The Mergers & Acquisitions Litigation Review: Germany
While the number of cases in Germany concerning M&A disputes was fairly low in the 1990s, a steady increase in the number of cases can be observed over the past 20 years.2 In Germany, the vast majority of M&A disputes are counterparty disputes while shareholder disputes are still rare in an M&A context. Furthermore, the characteristics of M&A disputes in Germany are strongly influenced by the fact that Germany is a civil law jurisdiction. As a result, judges in Germany take a much more active role in litigation, for instance during the taking of evidence, compared to common law jurisdictions. Unless the parties agree on arbitration, M&A disputes are typically brought before the commercial chamber of a German regional court. Since German litigation practice in actuality does not feature pretrial discovery or disclosure, German litigation is often described as 'frontloaded'. This means that all relevant facts and evidence must be submitted together with the parties' initial pleadings, particularly with the statement of claim and the statement of defence, which are usually fully fledged submissions with which evidence is already presented or offered.
That said, the majority of German M&A disputes are resolved by means of arbitration proceedings.3 According to the 2020 statistics of the leading German arbitration institution, the German Institute of Arbitration (DIS), the most popular seats of arbitration are Cologne, Munich and Frankfurt (Main).4 At least in purely German domestic arbitration proceedings, arbitrators often take a similarly active role as judges would in German litigation. While the pleading requirements in German civil litigation do not apply to commercial arbitration proceedings, which are usually subject to the chosen institutional rules, there is a tendency in arbitration proceedings with a strong German nexus for parties to file more robust initial pleadings than are strictly required under the applicable rules.
Legal and regulatory background
The procedural and substantive law that governs M&A disputes regularly follows from choice of law clauses and dispute resolution clauses in the purchase agreements since it is best practice in German M&A transactions to include such clauses. In the absence of a clause concerning jurisdiction or arbitration, the German Code of Civil Procedure provides for rules to determine jurisdiction. In cross-border disputes, international jurisdiction and thus the applicable procedural law are often determined pursuant to the provisions of the Brussels Ia Regulation or the Lugano Convention.5 The applicable domestic substantive law in cross-border disputes is determined in accordance with the Rome I Regulation (contractual claims) and Rome II Regulation (non-contractual claims) and – outside the scope of these regulations – the Introductory Act to the German Civil Code. The most important German substantive laws with regard to M&A disputes are the German Civil Code, the German Commercial Code, the Limited Liability Companies Act, the German Stock Corporation Act, the Transformation Act and the Securities Trading Act. In Germany, unlike, for instance, in the United States, all laws that are material for an M&A dispute are federal laws. Thus, a conflict-of-laws analysis concerning cross-border disputes with a connection to Germany needs to consider only whether German domestic law governs, and need not distinguish between various German state laws.
In the context of M&A transactions, three regulatory bodies are of particular importance. First, the German Federal Financial Supervisory Authority (BaFin) is the authority responsible for supervision of takeovers of domestic companies listed on a stock exchange in Germany. BaFin monitors, among others, the following transaction-related procedures: acquisition offers, takeover bids, mandatory offers and delisting offers.6 BaFin has the right to issue orders including an order prohibiting an offer. Orders of BaFin are subject to an objection procedure before the BaFin Objections Committee.7
Second, mergers between companies that fulfil certain thresholds set out in the Act against Restraints of Competition must be notified and are subject to merger control assessment by the German Federal Cartel Office (BKartA). The BKartA has extensive powers to request information and data for the merger control assessment. Parties to a merger subject to notification are prohibited from proceeding with the merger before the transaction has received clearance from the BKartA (gun jumping). In the case of larger mergers that have a European Union dimension, the merger is also subject to review by the European Commission.
Third, the Federal Ministry of Economics and Energy (BMWi) has the authority under the Foreign Trade and Payments Act and the Foreign Trade and Payments Ordinance to review and restrict or prohibit certain acquisitions of German companies by foreign investors from outside the EU, but in exceptional cases also from within the EU. The scope of investigation and the BMWi's means of control depend on how sensitive the area in which the target company operates is considered to be as well as the amount of shares to be acquired. A prohibition or restriction by the BMWi can be challenged before an administrative court with an action for annulment by the buyer or the seller, but not by the target.8
M&A-related disputes between shareholders and the company or its directors and officers are generally rare in Germany compared to M&A disputes against the counterparty to the transaction. This section outlines the substantive law and procedural aspects to be considered with regard to shareholder claims.
i Common claims and procedure
Common shareholder claims are related to either a breach of duties by directors and officers, or exploitation of influence on a company to the detriment of the shareholders by any person. Furthermore, shareholders may claim damages against the company due to a failure to provide information or the provision of false information either under the Securities Trading Act (WpHG) or based on tort law. Tort claims may also be directed against directors and officers. Following a transaction, minority shareholders may claim monetary compensation if they have to transfer their shares to majority shareholders (squeeze-out).
In managing the affairs of the company, members of the management board in particular have to comply with their duty of care and their duty of loyalty. The duty of care requires the board member to exercise the due care of a prudent manager, faithfully complying with his or her duties. With regard to the duty of loyalty, the board member, as a fiduciary, is obliged to give priority to the company's interests over her or his personal interests or the interests of third parties, and to safeguard the company's interests. In the event of a breach of those duties, the board member is liable towards the company for the damage caused. Correspondingly, claims against board members are pursued by the company. In pursuing such claims, the company is generally represented by the supervisory board. However, the general meeting of shareholders may appoint a special representative to pursue claims against a board member. Furthermore, shareholders owning, in the aggregate, 1 per cent of the share capital or a proportionate amount of the share capital of €100,000 may seek permission from a court to pursue the claims in their own name on behalf of the company. The court will permit such legal action only if certain statutory preconditions are met, including that the shareholders provide proof that they unsuccessfully requested the company to pursue the claims within a reasonable notice period. Otherwise and in contrast to other jurisdictions, German law does not provide for a derivative suit of individual shareholders to assert rights of the company.
