I OVERVIEW OF M&A ACTIVITY
The global M&A market hit a record year in 2015: with a total deal value of US$4,276 billion, M&A activity exceeded the 2007 peak of US$3,665 billion by more than 16 per cent. Compared to 2014, M&A deal value increased by over 30 per cent.2 The year also saw deals exceeding the US$100 billion mark, such as the announced merger of Allergan plc and Pfizer (US$184 billion; bid withdrawn by Pfizer due to new US tax legal regulations) and the acquisition of SABMiller plc by Anheuser-Busch InBev (US$120 billion). Further notable mega-deals were the acquisition of BG Group plc by Royal Dutch Shell Plc (US$81 billion), the acquisition of Time Warner Cable Inc by Charter Communications (US$78 billion) and the acquisition of EMC Corporation by Dell Inc (US$63 billion).
In stark contrast, however, the German M&A market in 2015 was not able to follow the global increase. On the contrary, M&A activity with German involvement (as bidder, seller or target) dropped by over 40 per cent from a seven-year high in 2014 (€145.7 billion) to €82.6 billion in 2015. While deals with German targets decreased by only 5 per cent (from €61.6 billion in 2014 to €58.3 billion in 2015), outbound activity of German buyers fell by more than 70 per cent from €84.1 billion in 2014 to €24.3 billion in 2015. As the number of announced deals with German involvement was almost constant (1,127 deals in 2015 compared to 1,149 deals in 2014), the average deal size decreased from €130 million to €70 million, largely due to the lack of mega-deals in 2015: while 2014 saw 10 deals surpassing the €5 billion mark, there was only one deal in 2015 (HeidelbergCement acquiring Italcementi for €6 billion). As a target country for M&A transactions, Germany continues to be the one of the most attractive jurisdictions in Europe when it comes to cross-border deals, with 135 inbound transactions in 2015 (Spain 106, France 101, Italy 97); only the UK attracted more inbound M&A, with 312 cross-border deals into UK announced in 2015.
The transaction volume of the 10 biggest transactions with German involvement reached more than €30 billion (€75 billion in 2014), including the €6 billion takeover of Italcementi by HeidelbergCement. The most active sector was the industrial products and services sector with 165 transactions worth €11.7 billion, including the €4.6 billion acquisition of Elster Group by Honeywell International. It is followed by the retail sector with transactions worth €9.6 billion, including the €3.5 billion acquisition of Tank & Rast GmbH by a consortium of ACP, ADIA, Meag, Borealis and CIC, the €2.8 billion dual-track sale of Douglas Holding AG by Advent International to CVC Capital Partners, and the €2.4 billion acquisition of GALERIA Kaufhof by Hudson’s Bay. Further notable deals in 2015 include the €2.9 billion merger of Coca-Cola Enterprises with Coca-Cola Erfrischungsgetränke AG, the acquisition of HERE by BMW, Audi and Daimler, as well as the €2.5 billion acquisition of GETRAG by Magn a.
The market for initial public offerings (IPOs) took a leap in 2015 with 14 IPOs in Germany (including new issues, listings, private placements, dual listings and transfers) and a total volume of €6.3 billion. Thus, the number of IPOs more than doubled compared to 2014 and 2013 (six IPOs in each year), and IPO volumes multiplied compared to €1.2 billion in 2014 and €2.2 billion in 2013. Although 2015 was a strong IPO year, it still did not reach the same strength as it did in 2007 when the German market saw 32 IPOs worth €7.4 billion.
II GENERAL INTRODUCTION TO THE LEGAL FRAMEWORK FOR M&A
The main source of regulation for public takeovers in Germany is the Takeover Act, as amended in 2006 to implement the EU Takeover Directive, as well as the German Stock Corporation Act, which provides the general framework of corporate legislation pertaining to German stock corporations. In addition, provisions of the German Securities Trading Act, including provisions on the disclosure of holdings of listed securities and certain other instruments, are relevant in connection with any public takeover relating to German target companies (or, in some respects, companies with securities that are listed at a German stock exchange).
Further provisions relevant for the implementation of a public takeover and potential further steps after the completion of a takeover are set out in the German Act on Corporate Transformation, the Stock Exchange Act, the Offering Prospectus Act and the Commercial Code.
The Takeover Act creates a comprehensive legal framework that enables public takeovers to be conducted fairly and transparently. The Takeover Act is also designed to protect the financial interests of minority shareholders and employees of target companies. It contains, inter alia, provisions dealing with takeover bids and mandatory bids, including provisions on pricing and procedure, and requirements in relation to the contents of the offer document.
The Takeover Act also provides for a specific squeeze-out procedure following a successful takeover bid (in addition to the general squeeze-out provisions under the German Stock Corporation Act, and in addition to the squeeze-out provisions under the German Act on Corporate Transformations), and a right of sell-out for minority shareholders following a successful takeover bid.
Pursuant to the Takeover Act, the Federal Ministry of Finance has adopted a number of regulations, one of which contains important provisions governing the contents of an offer document, the consideration payable in a takeover bid and exemptions from the obligation to make a compulsory offer.
