed, could better consider the interests of the parties.

It is currently a unanimous opinion that the statutory regulations on warranty liability do not fit the circumstances of a corporate acquisition. Therefore, a comprehensive contractual liability regime is usually agreed upon, excluding the statutory regulations.

Each corporate acquisition has such a high degree of individuality that statutory codification should focus on creating only a framework. This framework can then be filled in by party agreement.

Proposal: A statutory regulation on the attribution of knowledge, which takes into account the obligations for knowledge organization in the company, should increase legal certainty.

The attribution of knowledge is a complex issue that often leads to disputes. Clear statutory regulations can provide more transparency and security here.

In particular, the question of the attribution of knowledge could be resolved from the sole connection to the acting persons and their function and additionally determined in complex corporate organizations based on obligations for knowledge organization.

Proposal: The establishment of a uniform statute of limitations for claims for material defects and the clarification of the statute of limitations for purchase price adjustments should simplify the legal situation.

Different statutes of limitations can lead to uncertainties. A uniform regulation can provide a remedy here.

​Proposal: The facilitation of the transfer of legal relationships in an asset deal without the consent of the contracting party should increase transaction security.

The transfer of legal relationships is often an obstacle to company acquisitions. For example, it could be stipulated by law that company-related contractual relationships and all other company-related claims and liabilities based on the law of obligations are transferred to the acquirer without the consent of the third party. As this is at the expense of the contractual partner, a right of objection or an extraordinary right of termination for the contractual partner could be provided.

Proposal: The options for transferring personal authorizations are to be expanded to reduce obstacles to company succession.

Authorizations under public law are often difficult to transfer. A simplification in this area could make company succession easier overall. For example, it could be stipulated by law that company-related permits and other authorizations remain valid for a certain period (e.g. six months) after the transfer of the company, provided that no mandatory public-law concerns oppose this. 

Proposal: An exemption for companies in the law on general terms and conditions should strengthen freedom of contract in company acquisitions.

The contentious and not clearly resolved question of the application of AGB law to corporate acquisitions leads to uncertainties. A (general) exemption for (large) corporate acquisitions could provide a remedy here. Alternatively, it could be legally established that contractual terms are considered negotiated if the contracting parties have negotiated them individually or in connection with other provisions of the corporate acquisition agreement in a manner appropriate to the subject matter of the contract and the circumstances of the contract conclusion. This would recognize the usual negotiating character of corporate acquisition agreements and also allow so-called package solutions.

The proposed codification aims to make company acquisitions in Germany more efficient and legally secure and to provide a more uniform framework for smaller transactions. A clear legal framework could strengthen the negotiating position and reduce transaction costs. Small and medium-sized companies in particular could benefit from the simplified and standardized processes, which could make company succession easier in many cases.

The proposals to simplify the formal requirements, to relax the approval requirements for asset deals and to exclude the law on general terms and conditions are promising. It would be desirable if these were also pursued after a change of government at federal level.

However, the draft remains vague in crucial areas and does not sufficiently take practice into account. In Germany, practice already follows an internationally established standard that provides a suitable framework for many transactions even without codification. Moreover, many corporate acquisitions simply have too many peculiarities to be adequately addressed by a general statutory regulation. Against this background, there will still be a significant need for individual regulation and negotiation for most corporate transactions even after codification.