In addition to the members of the management board, the members of any supervisory board may also be liable to the company for a breach of their duty. The supervisory board, which exists either based on statutory requirement or agreement in the articles of association in many German companies, has the duty to supervise the management. It may, if necessary, withhold its consent to certain transactions so that the management may not carry out the transaction unless a majority of shareholders grants approval at the general meeting. Members of the supervisory board who are in breach of these duties are liable to the company.9
Any person who exploits his or her influence on the company, a member of the management board or of the supervisory board to act to the detriment of the company or its shareholders is liable to compensate the company for the damage suffered by the company as a result. Such influence can be based, for instance, on a business relationship, personal relationships with directors and officers of the company, or share ownership.10 The management board generally pursues the claims on behalf of the company. If the management board is not prepared to do so, shareholders may seek to pursue the claims subject to judicial approval under the above-mentioned prerequisites. Shareholders also may hold and pursue a claim of their own against the person who exercised undue influence. However, such shareholder claim requires that the shareholder suffers a direct damage, above and beyond the indirect damage that was caused via damage to the company. The line between indirect and direct damages may be difficult to draw. Generally, a decrease in share value as a result of damage inflicted against the company would be considered a mere indirect damage. In contrast, if a third party exploited her or his influence to cause the company to publish false information and the shareholder sold shares as a result, the (former) shareholder may have a personal claim for compensation.11 Members of the management board and of the supervisory board may also be liable in addition to the person exerting undue influence if they are found to have neglected their duties.12
The Securities Trading Act and the EU Market Abuse Regulation,13 which is directly applicable in Germany,14 set forth statutory claims resulting from the failure of a company to disclose information that is relevant with regard to the development of its future share price (insider information). In this regard, a takeover offer and the conclusion of a share purchase agreement both qualify as circumstances requiring ad hoc disclosure for the companies involved.15 If such a violation of disclosure of information can be established, a shareholder who purchased shares after the failure to disclose the information and before it became public, and who still holds the shares, may claim rescission of the share purchase or compensation for the difference in share price.16 A party who already owned the shares before the event giving rise to the insider information and sold them after the company's failure to disclose may also claim such compensation.
In addition, shareholders can assert tort claims against the company as well as against its directors and officers, including a tort claim for causing intentional damage contra bonos mores based on a failure to disclose information or providing false information outside of the scope of the Securities Trading Act.17 This is the case, for instance, when the management board directly harms shareholders or investors intentionally and unfairly by way of issuing grossly incorrect ad hoc disclosures in the course of an M&A transaction.18 In addition, shareholders can even assert claims in tort based on misleading statements made during press conferences or in private discussions with investors.19 However, compared to the ad hoc disclosure obligations under the Securities Trading Act, the applicable requirements are less strict regarding the truth and completeness of such informal information.20
Following an M&A transaction, majority shareholders of a stock corporation holding 95 per cent or more of the shares in the company may resolve the transfer of shares from the remaining minority shareholders (squeeze-out). In return, those minority shareholders can claim an appropriate cash settlement. Disputes arising over the adequacy of such settlement must be litigated before the commercial chamber of a regional court by means of an award proceeding.21 This proceeding, which bears some similarity to a judicial appraisal under US law, enables shareholders to independently ascertain the fair value of their shares.
The available remedies to shareholders are generally determined by the underlying claim and its objective. In addition, German corporate law offers various specific remedies for shareholders.
Shareholders are most likely to assert claims for payment of damages. Such claims include, among others, monetary compensation by way of restitution in kind, or resulting from the rescission of a share purchase where the company failed to make an ad hoc disclosure of insider information under the Securities Trading Act.
Additionally, a shareholder can challenge a shareholders' resolution and seek to have a court declare it null and void by way of an action for avoidance. A successful challenge requires that the resolution violates German substantive law or the articles of association of the corporation, for example, when the shareholder was not duly informed in advance about the shareholders' meeting or the resolution. The shareholder has to file the action for avoidance in court against the company within one month after the resolution was passed. Moreover, shareholders can apply for injunctive relief to prevent the implementation of a passed shareholder resolution by the company. However, the pre-emptive prevention of the passage of resolutions is generally inadmissible as it constitutes an undue anticipation of the decision on the substance.22 In the context of an M&A transaction, a shareholder might seek injunctive relief in connection with a resolution of the general meeting of shareholders that approves of going forward with the transaction.
Shareholders may use an award proceeding as a special procedure for disputes concerning valuation-dependent compensation, for instance regarding a squeeze-out.23 It is for the court to choose the most appropriate method of valuation in accordance with the law. The decisive factor is that the respective method is recognised in economics or business administration and is customary in practice.24 However, it is not uncommon for award proceedings to end in a settlement due to the long duration of the proceedings.25
To the extent that claims are made against directors and officers, they are subject to – as in the United States – high discretion regarding entrepreneurial decisions. Thus, if a member of the management board can demonstrate that it had sufficient information and could reasonably assume that the decision made was in the interest of the company, no conduct in breach of duty is assumed (business judgement rule). According to case law, directors and officers are consequently liable only in the event of unjustifiable conduct that significantly exceeds limits in relation to the company's well-being, or constitutes an irresponsible assumption of risk.26 However, a board member may only invoke the business judgement rule if she or he acted free of any conflict of interest.27 The question of whether and to what extent a conflict of one board member affects the discretionary scope of the rest of the board members remains controversial under German law. A distinction is made based on whether the conflicted board member disclosed the conflict of interest to the board.28 In the case of such disclosure, the business judgement rule is considered applicable to the other board members, provided that the conflicted board member neither participates in the preparation of the decision nor in the passing of the resolution.29
Similarly, directors and officers can defend themselves against tort claims based on violation of bonos mores if they were not aware of the occurrence of damage, the causality of their own conduct or the circumstances justifying the alleged nature of their conduct.30 Case law shows that the high threshold for a plaintiff to substantiate and prove a violation of bonos mores of an officer or director is difficult to pass. Even if directors and officers give misleading statements to investors in a situation characterised by intense speculation in the market, such conduct might not suffice to establish liability in tort if the corresponding questions by the investors could not be answered truthfully without disclosing the company's true intentions during that time.31
Under German law, the plaintiff generally bears the burden of proof for all elements of the claim, including the damage suffered. Shareholders often face great difficulties when attempting to establish the occurrence of actual damage, for instance damage based on the difference in share prices. This particular difficulty arises because – although it is possible to draw conclusions from the change in the share price immediately after insider information ultimately has become public – the influence of overall market movements also must be taken into account.32 Demonstrating concrete damage becomes even more challenging where the insider information is gradually reflected in the stock market prices and not at a single moment in time.33
Furthermore, the company along with its directors and officers may invoke the statute of limitations as a defence against a claim. The limitation period for tort claims as well as claims under the Securities Trading Act is three years. This period commences at the end of the year in which the claim arose and the plaintiff obtained knowledge of the circumstances giving rise to the claim and of the identity of the defendant, or would have obtained such knowledge if he or she had not acted with gross negligence. Damage caused by the exploitation of influence on the company are time-barred after five years.