In implementing the EU Takeover Directive, Germany has taken a minimalist approach, changing the existing German Takeover Act only to the extent necessary. In particular, Germany has opted out of the strict provisions of the Takeover Directive on frustrating actions that would have made such actions in hostile takeover scenarios generally subject to shareholder approval. Germany has also opted out of the breakthrough rule under the Takeover Directive that would have resulted in setting aside certain transfer restrictions and voting agreements during a takeover bid. The German non-frustration rules allow a target to take any action, including frustrating action, with the consent of its supervisory board. However, it is generally acknowledged that in giving its consent, the supervisory board is bound to authorise a frustrating action in a takeover situation only if the interest of the company to implement the action clearly outweighs the interests of the shareholders.
Although the stricter prohibitions of defensive measures and the breakthrough rules under the EU Takeover Directive could be opted into by German publicly listed companies, this possibility has not been used by any of the larger German corporates.
The Stock Corporation Act contains provisions relevant for all German stock corporations (both public and private), including provisions relevant to public and private takeovers of stock corporations, including those relating to the implementation of permissible defences that can be employed against hostile public takeovers, and provisions on the squeeze-out of minority shareholders by a majority shareholder (both in the case of publicly listed and private stock corporations) by a shareholder who has achieved 95 per cent or more of the shares of the corporation.
The Securities Trading Act contains provisions relating to insider dealing that make dealing in securities based on inside information a criminal offence. It also contains provisions dealing with market price manipulation, reporting requirements for significant shareholdings and reporting obligations for listed companies regarding major new business developments. These reporting requirements for major shareholdings have been significantly extended since 2011 to include reporting obligations for holders of other instruments linked to shares.
The Act on Corporate Transformations contains the mechanics for a process of statutory merger between two German companies, which can be an alternative to a takeover offer. It also contains the most important provisions regarding corporate restructurings that could be relevant in the post-closing phase both for public and private acquisitions, including, since 2011, provisions allowing the majority shareholder of a stock corporation (which itself has to be a stock corporation holding at least 90 per cent of the registered share capital of the target company) to squeeze out the remaining up to 10 per cent minority by implementing a merger between the target and the shareholder (for the shareholder as surviving corporation).
The Stock Exchange Act and the Offering Prospectus Act set out the rules dealing with the prospectus requirements applicable when issuing new shares as consideration for the takeover offer.
The Commercial Code provides for extensive disclosure obligations for publicly listed companies in respect of the structure of their share capital, the statutory provisions and provisions under the company’s articles on the nomination and dismissal of members of the supervisory and management boards, and certain categories of agreements or matters that may frustrate a takeover offer, including agreements among shareholders on the exercise of voting rights and the transfer of shares (to the extent these agreements are known to the management board), and material agreements of the company providing for a change of control clause.
III DEVELOPMENTS IN CORPORATE AND TAKEOVER LAW AND THEIR IMPACT
A noteworthy change to the capital markets laws that will have an impact on M&A transactions on a number of levels is related to the immediate applicability in all EU Member States of the EU Market Abuse Regulation (MAR),3 effective as of 3 July 2016. The provisions of the MAR will replace a number of the capital markets regulations of individual Member States, and will, in many cases, significantly increase and strengthen the compliance obligations. In particular, any issuers with securities that are traded, at the initiative of the issuer, in regulated unofficial markets, will in the future be subject to obligations to disclose inside information ad hoc, to maintain insider lists and to comply with regulations on directors’ dealings. In addition, rules restricting insider dealings and market manipulations will be significantly more strict, and potential sanctions in the case of infringements will be strengthened and more severe.
In 2013, the German legislator enacted the German Investment Code (GIC), which implemented the Alternative Investment Fund Managers Directive (2011/61/EU) (AIFMD). The GIC applies, inter alia, to managers of ‘alternative investment funds’ (AIFs) (including private equity funds), and aims to reduce the risks posed by alternative investment fund managers (AIFMs) to the financial system by introducing various mandatory disclosure, corporate governance, liquidity management and other requirements. In accordance with AIFMD, the GIC contains certain de minimis provisions under which AIFMs managing AIFs below certain thresholds are exempted from the full application of the GIC, and are only subject to a registration and not to a licensing requirement. The German Federal Financial Supervisory Authority (BaFin) is the regulator responsible for enforcing the provisions under the GIC.
Certain elements of the GIC are of particular relevance to private equity investors. In particular, the GIC contains a requirement for AIFMs to hold a minimum amount of capital (Section 25). For an internally managed AIF (i.e., when the management functions are performed by the governing body or any other internal manager of the fund), the minimum level is €300,000; however, for an AIFM that is an external manager to an AIF (or funds), it is €125,000. In addition, where the value of the portfolios under management exceeds €250 million, the AIFM must provide own funds equal to 0.02 per cent of the amount in excess of €250 million. This additional capital requirement is capped at €10 million. The GIC also imposes wide-ranging disclosure obligations on AIFMs. For example, managers are required to make regular disclosures to investors, including an annual report and numerous additional disclosures, such as details of investment strategy, liquidity and risks, and the use of leverage. In addition to these disclosures to investors, managers are required to disclose to the relevant authorities details of major shareholdings in non-listed (as well as listed) companies where these holdings exceed or fall below thresholds of 10, 20, 30, 50 and 75 per cent (Section 289). These disclosure obligations are particularly onerous for private equity investors.
