The Mergers & Acquisitions Review: Germany

Overview of M&A activity

The2 covid-19 pandemic has turned the world upside down. All the more surprising, after a state of shock during the first lockdown in 2020, the global M&A market and, in particular, the number of initial public offerings (IPOs) are approaching or even surpassing record highs. While the first half of 2020 saw a significantly subdued level of transaction activities with aggregate volumes of US$950.3 billion across 8,392 M&A deals, the second half of 2020 set a new highest half-year record with aggregate volumes of M&A deals reaching an estimated US$2.3 trillion across 10,942 deals. According to Mergermarket, 2021 promises to be the next record-breaking year: 12,862 deals being worth over US$2.8 trillion have been closed in the first six months with a well-filled pipeline for the remaining months of 2021. The rising buying power of SPACs (special purpose acquisition companies) is particularly worth noticing as it drives the increase of large or even mega deals (i.e., transactions valued at US$5 billion or more). Such deals amounted to a total number of 111 in 2020, the highest number since 2015 and a 22 per cent increase compared to 2019. Another driver of the fast recovery is the continued boom of private equity investments, reaching its highest annual value in 2020 since the global financial crisis in 2008–2009, with a total amount of US$608.7 billion (3.3 per cent up from 2019) invested across 3,509 transactions (280 less compared to 2019). Buy-out transactions took up a record high of over 25 per cent of all M&A deals globally, while technology remained the most attractive sector for sponsor-led investment. The number of businesses that had to file for insolvency as well as distressed M&A activities has, not least thanks to extensive financial stabilisation measures taken by governments worldwide, been much lower than expected at the outbreak of covid-19. This will likely change once the public funding is cut back to pre-covid-19 volumes.

The European M&A market experienced a parallel development fuelled by strong capital markets and investors with a lot of cheap money to invest in European targets. Looking at the entire year of 2020, deal-making declined both in terms of value (US$1.3 trillion, decrease of 1.4 per cent compared to 2019) and deal counts (9,053, noticeably lower than the 10,054 in 2019) but this was surpassed by a rapid recovery in the last six months of 2020. Overall, the market continues to be extremely robust in Europe in 2021, as a number of factors, in particular exceptionally strong capital markets, further propelled M&A activities to new heights: 6,320 deals worth US$1.03 trillion were recorded in the first half of 2021, an 81.1 per cent increase in value and 62.6 per cent in deal counts from the first half of 2020.

Cross-border M&A transactions continue to be evidently impacted by the ongoing covid-related restrictions on international travel, with the majority of European M&A in 2020 conducted internally. Within Europe, Germany accounted for 12.8 per cent of the total volume (highest since 2012) while the UK, with US$304.1 billion in total value, reached the highest annual level since 2015; it is too early to assess whether this volume would have been higher still or lower without Brexit and the last-minute agreement on the EU–UK Trade and Cooperation Agreement at the end of 2020. In comparison, 2021 is driven by much more force in international and, in particular, European deal-making as confidence is further growing in the market. Total inbound transactions in the first half-year amounted to US$181.5 billion (increase of 108 per cent compared with the first half of 2020) across 747 deals (increase of 16 per cent compared with the first half of 2020). The renaissance of cross-border M&A transactions will probably speed up at a similar pace as the global vaccination coverage.

In Europe, private equity transactions are fuelling the market with the highest annual deal value in 2020 since 2007. As a result, private equity (PE) buyouts accounted for a 24.2 per cent share of the total European M&A value in 2020 and 21.3 per cent of the total annual deal count. PE activities are unlikely to slow as sponsors remain a key driver of European M&A in 2021 buoyed by a healthy financing market, and many competing investors seeking attractive investments.

Not surprisingly, the German M&A market (looking at transactions involving at least one significant German participant as buyer, seller or target) was not spared the global rollercoaster ride caused by covid-19. After a substantial setback at the beginning of the pandemic, the German market quickly recovered and, compared to 2019, the total known deal value increased by almost 12 per cent in 2020. An impressive start was made in the first quarter of 2021 with the highest deal count with German involvement of any first quarter and the second highest known value since 2016. The prospects are positive and 2021 is shaping up to be an extraordinary year for M&A. Inbound interest is a deal magnet and the high stability of the DACH region (Germany, Austria and Switzerland) and Germany is drawing in investments from all around the world.