iv Advisers and third parties
In the – usual – absence of contractual agreements or other close connections between shareholders and M&A advisers or other third parties, there is usually no cognisable claim against such third parties under German law. However, a claim can be successful if the third party was substantially relied upon by the shareholders and thereby significantly influenced their decision-making process. Case law shows that courts set a high threshold for establishing the existence of these conditions and additionally require that the third party must have personally warranted the reliability of its contractual counterparty as well as the eventual completion of the transaction.34
On the other hand, a claim may be based on a contract between the adviser and the company if it was deemed to provide protection also for the shareholders as third parties to the contract. This requirement is fulfilled in cases in which the company has a particular interest in including the shareholders in the scope of protection of the contract, and the contract can be interpreted to the effect that the protection of the contract is to be extended to the shareholders. However, the adviser is liable only if she or he could recognise the inclusion of the shareholders in the scope of protection of the contract.35 In addition, tort claims by shareholders against advisers also come into consideration, for instance, due to actions against bonos mores. This might be the case where advisers deliberately issue false reports regarding the target.36
v Class and collective actions
German law traditionally does not provide for class or collective actions. However, Germany has implemented two model case proceedings: the model case motion under the Capital Markets Model Case Act (KapMuG) and the model declaratory action. Both proceedings aim at determining factual and legal issues, which are equally relevant for a large number of individual proceedings, by way of a model proceeding.37
Under the KapMuG, a shareholder can file a model case motion that seeks the determination of factual or legal issues in relation to claims for damages due to incorrect public capital market information or claims for consideration in the context of takeover bids.38 If at least 10 admissible and similarly directed model case motions are filed, the court of first instance issues an order for referral to the higher regional court and publishes this order. Upon publication of the order for referral, all courts of first instance must suspend proceedings that turn on issues that will be determined in the model case proceeding. The higher regional court, at its reasonable discretion, then selects a model plaintiff while the remaining plaintiffs become co-appointees. Subsequently, the higher regional court makes a uniform decision on these issues, which is binding for all courts of first instance when they resume the suspended proceedings.
The model declaratory action on the other hand allows for certain registered institutions, essentially consumer protection organisations, to file a request for the determination of declaratory relief regarding the existence of factual and legal requirements of claims or legal relationships between consumers and an enterprise. Since the scope of application of the model declaratory action is not limited with regard to the subject matter, shareholders can – in theory – pursue a declaratory judgment through an institution.39 However, it might often be doubtful whether the shareholders actually qualify as consumers within the meaning of the law.
vi Insurance and indemnification
Companies regularly obtain directors' and officers' liability insurance (D&O insurance), which covers financial loss caused by actions of the company's directors and officers. The insurance coverage includes claims for damage suffered by third parties outside of the corporate structure but also internally within the corporate structure. Therefore, the coverage includes claims both by the company itself and also by third parties against directors and officers.40 Pursuant to statutory provisions, D&O insurance does not cover intentional misconduct of directors and officers. However, these provisions can be – and in practice are often – replaced by contractual agreements that expand the insurance coverage to also cover lesser forms of fault, for example in cases in which a director considered it merely possible that her or his conduct might be unlawful, as opposed to having positive knowledge of the unlawfulness.41 Statutory law requires that D&O insurance coverage for members of the management board can amount to a maximum of 90 per cent of the damage and has to provide that a management board member is subject to an excess of at least 10 per cent.42
With regard to individual settlements, there are no particular procedural aspects to consider that are specific to shareholder claims. The Capital Markets Model Case Act does not offer any particular possibility of settlement either. The Code of Civil Procedure contains statutory provisions for the settlement of a model declaratory action between an institution and the defendant. However, practice shows that the parties use other means to settle disputes connected to a model declaratory action. For instance in Federation of German Consumer Organisations v. Volkswagen AG, the largest model declaratory action in Germany to date (though not an M&A dispute), Volkswagen AG concluded individual settlements with consumers instead of concluding a settlement with the institution in accordance with statutory provisions. Subsequently, the institution withdrew its action.43
Claims between the parties to a transaction are the most common form of dispute that arises in the M&A context either before or after closing. This section outlines substantive law and procedural aspects to be considered with regard to this category of claims.
i Common claims and procedure
Common counterparty claims are contractual claims based on breaches of representations and warranties or guarantees, statutory warranty claims and statutory liability claims.44 The latter category also includes pre-contractual liability claims and claims under tort law.45 Furthermore,
a party may exercise a right to rescind a contractual declaration when the – rather strict – statutory prerequisites are met, including in particular on the ground of deceit or duress.