The GIC also provides for a restriction on ‘asset stripping’ where a private equity fund subject to regulation under the GIC has acquired control over an unlisted company or over an issuer. In particular, independent from the specific legal form of the target, any amounts available for distribution must always be determined on the basis of the annual accounts of the immediately preceding fiscal year. In the case of targets in the form of a limited liability company (the most frequent corporate form in Germany), it remains unclear (and it has so far not been decided by any court) if these restrictions impose restrictions on capital or dividend distributions in addition to the statutory restrictions under the Limited Liability Company Act, in particular the capital maintenance rules. Furthermore, the GIC restricts the repurchase of own shares by a target acquired by a fund regulated pursuant to the GIC.
IV FOREIGN INVOLVEMENT IN M&A TRANSACTIONS
In terms of foreign involvement, foreign bidders interested in German targets come from all over the world, with a strong showing by US and British investors, closely followed by investors from Canada, Japan, France and Sweden. Outbound transactions by German purchasers very frequently involve the United States and Italy, followed by Britain and India, and Sweden, Spain and the Netherlands. The expectation of many analysts in previous years that Chinese inbound investment would increase in significance in terms of the number of transactions has not been confirmed, with a total of nine acquisitions (€259) by Chinese companies in Germany. However, in 2016, Chinese investors are becoming more and more active, with eight transactions with a total value of €5,377 million.
V SIGNIFICANT TRANSACTIONS, KEY TRENDS AND HOT INDUSTRIES
i Significant transactions
In the field of announced transactions worldwide, the single biggest transaction of series in the medical/pharma/biotech sector was the US$184 billion merger of Allergan plc and Pfizer. Due to new US tax legal regulations, Pfizer withdrew its plans. Further significant transactions were the acquisition of SABMiller plc by Anheuser-Busch InBev (US$120 billion), the acquisition of BG Group plc by Royal Dutch Shell Plc (US$81 billion), the acquisition of Time Warner Cable Inc by Charter Communications (US$78 billion) and the acquisition of EMC Corporation by Dell Inc (US$63 billion).
The market in Germany in 2015 was characterised by several large unsolicited takeover plans that were aborted at different stages: Vonovia stopped its intended €13 billion takeover of Deutsche Wohnen AG. Deutsche Wohnen AG itself planned to acquire LEG Immobilien for €7.6 billion and Conwert Immobilien Invest for €2.6 billion. The takeover offer of Potash Corporation of Saskatchewan for German DAX company K+S Aktiengesellschaft also received a great deal of attention. Because the management of K+S did not enter into discussions, Potash did not pursue its plan.
The largest successful transactions included:
- a the €6.0 billion takeover of Italcementi by HeidelbergCement;
- b the €4.6 billion acquisition of Elster Group by Honeywell International;
- c the €3.5 billion acquisition of Tank & Rast GmbH by a consortium of ACP, ADIA, Meag, Borealis and CIC;
- d the €2.8 billion dual-track sale of Douglas Holding AG by Advent International to CVC Capital Partners;
- e the €2.9 billion merger of Coca-Cola Enterprises with Coca-Cola Erfrischungsgetränke AG; and
- f the €2.4 billion acquisition of GALERIA Kaufhof by Hudson’s Bay.
ii Key trends
One of the most conspicuous trends is the increased interest of German strategic investors in acquiring companies in the United States, and, more generally, a return of interest in targets in the Western developed world. The total volume of announced deals with German bidders and US targets was €25 billion for 2015. Compared to previous year, German bidders are still very interested in acquiring US companies (e.g., the €2.8 billion acquisition of HERE from Nokia Oyi by a consortium including the German market leader in the automotive industries (Audi, BMW and Daimler)).
Analysts expect that this trend will continue. The United States economy has not yet reached its pre-crisis growth rates, but is once again generally seen as the country with the most positive growth prospects in the developed world. On the other hand, growth in Asia, and specifically in China, is expected to decline, which will likely shift German investors’ attention away from this region and back to developed economies. German potential bidders, including strategic investors, continue to have full coffers, so continued significant outbound investment is very likely.
Also significant is the further increase of multiples in the valuation of M&A acquisitions. The continuous increase of stock prices, driven by low interest rates on fixed income instruments, pushed price levels up in the M&A market. In particular, in the market for leveraged buyout transactions, the average valuations and multiples have almost reached the peak levels of 2006 and 2007, which is generally seen as an expression of the dearth of suitable target companies combined with the ongoing liquidity overhang, both of which have significantly increased investors’ preparedness to take risks and accept leverage.
As far as the general market is concerned, statistics kept by St Gallen University show that there has – as there was in the previous year – been an increased trend towards consolidation, with transactions where the purchaser and target belong to the same sector increasing throughout the various sectors. Strong candidates for consolidation were the area of food producers, the textile industry, the energy and waste disposal industries, and the media. In 2015, there was also an increased tendency towards consolidation in the real property markets; one highlight in this sector was the takeover of Süddeutsche Wohnen by Deutsche Annington (meanwhile renamed Vonovia), which was among the top 10 deals in 2015. As a result of a number of acquisitions, Vonovia was even included in the German DAX, the first real property company ever to be so included. The chemical industry also showed itself to be strong in consolidation deals, with a share of 74 per cent of all transactions in this sector involving targets and purchasers from the same sector. This tendency also underlines the increased strength of strategic bidders in the overall market, in spite of continuing low interest levels that also make transactions particularly attractive for financial investors.