The landmark transactions in 2020 and 2021 so far include the acquisition of thyssenkrupp's elevator business by a consortium of investors and Siemens AG's spin-off of a 55 per cent stake of Siemens Energy AG into a separate listed company. Both are further episodes of the ongoing breaking-up of traditional German conglomerates which were known to be the backbone of the German economy for stable returns. Many of these companies are now spinning off or selling parts of their businesses to refocus on their core business and improve operational efficiencies. Further mega deals are the (renewed) takeover offer of Vonovia for Deutsche Wohnen and the acquisition of lighting technology and electronic components specialist HELLA GmbH & Co KGaA by France-based automotive supplier Faurecia SA. The list of top 10 German deals with a value of at least US$5 billion is completed as follows:

  1. acquisition of US-based Varian Medical Systems by Siemens Healthineers AG with the latter being another successful spin-off of Siemens AG next to Siemens Energy AG;
  2. Thermo Fisher Scientific Inc's attempted acquisition of QIAGEN NV;
  3. acquisition of METRO AG by EP Global Commerce, a.s.;
  4. acquisition of the telecommunications towers division of Telxius Telecom SA in Germany, Spain, Brazil, Chile, Peru and Argentina by the American Tower Corporation;
  5. acquisition of France-based car rental service provider Europcar Mobility Group SA by Volkswagen AG, Attestor Limited and Pon Holdings BV from Centerbridge Partners;
  6. Kinnevik AB's spin-off of a 21.11 per cent stake in Zalando SE; and
  7. acquisition of specialty chemical processes and equipment provider Atotech Limited by MKS Instruments, Inc from the Carlyle Group.

In 2020, the total number of IPOs in the prime standard segment of the German stock exchanges dropped to a total of nine; the main reasons being the temporary crash of the stock exchanges worldwide caused by the pandemic and the delayed arrival of the wave of SPACs in Germany and the DACH region only in 2021. Nevertheless, in 2020, the German IPO market saw the strongest third quarter in 20 years; the number of IPOs increased by 78 per cent and total value by more than 138 per cent. The listings of Siemens Energy, HENSOLDT, Knaus Tabbert und Brockhaus Capital Management on the Frankfurt Stock Exchange made the headlines. Due to the market's current high liquidity and valuation, the IPO boom continues in 2021 with the Frankfurt listing of Vantage Towers (Vodafone's tower company) and the IPO, or at least expected IPO, of several German unicorns such as ABOUT YOU and of family-owned market leaders. Following the Wirecard scandal (i.e., the series of accounting scandals that resulted in the insolvency of Wirecard, a German payment processor and financial services provider that was part of the DAX index), Germany's leading stock index DAX expanded its size and changed rules to boost the quality of its member companies. In particular, companies active in chemicals, pharma or bio/medical technology have benefited from the DAX promotion in 2021, which makes them attractive takeover targets.

In terms of industry focus, technology, media/telecom, pharma and medical/biotech sectors have proven to be survivors (if not winners) of the pandemic, with German-based company BioNTech dominating the headlines worldwide: further growth in deals (despite current high valuations) in the post-covid era could also be expected.

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 European Union (EU) Takeover Directive, as well as the German Stock Corporation Act, which provides the general framework of the corporate legislation pertaining to German stock corporations (and to some degree to European companies (societas Europaea (SE)) seated in Germany, the general rule being that most of the rules applicable to German stock corporations also apply, at least in a very similar manner, to German SEs). 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 to 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 particular 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 offer documents.

The Takeover Act also provides a specific squeeze-out procedure following a successful takeover bid (in addition to the general squeeze-out provisions under the Stock Corporation Act and the squeeze-out provisions under the 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 a 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 benefit for the company of implementing the action clearly outweighs the interests of the shareholders.