Disputes arising before the signing of the purchase agreement predominantly involve pre-contractual liability claims (culpa in contrahendo).46 Three different scenarios are generally recognised as potentially constituting a breach of a pre-contractual duty by a party that may give rise to liability.47 In the first scenario, a party only pretends to be interested in concluding a contract with the counterparty and the counterparty incurs costs by relying on this false representation; for example, costs for its advisers.48 In the second scenario, the parties have already commenced contract negotiations, but subsequently one party abandons these negotiations without cause. In the third scenario, a counterparty violates its duty of disclosure by providing incorrect information or omitting information.49 In this regard, the broad assumption of a pre-contractual duty of disclosure in the case law of the German Federal Court of Justice as well as related considerations of attribution of knowledge must be observed.50 Even in contract negotiations in which the parties pursue opposing interests, a party may be obligated to inform its counterparty of such circumstances that are, for example, likely to frustrate the purpose of the agreement pursued by the counterparty if it does not or cannot know these circumstances.51 Since the different claim scenarios of pre-contractual liability claims essentially have the same basis in law, the prerequisites to mount a successful claim in each scenario are to establish:
- that a breach of duty has occurred;
- that the counterparty is at fault for this breach of duty;
- that this breach of duty has caused damage to the plaintiff; and
- the amount of damage incurred by the plaintiff.52
A party's alleged misconduct in relation to contract negotiations may also give rise to tort claims in parallel to pre-contractual liability claims.53
Other pre-closing disputes can arise out of various agreements concluded before and after the signing of the purchase agreement, including non-disclosure agreements, exclusivity agreements and break-up fee arrangements.54
In some cases, the parties may also dispute whether a valid purchase agreement has been concluded and therefore whether the closing of the transaction may be compelled. Such scenarios arise commonly in relation to the exercise of call options for buyers and put options for sellers. In both cases, the contract is concluded by exercising the option in favour of the respective party.55
In the time period between signing and closing, the buyer may exercise the right to reform or exit the purchase agreement due to a material change in circumstances, either based on a contractual clause concerning material adverse change (MAC) or material adverse events (MAE), or based on statutory provisions. MAC and MAE clauses are designed to protect the buyer from significant deterioration of the target between signing and closing. The absence of a material adverse change is usually agreed upon as a closing condition.56 However, in the event that a significant deterioration occurs, the buyer is not obliged to close the transaction since the closing condition is not fulfilled. The seller then has the opportunity to remedy the deterioration until an agreed long-stop date. If the situation is not remedied within the agreed time frame, the buyer is entitled to withdraw from the transaction. Absent agreement on a MAC or MAE clause, a party may alternatively invoke frustration of the basis of the transaction pursuant to statutory law in order to seek a reform of contract provisions or to revoke the contract as a whole.57 The law distinguishes between two scenarios. In the first scenario, the basis of the transaction is frustrated due to a change in circumstances after the conclusion of the contract. In the second scenario, material assumptions of the parties that have become the basis of the transaction are found to be incorrect.58 However, parties can contractually agree to limit or waive this statutory right, instead replacing it with a contractual regime of MAC and MAE provisions.59
Post-closing claims are predominantly contractual claims based on alleged breaches of guarantees and warranties or indemnification clauses. Consequently, such clauses are regularly negotiated and formulated with great specificity. Notably, on the other hand, all statutory provisions and statutory claims that can be waived are usually waived in purchase agreements, thereby replacing the statutory regime of claims with the negotiated contractual regime of claims. However, certain statutory provisions and case law of the German Federal Court of Justice prevent the waiver of statutory claims arising from intentional conduct of a counterparty as well as rights of a party in cases of fraud.60 As a result, there is a risk that the contractually agreed liability regime might be undermined by the mandatory application of statutory law, including due to the far-reaching case law concerning the attribution of knowledge in companies.61 Parties also often agree on caps and de minimis provisions that might limit or exclude contractual claims based on warranties.62
A buyer may also raise claims for indemnification in the event that a risk materialises that was previously identified – usually in the due diligence process – and included in an indemnity clause.63 With regard to these often extensively negotiated warranty and indemnity clauses, warranty and indemnity insurance (W&I insurance) has become increasingly popular and thus provides a new possibility for counterparties to seek compensation.64 With the help of such W&I insurance, the seller's liability for breaches of warranty is excluded to a certain extent. Instead, the buyer may have recourse to the insurer in the case of an insured event, and therefore does not bear the insolvency risk of the seller. Consequently, buyers are almost always the policyholders.65 Moreover, purchase price adjustment mechanisms, for example, by means of closing date accounts, may also give rise to claims between the parties for positive or negative adjustment amounts.66
With regard to the burden of substantiation and proof, a party generally must present and prove in a substantiated manner the facts on which it relies and which are favourable for its claim or defence. However, as pretrial discovery (or disclosure) is not a feature of German litigation practice, the German Civil Code partially provides rules for presumptions of fact with regard to individual elements of a claim. A prominent example is the presumption of the counterparty's fault for a breach of contract if the plaintiff succeeds in establishing factually and legally that the defendant committed a breach. German case law provides for additional rules to be considered, such as a secondary burden of substantiation of the counterparty as well as the recognition of prima facie evidence. In the common occurrence where the parties select arbitration as the dispute resolution mechanism in their contract (see below), the arbitration proceedings may include a document production phase.67
The appropriate and available remedies against counterparties follow from the underlying claim and its objective. If one party seeks to compel the closing of the transaction, for instance after exercising a call option, it can pursue such claim with a suit for performance. However, in most cases a plaintiff will seek monetary compensation from its counterparty by way of a claim for payment.68 Depending on the damage suffered and on the type of claim, this compensation may aim at restoring an original state or even to recover lost profits. While German civil law allows agreements of contractual penalties and liquidated damages, it does not provide for punitive damages.
Furthermore, a plaintiff can also seek a judgment ordering the defendant to indemnify the plaintiff from certain liabilities. In addition, a plaintiff can seek declaratory relief to the extent that damages cannot be fully assessed at the time, or if the declaration sought is prejudicial to further litigation. For example, a party may seek a declaratory judgment that the purchase agreement was not effectively concluded or that the counterparty does not hold particular claims against the party. A plaintiff also has the option to bring a multi-tiered claim that, as a first step, asserts a right of disclosure against the defendant and, as a second step, seeks further relief, for example, payment of a purchase price adjustment amount or damages on the basis of the disclosed information. In such multi-tiered proceedings, the plaintiff's entitlement to disclosure is based on a substantive claim to receive information against the defendant – rather than disclosure being a procedural feature of the proceeding.