Another noteworthy development that began a couple of years ago is the increased presence of activist shareholders in the German market who seek to actively influence the management of a company that they believe is underperforming or that, in the activist investors’ view, has the potential to return additional value to the shareholders. The approach is not seen as frequently as it is in the United States, but there is a notable increase, partly driven by the same activist investors that have been active in the United States for a much longer period of time.
iii Hot industries
In terms of completed mega-deals in Germany, the industrial products and services sector was very frequently the target and the bidder in transactions, followed by the internet, e-commerce and computer software sector.
VI FINANCING OF M&A: MAIN SOURCES AND DEVELOPMENTS
The availability of M&A-related financing decreased slightly towards the end of 2015. However, 2016 is expected to offer a favourable market environment, with banks facing competition from alternative lenders such as debt funds on leveraged buyouts. Mergermarket expects a pick up in activity in the upcoming quarters within high consolidating industries such as real estate, agriculture, the food industry and automotive suppliers.4
More stringent regulatory requirements for banks, especially in relation to capital and liquidity, resulting from the implementation of Basel III through CRD IV, CRR and related regulations, came into force in 2014 (subject to phase-in provisions over the next few years). Contrary to what may have been expected, the actual impact of these regulatory developments on the availability of syndicated bank financings (both senior tranches and – increasingly – also second lien and sometimes mezzanine tranches), both generally and for private equity investors, has been relatively limited ever since. In particular, the increased requirements have apparently not reduced the lending capacity of banks for acquisition financings, at least where the targets were of sufficient quality. It is generally believed that this is a result of the low interest policy of the Central Bank, combined with asset purchase programmes of a size unseen so far, which significantly increased the liquidity in the market and thus overcompensated for any restrictive effect that the new capital and liquidity requirements might otherwise have had. In Germany in particular, these factors have been compounded by the negative real interest on German bonds, which contributed to a sustained inclination of all actors in the financial market to take risks in return for acceptable yield prospects. Competition on the syndicated lending market therefore continued to be strong.
On the other hand, in contrast to the relatively hopeful developments in 2014, capital markets, and in particular high-yield bond markets, were volatile in Europe in 2015. In the second quarter of 2015, the European high-yield bond market virtually ground to a halt.5 High-yield issues only slightly picked up again in the second half of 2015, without ever reaching the levels of the preceding year. The few German domiciled or headquartered issuers who tried to tap the high-yield bond market in the second half of 2015 mostly turned directly to the much more liquid US market (e.g., Fresenius with a US$300 million high-yield bond issue in September 2015 and T-Mobile with an US$2 billion issue in November 2015).6 Another factor contributing to the weak performance of the high-yield bond markets in Germany may have been a renaissance of mezzanine financings and second lien financings, as well as the availability of debt financings from debt funds, in particular unitranche financings (see below). Nevertheless, interest by investors in high-yield bond investments has remained strong, with many issues oversubscribed, in particular for issuers with a rating at the upper end of the sub-investment grade spectrum (e.g., Schaeffler Finance BV, which issued €650 million of high-yield bonds in one of the largest and widely reported transactions of this kind in March 2015).
Despite the relative slowdown in 2015, high-yield and crossover bonds documented under German law have generally proven to be a feasible option for the financing and refinancing of private equity acquisitions. They have been successfully placed in the market in various instances as refinancing for German corporate issuers (such as HeidelbergCement, Continental, Phoenix Pharmahandel and KUKA), which shows their marketability. Issuers of German law high-yield bonds benefit in particular from two advantages: the documentation of the covenant package is in general shorter and less convoluted, but remains in substance the same as that for New York law bonds, which reduces the administrative effort and operational risk for the issuer significantly; and the choice of German law and the jurisdiction of the German courts mitigates the risk of expensive US litigation (in particular in Regulation S offerings, where bonds are not sold into the US). Thus, German-law high-yield bonds remain a viable alternative to New York-law bonds, and should also be increasingly considered in connection with private equity deals to the extent marketability of the bonds is ensured.
A widely noted change in the supervisory practice of the BaFin concerns the admission of debt funds to the German lending market. In a new guideline letter dated 12 May 2015, the BaFin has significantly relaxed the previous regulatory restrictions for debt funds and has clarified that AIFs, in particular special AIFs (both open-ended and closed funds) as well as hedge funds, are allowed to originate, restructure and prolongate loans, subject only to the (limited) statutory rules on financial products contained in the GIC (which implemented AIFMD), but without the need of a banking licence under the German Banking Act. At the same time, however, the BaFin announced that additional regulatory rules will be implemented soon, which are likely to include restrictions against (or a prohibition of) debt funds granting loans to consumers, a limitation on leverage, certain requirements on risk management, as well as rules on risk diversification and minimum liquidity. Unlike in other local markets where debt funds have increasingly and successfully competed with banks for leveraged financings, in particular by way of unitranche financings, the relaxation of the regulatory regime in Germany has – at least so far – not resulted in the significant participation of non-bank lenders in the acquisition financing market. In senior financings with lower leverage, debt funds have found it difficult to compete with banks in terms of pricing, given the continued low interest environment. Debt funds have participated more frequently in more highly leveraged financings, particularly in real estate financings. Nevertheless, despite their perceived advantages over bank financings – especially the higher degree of flexibility, the potential to provide highly geared financings and the lean decision-making processes assuring greater flexibility where timing is of the essence – debt funds have so far failed to make significant inroads in the German market.