Although the stricter prohibitions of defensive measures and the breakthrough rules under the Takeover Directive could be opted in 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:

  1. provisions relevant to public and private takeovers of stock corporations;
  2. provisions relating to the implementation of permissible defences that can be employed against hostile public takeovers; and
  3. 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 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 important areas of insider dealing, directors' dealings and market manipulation are regulated on a European level on the basis of the Market Abuse Regulation (MAR)3 which is directly applicable in Germany. Key characteristics of the MAR are the focus on an equal level of information for all shareholders of a listed company as well as severe sanctions in the case of infringements.

The Act on Corporate Transformations, inter alia, contains the mechanics for a process of statutory mergers 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 provisions allowing the majority shareholder of a stock corporation (which itself has to be a German stock corporation holding at least 90 per cent of the registered share capital of the target company) to squeeze out the remaining minority of up to 10 per cent by implementing a merger between the target and the shareholder (with the shareholder as surviving corporation).

The Stock Exchange Act and the Offering Prospectus Act set out the rules dealing with prospectus requirements applicable when issuing new shares as consideration for a takeover offer.

The Commercial Code in particular provides for extensive disclosure obligations for publicly listed companies in respect of:

  1. the structure of their share capital;
  2. the statutory provisions and provisions under a company's articles on the nomination, dismissal and remuneration of members of the supervisory and management boards; and
  3. 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 that these agreements are known to the management board), and material agreements of a company providing for a change of control clause.

Developments in corporate and takeover law and their impact

i Covid-19-related laws facilitating M&A transactions during the pandemic

Many corporate measures in connection with mergers and takeovers require the approval of the shareholders. If the target or the bidder is a German stock cooperation or SE, this generally means that a physical general meeting has to be held in which all shareholders can participate and exercise their voting rights. In reaction to the bans on public meetings as part of the covid-19 restrictions, the German legislator introduced the right for corporates to hold virtual general meetings in which the shareholders can only participate remotely, thereby enabling those companies to obtain shareholder approval for material measures despite the covid-19 restrictions. The provisions on virtual general meetings, which were only recently extended until the end of 2021, were coupled with restrictions on the right of shareholders to ask questions during the general meeting. This right to ask questions and the corresponding obligation of the company to provide sufficient answers used to be one of the favourite tools of (minority) shareholders to challenge the shareholder approval and to block the implementation of important measures such as mergers or squeeze-outs. It remains to be seen if well-attended physical general meetings will have a comeback in the post-pandemic era or if remotely participating shareholders will be the future of general meetings of German corporates.

To stabilise the German economy during the pandemic, the Federal Republic of Germany has, indirectly through the economy stabilisation funds, acquired participations in some well-known German listed companies in exchange for financial assistance, (e.g., in Lufthansa and TUI). Such participations of the German state are exempted from the obligation to make a mandatory takeover offer even if the control threshold is exceeded. As the tourism sector is slowly recovering as a result of the easing of the travel restrictions, it is expected that the German state will use any opportunity to sell its participations in private companies, creating attractive investment opportunities for investors.

ii German Investment Code

In 2013, the German legislator enacted the German Investment Code (GIC), which implemented the Alternative Investment Fund Managers Directive (AIFMD).4 The GIC applies, inter alia, to managers of alternative investment funds (AIFs) (including private equity funds) and aims to reduce the risks posed by AIF managers (AIFMs) to the financial system by introducing various mandatory disclosures, corporate governance, liquidity management and other requirements. In accordance with the AIFMD, the GIC contains certain de minimis provisions under which AIFMs managing AIFs below certain thresholds are exempted from full application of the GIC and are subject only to a registration rather than a licensing requirement.

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 AIFs), it is €125,000. In addition, if the value of the portfolios under management exceeds €250 million, the AIFM must provide its own funds equal to at least 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, if 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 or upstream securities 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.

iii Supply Chain Law

In June/July 2021, the two houses of the German Parliament adopted the much-discussed Supply Chain Act (SCA).5 The SCA requires German companies with more than 3,000 employees as from 1 January 2023, and German companies with more than 1,000 employees as from 1 January 2024 to ensure that their suppliers comply with environmental regulations and human rights and refrain from employing child labour. Any infringement can trigger severe sanctions and lead to non-governmental organisations and trade unions being entitled to enforce the rights of foreign persons affected in German courts. The potential consequences of this right of action have to be evaluated in light of the groundbreaking Dutch court ruling obtained by an environmental protection organisation requiring Shell to reduce its CO2 footprint by 45 per cent until 2030.