In urgent cases, a party can apply for a preliminary injunction, in particular for the purpose of securing a certain status quo, for instance to prevent shares or assets being sold to third parties.69
To the extent that the statute of limitations pursuant to the German Civil Code applies, a party can invoke as a defence that the claim is time-barred. The regular statutory limitation period in most cases is three years, but only two years for common statutory warranty claims. However, it is common practice in German purchase agreements to waive the statutory limitation periods and negotiate limitation periods that are tailored to the needs of the parties and the transaction. For particular guarantees such as a warranty of title, an agreement on longer limitation periods of up to 15 years is not unusual.70 In the context of indemnification claims, there is a specific risk that the right to indemnification could become time-barred before the event for which indemnification can be sought occurs; for example, a third-party claim. Therefore, the issue of statute of limitations deserves particular attention when drafting an indemnification clause but also in M&A disputes concerning indemnification more generally.71
German civil procedure law also provides for the possibility to involve a third party in a pending lawsuit by way of a third-party notice. A party typically employs this procedural mechanism if there is a risk of a negative decision, as a result of which the party would be able to assert a warranty or compensation claim in subsequent litigation as plaintiff against the third party. As a result of the third-party notice, the court in such subsequent litigation is bound by the reasoning of the decision from the preceding litigation to the benefit of the plaintiff. Absent the third-party notice, the third party otherwise would not be bound by any res judicata effect of the preceding litigation, to which it was not a party.
M&A disputes are predominantly adjudicated by arbitral tribunals in private commercial arbitration proceedings. In most German M&A transactions, and especially in transactions involving foreign parties, the parties include an arbitration clause in the purchase agreement or enter into a separate arbitration agreement.72
The key reasons for selecting arbitration include, among others, the ability to nominate arbitrators with regard to their qualifications, experience and suitability for a particular dispute, greater flexibility and influence on how to conduct the proceedings, and the higher level of confidentiality in arbitration compared to litigation, which involves public court hearings.73 Moreover, the parties may agree that the proceedings shall be conducted in the English language and that English language documents may be introduced into the proceedings without a German translation, which saves translation costs and also makes it easier for foreign parties to manage the proceedings.74 In particular in transactions involving parties outside the European Union, arbitration is also attractive due to the relative ease of international enforcement of arbitral awards, especially under the New York Convention.75
Parties may also agree on an expert proceeding to render a final and binding determination of individual issues, for example, the determination of a purchase price in the context of a purchase price adjustment mechanism in the purchase agreement.76 Especially in disputes concerning questions of accounting or valuation only, an expert determination has the potential of offering a quicker solution.77 Generally, however, parties tend to agree on a comprehensive arbitration agreement that comprises all disputes arising out of or in connection with the transaction.78 In contrast, a two-tier dispute resolution mechanism (e.g., tier one mediation, tier two arbitration) is uncommon in German M&A disputes.79
The leading German arbitration institution is the DIS. The latest version of the DIS institutional rules were published in 2018.80 The DIS also offers special rules, among others, for corporate law disputes and for expert determination. Alternatively, an arbitration proceeding administered by the International Chamber of Commerce (ICC) and pursuant to its arbitration rules also represents a popular choice for dispute resolution in M&A transactions with a German nexus.
v Other issues
As mentioned above, most German M&A disputes are decided by private arbitral tribunals. As a flipside of this preference for arbitration, domestic courts rarely are called upon to address and render opinions on key issues in M&A disputes. As a result of this lack of court involvement and since most arbitral awards are not made public, little German case law is available to provide guidance on common key issues in (large and complex) M&A disputes.81 It is therefore all the more important that the personal knowledge and experience of legal counsel and arbitrators regarding M&A disputes is taken into account.82
Irrespective of the civil law aspects, a party, usually on the purchaser side, sometimes files charges of criminal fraud with the public prosecutor's office in order to increase the pressure on the other party in a post-M&A dispute and its willingness to settle. However, in addition to the risk of loss of reputation for both sides, such an action – once initiated – is not under the parties' control since the public prosecutor's office decides autonomously on the proceedings.83
As mentioned above, the parties to German M&A transactions regularly agree on arbitration as a means of dispute resolution. This choice helps to avoid some of the common complications that arise in litigation involving parties from different countries, for example in relation to international service of notices and briefs, the language of the proceedings, the taking of evidence and the enforcement of the decision.
In the absence of a specific dispute resolution clause, the court's jurisdiction will need to be determined pursuant to the Brussels Ia Regulation or the Lugano Convention respectively in conjunction with the German Code of Civil Procedure. The case will typically be heard before a chamber of commerce at a regional court. Several regional courts, including the Regional Court of Frankfurt (Main), have recently established special chambers to adjudicate international commercial disputes.84 Before such chambers, the parties can agree on oral hearings in English and to submit documentary evidence in English without providing a German translation. However, the consent of all parties to the proceeding is required to refer the case to such special chamber.
In a dispute involving a German party before a US court, the German party might try to avert discovery by asserting that the production of documents would violate German and European data privacy law. However, US courts have ruled against the German party in cases where the documents to be produced were subject to a protective order and the interest of the party seeking the discovery outweighed the interest of the German party.85
In contrast, while pretrial discovery is not a feature in German litigation practice, a party to a German court proceeding (or arbitration) may seek the aid of US courts to order discovery by means of an application pursuant to 28 USC Section 1782.86
Year in review
As mentioned above, due to the preference for arbitration agreements in German M&A transactions, there is a scarcity of case law of German courts on M&A disputes. However, a recent and exceptional decision of the Higher Regional Court of Munich in which the Court had to rule on pre-contractual disclosure obligations and the consequences of breaching such obligations deserves attention. The Court held that the seller of a company is generally obliged to inform the purchaser, even without being asked to do so, of specific events that constitute significant indications of an ongoing crisis of the company. In that case, the contractually agreed exclusion of liability for the purchaser's rights and claims based on defects did not apply since such exclusion did not encompass culpable breaches of pre-contractual disclosure obligations.87 This decision, which applied the Federal Court of Justice's case law, illustrates the importance of a properly conducted due diligence and the risk that the contractual liability regime might be undermined by the mandatory statutory liability regime.