Finally, there has been a modest ‘renaissance’ of mezzanine and second lien acquisition financings provided by banks.
As in previous years, club deal financings (mostly by banks) were also seen as a viable option in the segment of small or mid-cap transactions. They continued to be an attractive option for smaller or mid-sized acquisition financing packages, in particular given the stronger relationship of the borrower or sponsor to the financing banks, and thus the leaner post-closing communication and administration processes.
Excess liquidity in 2015 also induced opportunistic behaviour on the part of sponsors. Many banks were facing repricing and recapitalisation requests as well as a general trend of loosening covenants. However, unlike in the US market, covenant-light financings have still been very rare, and virtually unseen in borrowers other than investment grade borrowers.
The record liquidity in the markets has, as in 2014, favoured recapitalisation transactions through additional debt financings, in particular in situations where a genuine exit has proven difficult. Given the conditions in the European equity capital markets, which remained difficult throughout 2015, the routes to ‘true’ exits are often limited to sales to a strategic investor or secondary buyouts. One of the most widely noted recapitalisation transactions in Germany in 2015 was the successful recapitalisation by KKR of its WMF investment, only one year after KKR’s acquisition of 100 per cent of the shares of WMF through a squeeze-out of public shareholders.
In the current environment of readily available funds at relatively low margins, a recapitalisation through debt refinancing continues to be an attractive option, especially where a true exit may require further preparations. Even though recapitalisations pose several challenges from a legal perspective, many successfully closed transactions have shown that these can be sufficiently solved. The increase of the leverage ratio to finance the additional cash amounts taken out by the investor require diligent review and monitoring, in particular in respect of capital maintenance rules and liquidity protection rules. A violation of these rules may result in the personal liability of the management of the group companies. As with other types of financing, the refinancing documentation would usually address these issues to a certain extent (such as in respect of the capital maintenance regime) by the insertion of ‘limitation language’ limiting the liability of subsidiaries in respect of upstream and cross-stream securities granted by them. To the extent cash is upstreamed to investors (i.e., similar to a ‘super dividend’), however, this requires additional legal and financial analysis of available capital reserves, as well as sound and solid liquidity planning to avoid personal liability issues. Additional leeway can often be created for this purpose by group restructurings, in particular where hidden reserves can be realised. Appropriate measures should also be taken to mitigate insolvency clawback risks that may arise in respect of cash upstreamed by subsidiaries to investors if the portfolio company becomes insolvent during a hardening period that generally lasts one year.
Landmark leverage financings with German domiciled borrowers include the €4.4 billion syndicated bridge financing for Heidelberg Cement for the purpose of the acquisition of Italcementi SpA, acquisition financing in an amount of €700 million for Telecolumbus for the acquisition of Primacom as well as the additional €600 million acquisition facility for the purchase of Pepcon, and a €505 million syndicated loan for Remedco Holding for the acquisition of the RHN Group.7
Further noteworthy leveraged financing transactions included the €1.9 billion project financing for the ‘Veja Mate’ offshore wind farm off the German coast, and the approximately €1 billion leveraged financing for Phoenix Pharmahandel.8
The trends in financial and legal terms outlined above illustrate that financing is available to those who can identify suitable opportunities to invest, and private equity investors continue to be able to raise financings on attractive terms, especially as excess liquidity is still driven by loose monetary policy and the resulting high lending capacity.
VII EMPLOYMENT LAW
The most noteworthy developments in German employment law in 2015 that may be of relevance in an M&A context concern temporary agency workers and minimum wages. Additionally, in 2015, the Federal Labour Court has requested a preliminary ruling from the European Court of Justice, the outcome of which may have a material impact on the acquired rights of transferring employees.
i Temporary agency workers
The legal position of temporary agency workers has again been strengthened further, and yet it continues to be an area of uncertainty. While employers may only engage temporary agency workers ‘temporarily’, no sanctions apply if a temporary agency worker has been taken out for a period that exceeds such time frame, provided that the agency from which the worker was hired holds a valid permit. Moreover, while the works council of a company can be entitled to prevent the permanent engagement of temporary agency workers by way of an objection, it is still not clear in this context how a ‘permanent’ and a ‘temporary’ engagement can be distinguished. Further to that, higher labour courts ruled in 2015 that temporary agency workers shall be taken into account for the purposes of the thresholds under the German Works Constitution Act (e.g., for the determination of the number of works council members to be released from the duty to work). Finally, in 2015, the Federal Labour Court dealt with the definition of equal pay for temporary agency workers: it is the compensation that the employer pays an employee performing the same tasks that the agency worker carries out and during the same working hours. The tasks actually performed count. The burden of proof lies with the agency worker. Another item of uncertainty is the legal consequence in the event that an agency worker is not an employee of the providing agency, but rather, for example, an employee of a subcontractor. A higher labour court found such chain hiring to be impermissible, with the consequence that the relevant agency worker was deemed employed by the hirer.