In addition to the changes to German foreign trade law in the 2020 concerning the healthcare sector against the background of the covid-19 pandemic, another extensive reform of German foreign trade law came into force in May 2021. The subject of the reform was the high-tech and key technology sector. As of May 2021, transactions in this sector (e.g., certain areas of artificial intelligence that could be prone to abuse like cyber-attacks, IT products in the areas of cyber security and criminal investigation, robotics, quantum technology) may be subject to a notification requirement and the need for clearance of the transaction by the Federal Ministry of Economics and Energy. This further reform is in line with the tendency of the German legislator to make German foreign trade law more restrictive. The recent changes are intended to protect important technologies and ultimately Germany's security, but also may create legal uncertainty in their application, and increase the risk of disputes.88
1 Rüdiger Harms is a counsel and Harry Nettlau is an associate at Cleary Gottlieb Steen & Hamilton LLP. The authors would like to acknowledge the assistance of Nils Andräs, Till Hackstein, Philipp Kirst, Malte Menden, Zachary O'Dell, and Felix Spehl in the preparation of this chapter.
2 Ghassemi-Tabar/Wilk, in Born/Ghassemi-Tabar/Gehle, MHdBGesR, Vol. VII, 6th Ed. (2020), Section 1 Paragraph 1 et seq.
3 See Louven/Mehrbrey: Bedeutung aktueller M&A-Streitigkeiten für die Gestaltungspraxis, NZG 2014, 1321.
5 Regulation (EU) No. 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters; Lugano Convention of 30 October 2007 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters.
8 Flaßhoff/Glasmacher, Wankende Verwaltungsakte im Außenwirtschaftsrecht bei Unternehmenskäufen, NZG 2017, 489 (493).
9 Habersack, in MünchKomm-AktG, 5th Ed. (2019), Section 116 Paragraph 20; Koch, in Hüffer/Koch, AktG, 15th Ed. (2021), Section 116 Paragraph 2.
10 Koch, in Hüffer/Koch, AktG, 15th Ed. (2021), Section 117 Paragraph 3; Spindler, in MünchKomm-AktG, 5th Ed. (2019), Section 117 Paragraph 17 et seq.; Leuering/Goertz, in Hölters, AktG, 3rd Ed. (2017), Section 117 Paragraph 3.
11 Spindler, in MünchKomm-AktG, 5th Ed. (2019), Section 117 Paragraph 53 et. seq.
12 Spindler, in MünchKomm-AktG, 5th Ed. (2019), Section 117 Paragraph 58; Koch, in Hüffer/Koch, AktG, 15th Ed. (2021), Section 117 Paragraph 10.
13 Regulation (EU) No. 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC (L 173/6).
14 Kumpan, in Baumbach/Hopt, HGB, 40th Ed. (2021), Vorb. MAR Paragraph 1; Kumpan/Grütze, in Schwark/Zimmer, Kapitalmarktrechts-Kommentar, 5th Ed. (2020), Article 17 Paragraph 7.
15 Kumpan/Grütze, in Schwark/Zimmer, Kapitalmarktrechts-Kommentar, 5th Ed. (2020), Article 17 Paragraph 92; Kumpan, in Baumbach/Hopt, HGB, 40th Ed. (2021), Article 17 MAR Paragraph 5.
16 Judgment of the Federal Court of Justice dated 13 December 2011, NZG 2012, 263; Kumpan, in Baumbach/Hopt, HGB, 40th Ed. (2021), Section 97 WpHG Paragraph 6.
17 See Spindler, in MünchKomm-AktG, 5th Ed. (2019), Section 117 Paragraph 53 et seq.
18 Wagner, in MünchKomm-BGB, 8th Ed. (2020), Section 826 Paragraph 115 et seq.; Ritter, in Schüppen/Schaub, Münchener Anwaltshandbuch Aktienrecht, 3rd Ed. (2018), Section 24 Paragraph 67 et seq.; Staudinger, in Schulze, BGB, 10th Ed. (2019), Section 826 Paragraph 16.
19 Wagner, in MünchKomm-BGB, 8th Ed. (202017), Section 826 Paragraph 115 et seq.
20 Judgment of the Higher Regional Court of Stuttgart dated 26 March 2015, ZIP 2015, 781 (783, 785): judgment of the Higher Regional Court of Braunschweig dated 12 January 2016, ZIP 2016, 414 (416 et seq.) – Porsche.
21 Grunewald, in MünchKomm-AktG, 5th Ed. (2020), Section 327f Paragraph 2; Koch, in Hüffer/Koch, AktG, 15th Ed. (2021), Section 327f Paragraph 1; see Müller-Michaels, in Hölters, AktG, 3rd Ed. (2017), Section 327f Paragraph 13.
22 See Hüffer/Schäfer, in MünchKomm-AktG, 4th Ed. (2016), Section 243 Paragraph 153 et seq.
23 Koch, in Hüffer/Koch, AktG, 15th Ed. (2021), Section 1 SpruchG Paragraph 2; Simons, in Hölters, AktG, 3rd Ed. (2017), Section 1 SpruchG Paragraph 1.
24 Müller-Michaels, in Hölters, AktG, 3rd Ed. (2017), Section 327f Paragraph 14.
25 Kubis, in MünchKomm-AktG, 5th Ed. (2020), Vorb. SpruchG Paragraph 7.
26 Koch, in Born/Ghassemi-Tabar/Gehle, MHdBGesR, Vol. VII, 6th Ed. (2020), Section 30 Paragraph 10 et seq.: judgment of the Federal Court of Justice dated 21 April 1997, NJW 1997, 1926 – ARAG/Garmenbeck; Koch, in Hüffer/Koch, AktG, 15th Ed. (2021), Section 93 Paragraph 8.