Several of the above items may soon be resolved by the legislature. The government is currently discussing amendments to the law, which shall enter into force in 2017. Key proposals include a general 18-month limit on the use of individual temporary agency workers by a hirer (longer terms up to 24 months may be permitted through collective bargaining agreements). At the end of such period, the agency worker has to be assigned to a different hirer or will principally be deemed to be employed by the hirer. Equal pay, as a rule, has to be provided from nine months into the engagement of an agency worker (although the issue of what exactly constitutes equal pay remains unresolved). Agency workers have to be taken into account for the thresholds for co-determination and works constitution purposes. Finally, typical scenarios of abuses of agency work (e.g., by using agreements that on their face constitute service contracts) will no longer go unsanctioned. Rather, agency workers hired under agreements that do not explicitly specify that they are for agency work will principally be deemed employed by the hirer irrespective of whether the agency holds a valid permit for agency work.
ii Business transfers
In the field of business transfers within the meaning of Section 613a German Civil Code, the Federal Labour Court has essentially confirmed its stand on items in this context (e.g., the requirements for a business transfer). Further to that, the Court has put a request for a preliminary ruling to the European Court of Justice regarding the German rule that, following a business transfer, the transferee is essentially bound by the content of the employment agreements of transferring employees as if it had concluded such agreements itself. In summary, the Court is asking whether the EU Directive on the approximation of the laws of the Member States relating to the safeguarding of employees’ rights in the event of transfers of undertakings, businesses or parts of undertakings or businesses, or the right to entrepreneurial freedom pursuant to Article 16 of the EU Charter of Fundamental Rights, require German law to provide for exemptions to this rule. In the underlying case, the employment agreement of a transferring employee provides that the collective bargaining agreements of a specific industry, as amended from time to time, shall be applicable to the employment relationship. The transferee contests that this can apply in cases where the transferee is not bound by such collective bargaining agreements, and therefore has no means to influence their future content; and holds that the reference should become static through the transfer (i.e., limited to the content of the relevant collective bargaining agreements at the time of the business transfer).
iii Minimum wages
Since 1 January 2015, a mandatory minimum wage applies in Germany, and the paid gross wage of employees across all sectors must not fall below an amount of €8.50 per working hour. Such amount is reviewed periodically. The first review had to be completed by 30 June 2016 for a potential adjustment taking effect per 1 January 2017. A number of issues in the context of the law may entail material risks for an acquirer of a business in Germany. For example, principally, it is still unclear whether payments made by the employer in addition to an agreed base compensation (e.g., supplementary payments, performance-related payments or other payments) count towards the minimum hourly wage. Precedent by local and higher labour courts is heterogeneous. The Federal Labour Court has ruled in a first decision on the subject that annual payments such as, for example, a vacation bonus, do count towards the minimum wage if they are paid in monthly instalments and that payment is unconditional and irrevocable.
Further to that, there is uncertainty as to the treatment of employees working under flexible working time regimes and receiving an unvarying fixed monthly compensation. Finally, the law provides that a principal shall be liable for his or her subcontractors’ compliance with the minimum wage requirements. While it has been voiced by legal writers and by the Federal Department of Labour that the scope of this norm shall be limited to general contractors, the law contains no such indications. Therefore, there is a substantial likelihood that it applies to any principals.
Additionally to the minimum wage as such, the law has introduced certain documentation requirements on industry sectors deemed particularly prone to illicit employment (e.g., the construction industry). These have to document on a daily basis the actual beginning and end of the working time of all employees earning below an amount of €2,958 per month gross. Lobbying for easement of these requirements continues after some first relief of the original, even stricter requirements.
In practice, the minimum wage law has resulted in material cost increases in low-wage sectors, and a reduction in the number of paid internships and marginal employment relationships in Germany.
VIII TAX LAW
There have been no major legislative actions since the beginning of 2015 that have had a direct impact on M&A-related aspects of German tax law. However, some draft bills, case law and certain general trends are or could be of relevance to German M&A practice.
i The ‘anti-VW/Porsche’ clause
Under German tax law, assets that qualify as a stand-alone business unit can be transferred in a tax-neutral manner to a company or partnership by way of a contribution against the issuance of new shares in the company on a rollover of book values basis (i.e., without triggering taxable gains). It is also possible to grant, on top of the new shares, additional consideration (e.g., a loan note) as long as the value of this other consideration together with the issued shares does not exceed the book value of the contributed business unit. The same applies to the contribution of shares if the acquiring company holds or will hold the majority of the shares. In 2012, Porsche SE contributed its remaining 50.1 per cent share in an interim holding company, which itself was the sole shareholder of the car manufacturer Porsche AG, to Volkswagen AG against the issuance of one new Volkswagen share and a payment of €4.46 billion. Since the consideration comprising the one share and the payment equalled the book value of the contributed shares, the contribution did not realise taxable gains in the 50.1 per cent shareholding. As a reaction to the Porsche/VW deal, there has been a lot of criticism of the underlying provision of German tax law, as it would allow for an ‘unacceptable’ mismatch between the value of the shares and the other consideration. As a reaction to it, the German legislator limited the tax neutrality of reorganisations that include boot (i.e., consideration in cash or in kind apart from newly issued shares) in a way that tax neutrality is possible only to the extent that the boot does not exceed 25 per cent of the book value of the assets contributed or an overall amount of €500,000 (provided that the book value of the assets contributed is in any case the maximum limit).