27 Spindler, in MünchKomm-AktG, 5th Ed. (2019), Section 93 Paragraph 69 et seq.; Fleischer, in Spindler/Stilz, AktG, 4th Ed. (2019), Section 93 Paragraph 72.
28 Fleischer, in Spindler/Stilz, AktG, 4th Ed. (2019), Section 93 Paragraph 72a; Spindler, in MünchKomm-AktG, 5th Ed. (2019), Section 93 Paragraph 71 et seq.
29 Spindler, in MünchKomm-AktG, 5th Ed. (2019), Section 93 Paragraph 72.
30 Wagner, in MünchKomm-BGB, 8th Ed. (2020), Section 826 Paragraph 25.
31 A notable example being the case of Porsche SE. Investors claimed damages amounting to more than €1 billion based on a misleading press release in relation to the planned VW takeover. The court dismissed the action and ruled that in cases of informal communications to the capital market, stricter requirements must be set for establishing liability under claims in tort than in the case of false ad hoc disclosures (judgment of the Higher Regional Court of Stuttgart dated 26 March 2015, ZIP 2015, 781 (784) – Porsche).
32 See Kumpan, in Baumbach/Hopt, HGB, 40th Ed. (2021), Section 97 WpHG Paragraph 6.
33 Fleischer, in Assmann/Schütze/Buck-Heeb, HdB-Kapitalanlagerecht, 5th Ed. (2020), Section 6 Paragraph 53.
34 Judgment of the Federal Court of Justice dated 12 December 2005, NJW-RR 2006, 993; see Beisel, in Beisel/Klumpp, Der Unternehmenskauf, 7th Ed. (2016), Section 17 Paragraph 17 et seq.
35 Beisel, in Beisel/Klumpp, Der Unternehmenskauf, 7th Ed. (2016), Section 17 Paragraph 18.
36 Heun-Rehn/Hoffmann, in Mehrbrey, Handbuch Streitigkeiten beim Unternehmenskauf, 1st Ed. (2018), Section 18 Paragraph 44 et seq.
37 Schmitt, in Born/Ghassemi-Tabar/Gehle, MHdBGesR, Vol. VII, 6th Ed. (2020), Section 43 Paragraph 86.
38 Schmitt, in Born/Ghassemi-Tabar/Gehle, MHdBGesR, Vol. VII, 6th Ed. (2020), Section 43 Paragraph 20 et seq.; Schneider, Kollektivrechtsschutz durch Verbraucherschutzverbände statt Class Actions?, BB 2018, 1986 (1988).
39 Schneider, Kollektivrechtsschutz durch Verbraucherschutzverbände statt Class Actions?, BB 2018, 1986 (1989).
40 Armbrüster, in Born/Ghassemi-Tabar/Gehle, MHdBGesR, Vol. VII, 6th Ed. (2020), Section 108 Paragraph 1.
41 See Seitz, Vorsatzausschluss in der D&O-Versicherung - endlich Licht im Dunkeln!, VersR 2007, 1476; Heun-Rehn/Hoffmann, in Mehrbrey, Handbuch Streitigkeiten beim Unternehmenskauf, 1st Ed. (2018), Section 18 Paragraph 13.
42 Spindler, in MünchKomm-AktG, 5th Ed. (2019), Section 93 Paragraph 227.
43 See Gurkmann/Jahn, Außergerichtlicher Vergleich im Rahmen einer Musterfeststellungsklage, VuR 2020, 243.
44 Becker/Mallmann, in Born/Ghassemi-Tabar/Gehle, MHdBGesR, Vol. VII, 6th Ed. (2020), Section 134 Paragraph 1.
45 Becker/Mallmann, in Born/Ghassemi-Tabar/Gehle, MHdBGesR, Vol. VII, 6th Ed. (2020), Section 134 Paragraph 95.
46 Elsing/Kramer, Post M&A Disputes under German Law in Festschrift für R. Geimer, Fairness Justice Equity 2017, p. 70.
47 Mehrbrey/Jaeger, in Mehrbrey, Handbuch Streitigkeiten beim Unternehmenskauf, 1st Ed. (2018), Section 3 Paragraph 4 et seq.
48 Mehrbrey/Jaeger, in Mehrbrey, Handbuch Streitigkeiten beim Unternehmenskauf, 1st Ed. (2018), Section 3 Paragraph 4 et seq.
49 Becker/Mallmann, in Born/Ghassemi-Tabar/Gehle, MHdBGesR, Vol. VII, 6th Ed. (2020), Section 134 Paragraph 114.
50 Risse, Wissenszurechnung beim Unternehmenskauf: Notwendigkeit einer Neuorientierung NZG 2020, 856.
51 Judgment of the Federal Court of Justice dated 25 July 2006, NJW 2006, 3139 Paragraph 18.
52 Becker/Mallmann, in Born/Ghassemi-Tabar/Gehle, MHdBGesR, Vol. VII, 6th Ed. (2020), Section 134 Paragraph 145.
53 Mehrbrey/Jaeger, in Mehrbrey, Handbuch Streitigkeiten beim Unternehmenskauf, 1st Ed. (2018), Section 3 Paragraph 13 et seq.
54 Elsing/Kramer, in Post M&A Disputes under German Law in Festschrift für R. Geimer, Fairness Justice Equity 2017; Mehrbrey/Jaeger, in Mehrbrey, Handbuch Streitigkeiten beim Unternehmenskauf, 1st Ed. (2018), Section 3 Paragraph 5; Wächter, in M&A Litigation, M&A Recht im Streit, 3rd Ed. (2017), p. 4, Paragraph 39 et seq.
55 Mehrbrey/Jaeger, in Mehrbrey, Handbuch Streitigkeiten beim Unternehmenskauf, 1st Ed. (2018), Section 3 Paragraph 6 et seq.
56 Kästle/Haller, Schieds- oder Schiedsgutachterverfahren zur Feststellung eines Material Adverse Change (MAC) beim Unternehmenskauf, NZG 2016, 926.
57 Finkenauer, in MünchKomm-BGB, 8th Ed. (2019), Section 313 Paragraph 81.
58 Finkenauer, in MünchKomm-BGB, 8th Ed. (2019), Section 313 Paragraph 54.
59 Finkenauer, in MünchKomm-BGB, 8th Ed. (2019), Section 313 Paragraph 51.
60 Becker/Mallmann, in Born/Ghassemi-Tabar/Gehle, MHdBGesR, Vol. VII, 6th Ed. (2020), Section 134 Paragraph 95; Elsing/Kramer, Post M&A Disputes under German Law in Festschrift für R. Geimer, Fairness Justice Equity 2017 p. 72.
61 See Risse, Wissenszurechnung beim Unternehmenskauf: Notwendigkeit einer Neuorientierung NZG 2020, 856; Schudlo/Kersten, Kenntnis im Haftungssystem des Unternehmenskaufs, BB 2021, 1154.
62 Elsing/Kramer, in Post M&A Disputes under German Law in Festschrift für R. Geimer, Fairness Justice Equity 2017, p. 72.
63 Becker/Mallmann, in Born/Ghassemi-Tabar/Gehle, MHdBGesR, Vol. VII, 6th Ed. (2020), Section 134 Paragraph 42.
64 See Hoger/Baumann, Der M&A-Vertrag bei Abschluss einer W&I-Versicherung, NZG 2017, 811.
65 See Hoger/Baumann, Der M&A-Vertrag bei Abschluss einer W&I-Versicherung, NZG 2017, 811.
66 Elsing, in Salger/Trittmann, Internationale Schiedsverfahren, 1st Ed. (2019), Section 28 Paragraph 58.
67 Becker/Mallmann, in Born/Ghassemi-Tabar/Gehle, MHdBGesR, Vol. VII, 6th Ed. (2020), Section 134 Paragraph 213.
68 See Mehrbrey, in Mehrbrey, Handbuch Streitigkeiten beim Unternehmenskauf, 1st Ed. (2018), Section 2 Paragraph 36.
69 Mehrbrey, in Mehrbrey, Handbuch Streitigkeiten beim Unternehmenskauf, 1st Ed. (2018), Section 2 Paragraph 58.
70 Bisle, Gewährleistungs- und Garantieklauseln in Unternehmenskaufverträgen, DStR 2013, 364 (366).
71 Becker/Mallmann, in Born/Ghassemi-Tabar/Gehle, MHdBGesR, Vol. VII, 6th Ed. (2020), Section 134 Paragraph 52 et seq.
72 See Elsing/Kramer, in Post M&A Disputes under German Law in Festschrift für R. Geimer, Fairness Justice Equity 2017, p. 69; Becker/Mallmann, in Born/Ghassemi-Tabar/Gehle, MHdBGesR, Vol. VII, 6th Ed. (2020), Section 134 Paragraph 192; Mehrbrey/Pörnbacher/Baur, in Mehrbrey, Handbuch Streitigkeiten beim Unternehmenskauf, 1st Ed. (2018), Section 2 Paragraph 60 et seq.
73 Elsing, in Salger/Trittmann, Internationale Schiedsverfahren, 1st Ed. (2019), Section 28 Paragraph 3.
74 Elsing/Kramer, in Post M&A Disputes under German Law in Festschrift für R. Geimer, Fairness Justice Equity 2017, p. 76.
75 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 10 June 1958); see Mehrbrey/Pörnbacher/Baur, in Mehrbrey, Handbuch Streitigkeiten beim Unternehmenskauf, 1st Ed. (2018), Section 2 Paragraph 64.
76 Mehrbrey/Pörnbacher/Baur, in Mehrbrey, Handbuch Streitigkeiten beim Unternehmenskauf, 1st Ed. (2018), Section 2 Paragraph 70.
77 Mehrbrey/Pörnbacher/Baur, in Mehrbrey, Handbuch Streitigkeiten beim Unternehmenskauf, 1st Ed. (2018), Section 2 Paragraph 69.
78 See Elsing/Kramer, in Post M&A Disputes under German Law in Festschrift für R. Geimer, Fairness Justice Equity 2017, p. 75.
79 Elsing/Kramer, in Post M&A Disputes under German Law in Festschrift für R. Geimer, Fairness Justice Equity 2017, p. 75.
81 See Louven/Mehrbrey, Bedeutung aktueller M&A-Streitigkeiten für die Gestaltungspraxis, NZG 2014, 1321.
82 Becker/Mallmann, in Born/Ghassemi-Tabar/Gehle, MHdBGesR, Vol. VII, 6th Ed. (2020), Section 134 Paragraph 1.
83 Reichling/Corsten/Borgel, M&A-Transaktionen und das Straf- und Ordnungswidrigkeitsrecht (Teil I): Risiken für die Verkäuferseite, BB 2021, 1545.
84 See for instance, Chamber for International Commercial Disputes at the Regional Court of Frankfurt (Main): https://ordentliche-gerichtsbarkeit.hessen.de/ordentliche-gerichte/lgb-frankfurt-am-main/lg-frankfurt-am-main/chamber-international).
85 See Brightedge v. Searchmetrics, US District Court for the Northern District of California, Order of 8 November 2017 - 14-cv-01009-HSG (MEJ); BeckRS 2017, 132018.
86 See Kreindler/Nettlau, in Salger/Trittmann, Internationale Schiedsverfahren, 1st Ed. (2019), Section 14, Paragraph 1 et seq. Whether the procedure pursuant to 28 USC Section 1782 is also available in foreign arbitration proceedings is a more controversial question.
87 Judgment of the Higher Regional Court of Munich dated 3 December, 2020 NZG 2021, 423.
88 Lippert, Der letzte Baustein? – Die deutsche Investitionskontrolle nach der 17. AWV- Änderungsverordnung, BB 2021, 1289.