ii Inbound real estate investments
Investors operating a commercial business in Germany are generally required to keep accounts in accordance with German GAAP and, as a consequence, they need to determine their relevant taxable income on an accrual basis, and are not allowed to calculate their income based on the significantly less burdensome cash-flow method where they would simply have to deduct all business expenses from their proceeds. However, on 15 October 2015, the German Federal Fiscal Court held, in preliminary proceedings,9 that a foreign entity that merely holds and rents real estate in Germany without creating a permanent establishment or representative in Germany cannot be forced to calculate the German tax base of its rental income by drawing up German GAAP accounts. Rather, such foreign taxpayers shall be free to calculate their income based on the cash-flow method where they would simply have to deduct all business expenses related to the German real estate from their German rental proceeds. If this decision is held up in the main proceedings, the tax-compliance burden for certain inbound real estate investors will definitely be eased.
iii Real estate transfer tax (RETT)
German RETT becomes due not only upon the direct transfer of German real estate itself, but also upon certain direct or indirect transfers of shares or partnership interests in real estate owning companies. In particular, RETT is levied:
- a in the event of the direct or indirect transfer of 95 per cent (or more) of the interests in the assets of a real estate owning partnership within a five-year period (Section 1 Paragraph 2a RETT Act);
- b if 95 per cent (or more) of the shares or partnership interests in a real estate owning company are directly or indirectly transferred to a single person (including related persons) (Section 1 Paragraph 3 RETT Act);
- c if a person (including related persons) holds, as a result of a transaction, directly or indirectly 95 per cent (or more) of the shares or partnership interests in a real estate owning company (Section 1 Paragraph 3 RETT Act); or
- d if a person holds, as a result of a transaction, a direct or indirect economic interest of 95 per cent (or more) in a real estate owning company (Section 1 Paragraph 3a RETT Act).
However, Section 6a RETT Act currently provides for an intragroup reorganisation exemption applying to certain direct and indirect transfers of real estate or participations in real estate-owning entities. Under this exemption, RETT is not attracted if the transaction involves one controlling company and one or more controlled companies, with control being defined as a direct or indirect shareholding of at least 95 per cent between the relevant entities for at least five years before and after the reorganisation. The German Federal Fiscal Court10 suspects that this RETT exemption could constitute unlawful state aid; therefore, on 25 November 2015, it officially asked the German Federal Ministry of Finance to join a pending case that relates to such intragroup reorganisation exemption. It has also enquired of the German Federal Ministry of Finance whether that exemption had been notified as potential state aid before it was implemented. The outcome of the case needs is awaited, but it already demonstrates the increasing importance of the state aid rules for Member States’ taxation.
IX COMPETITION LAW
In 2015, about 1,100 merger control notifications were reviewed by the German Federal Cartel Office (FCO), a slight decrease compared to the three previous years. Overall, the total number of notifications remains relatively low compared to the pre-financial crisis years (2008: almost 1,700 filings; 2007: more than 2,400 filings). Similar to previous years, the FCO cleared almost all notified transactions (99 per cent) within the Phase I deadline of one month. Only 11 transactions raised potential competitive concerns and were reviewed in more detail (Phase II proceedings), decreasing the number of Phase II proceedings by half compared to the previous year. Out of these 11 transactions, one was blocked by the FCO, seven were cleared unconditionally, one was cleared subject to remedies and two were abandoned by the parties themselves. The transaction eventually blocked related to the planned acquisition of Kaiser’s Tengelmann by competing grocery retailer EDEKA. According to the FCO, the takeover would have immensely limited the choice of local consumers and their possibility to switch to another retailer. The FCO also stressed that the takeover would have increased concentration on the demand side in the food procurement markets. While the FCO indicated individual Kaiser’s Tengelmann outlets that EDEKA could have taken over without any concerns, the companies pursued an ‘all or nothing approach’ and applied instead for a ministerial approval. Recently, this application has given the case an even higher profile, since the German Federal Minister for Economic Affairs and Energy actually granted the approval in March 2016 (subject to several conditions and obligations). The parties’ application is one of only 22 in German merger control history, and the first with a positive outcome since 2002. As a consequence of the Minister’s decision, Daniel Zimmer, the head of the German Monopolies Commission, an academic advisory body on competition matters to the government, resigned from his duties, which caused commotion even in the popular media (which predominantly criticised the Minister). The next act in this ‘groceries drama’ will take place in front of the courts. While Kaiser’s Tengelmann and EDEKA are challenging the FCO’s initial decision to block the transaction, competing grocery retailer REWE has lodged a complaint against the ministerial approval. The proceedings are still ongoing.
By the end of 2016, the 9th Amendment of the German Act against Restraints of Competition (ARC) shall come into effect, providing three changes to the statutory provisions that will also be of relevance for merger control. They are particularly targeted at ‘digital markets’. First, it is planned to amend the statutory provisions so as to clarify that even when services are offered without consideration in the form of a monetary payment, a ‘market’ relevant for the application of competition law provisions nevertheless can exist. Recently, the question of whether free-of-charge services (which are rather common, especially for ‘digital giants’ such as Facebook) are within the scope of the ‘market’ concept underlying competition law has been debated controversially. Secondly, it is planned to complement the statutory criteria for assessing a company’s market position (and, potentially, dominance) by certain aspects that are particularly relevant for the analysis of ‘digital platforms’ business models, inter alia, network effects, the importance of data, user behaviour and corresponding economies of scale. Regarding data relevance, it is also envisaged to improve the procedural cooperation between competition authorities and data protection supervisors. Finally, the 9th Amendment of the ARC is supposed to implement additional merger control thresholds so as to expand the ambit of German merger control.
Following the proposed amendment, not only transactions relating to companies with a certain minimum turnover worldwide and in Germany would be subject of German merger control. Rather, transactions that (albeit relating to target companies with negligible turnover) have a high transaction value would have to be notified as well. This would be a direct effect on the increasing M&A activity in the digital sector, which revealed the weaknesses of merger control regimes that solely rely on turnover. For instance, the merger of Facebook and WhatsApp, despite its US$19 billion transaction value, high public profile and material impact on all EU consumers, almost escaped the review competence of the Commission due to the very low turnover of WhatsApp. The proposed change is hence based on the notion that a high transaction value can be indicative of the competitive significance of a transaction. The German Ministry for Economic Affairs and Energy has indicated that it considers a transaction value exceeding at least €350 million to be a reasonable complementation of the existing thresholds for review.
In 2013, the ARC was amended to the effect that a public bid or a series of transactions in securities may be implemented even prior to merger control clearance, provided that the transaction is notified to the FCO without delay and the acquirer does not exercise the voting rights attached to the securities. Practical experience shows, however, that merger parties still tend to refrain from relying on this provision, and, rather than filing a notification subsequent to the transaction’s implementation, to coordinate their M&A process in such a way as to obtain timely Phase I approval after signing a deal. Presumably, companies shy away from the risk of the FCO raising concerns later on. It also remains uncertain what period of time is implied by the term ‘without delay’ (i.e., when exactly a notification following the implementation of a transaction should be filed).
Still noteworthy with regard to German merger control is that, due to the 8th Amendment of the ARC, the FCO has jurisdiction even over de minimis transactions (i.e., transactions that relate to markets accounting for a sales volume of less than €15 million in Germany (irrespective of whether the relevant geographic market is actually broader than Germany)). These transactions have to be notified. However, once proceedings are initiated, the FCO must not block the transaction insofar as the de minimis markets are concerned. The most prominent case in which this amended de minimis provision became relevant is still the proposed merger between semiconductor equipment manufacturers Applied Materials and Tokyo Electron. While the FCO had full jurisdiction over the transaction, the substantive scope of its review was limited, as the competitive analysis of all de minimis markets (which accounted for 22 out of 40 markets affected in total) could not be relied on with respect to potentially blocking the deal; hence, the FCO cleared it unconditionally in 2014. Eventually, the transaction was abandoned by the parties due to substantial concerns raised in particular by the US Department of Justice (but also by the Ministry of Commerce of the People’s Republic of China in China). This may well call into question whether the revised de minimis provision is sensible, as it may, on one hand, grant the FCO jurisdiction, forcing it to use investigation resources and workforce hours, but on the other hand still statutorily forces the authority to overlook potential areas of competitive concern.
Finally, regarding additional guidance material, the FCO is currently still in the process of reviewing and updating its ‘Information leaflet on the German control of concentrations’, which contains explanations of the most important terms and procedural aspects of German merger control. It remains to be seen whether the leaflet will be published this year. Already updated in 2014, the FCO’s information leaflet ‘Guidance on domestic effects in merger control’ is of relevance in particular for foreign-to-foreign mergers. One year after its publication, the overall experience of this guidance (which outlines the FCO’s understanding and practice with regard to the domestic effects of a merger and thus a filing requirement in Germany) appears to be positive overall. The paper, which is also available in English, may serve as a useful starting point for transaction parties and their counsel when self-assessing the obligation to file. Based on the leaflet, however, the FCO applies rather strict standards, establishing a domestic effect even in cases where there may only be potential competitive effects in Germany caused by foreign-to-foreign mergers. Indeed, the FCO remains keen to secure jurisdiction over the broadest number of mergers possible, taking the concept of ‘domestic effect’ seriously.
Globally, 2015 turned out to be a record year in terms of M&A, under each of the aspects of total volumes, volumes in the United States and the number of mega-deals. However, analysts hesitate to see this development as an indication of a new large wave of M&A. In contrast to international developments in 2015, the German market remained rather sober, but still developed solid activity, even if it was far below the records reached in other countries. Observers expect that, to keep up with the increased pace of international M&A activity, German companies will increasingly invest abroad. It is also expected that the number of M&A transactions will grow at the behest of activist investors who increasingly put management under pressure to restructure their business portfolios. In Germany, the first half year of 2016 shows that Chinese investors are very interested in acquiring German targets (2015: nine transactions with a total value of €259 million; 2016: eight transactions with a total value of €5,377 million), having already invested 20 times more than it did in 2015. Generally, German companies will be one of the main targets for foreign investors.
1 Heinrich Knepper is a partner at Hengeler Mueller.
2 Mergermarket Global and Regional M&A: 2015; Mergermarket Trend Report Q1 2016: Germany.
3 Regulation (EU) No. 596/2014 of the European Parliament and of the Council of 16 April
2014 on market abuse.
4 Mergermarket Trend Report Q1 2016: Germany.
5 Source: scope ratings, European high-yield bond market Q2 2015 wrap-up, www.scoperatings.com.
6 Source: Thomson ONE database, All Syndicated Loans, Domicile Nation Germany, 2015.
7 Source: Thomson ONE database, All Syndicated Loans, Domicile Nation Germany, 2015.
9 I B 93/15.
10 II R 62/14.