Compliance with this new legislation will likely become another focus item in the due diligence of German target companies. It remains to be seen how the obvious difficulties in determining effective compliance with such rules besides the implementation of a proper supplier code of conduct will be tackled.

iv Foreign Trade and Payments Ordinance and Foreign Trade Act

The Foreign Trade and Payments Ordinance and the Foreign Trade Act govern foreign direct investment (FDI) screening in Germany. Generally, foreign investors may be required to obtain clearance by the Federal Ministry of Economics and Energy (BMWi) for acquisitions of shares in a German company in particular if (1) the acquirer directly or indirectly holds at least 10, 20 or 25 per cent of the voting rights (as the case may be) upon completion of the acquisition and (2) the target operates in certain sensitive sectors.

In 2020, the EU enacted the EU FDI Screening Regulation,6 which requires EU Member States to adopt certain harmonised standards for their national investment review proceedings. As a result, Germany introduced new legislation in 2020 and 2021 that expands the list of sensitive sectors to include companies operating in the defence industry, certain IT encryption technology, critical infrastructures and a wide range of critical technologies. Clearance by the BMWi is a statutory closing condition for all transactions concerning any such sensitive sector.

There have been numerous successful investments by foreign investors but the actual number of identified security risks that the FDI regimes are designed for is low compared with the total number of acquisitions involving European target companies. Only a fraction of acquisitions by foreign investors give rise to concerns about state-controlled influence, supply bottlenecks or a know-how drain. Since 2004, the BMWi has reviewed over 900 acquisitions, with the number and complexity of the cases increasing steadily in recent years. During this time, the BMWi has prohibited an acquisition only twice. In around 30 cases, national security interests were sufficiently satisfied without prohibition of the acquisition by means of amicable contractual agreements (special security agreements) between the acquirer group and the German state.

The EU FDI Screening Regulation introduces Europeanised security and public order interests in FDI proceedings. While until recently restrictions or prohibitions of transactions were only possible in cases of risks to national security interests, national authorities in the EU must in the future also consider the effects of an acquisition on the public order or security of other EU Member States and of the EU itself when making their assessment. Under the EU FDI Screening Regulation and the expected further tightening of national FDI regimes, FDI proceedings will have an even stronger impact on the structuring and timeline of M&A transactions involving non-EU/European Free Trade Association acquirers or sensitive sectors as is the case today. It is generally noted that the tighter Europeanised FDI rules correspond to a global tendency towards protectionism, aimed (not explicitly, but nevertheless clearly) against attempts of Chinese companies (in particular, state-owned or close to the state enterprises and technology companies) to gain footholds in Western key industrial sectors.

Foreign involvement in M&A transactions

Germany continues to be one of the most attractive target jurisdictions in Europe, with 416 inbound transactions in 2020 (France: 251, Italy: 198). Only the UK attracted more inbound deals, with 549 transactions in 2020. This picture remained largely unaltered in the first six months of 2021: while the UK and Italy have witnessed an even stronger recovery (i.e., inbound transactions recorded in total of US$137.4 billion in the first half of 2021 with an annual increase of 267.9 per cent in the UK and of US$13.2 billion in Italy being equal to an annual increase of 157 per cent), Germany's US$50.8 billion in the first half of 2021 also yielded a remarkable 48.8 per cent jump.7

In the DACH region, Germany's share of overall M&A even increased from 72.8 per cent in 2020 to 76.5 per cent in the first half of 2021.8

The volume of inbound M&A activity will likely increase in the next few years because an overwhelming majority of German companies expect growth opportunities to come from within the region over the next three years.9

Significant transactions, key trends and hot industries

i Significant transactions

There was not one single most significant German M&A transaction in the period under review but quite a number of larger and smaller transactions that stick out for different reasons (e.g., the IPO of HENSOLDT, one of Germany's leading companies focusing on sensor technologies for protection and surveillance missions in the defence, security and aerospace sectors, that was supported by the German government as shareholder despite the public call for protection of national security interests).

In terms of volume, the largest leveraged buy-out in 2020 with a volume of €17.2 billion was completed by two PE investors and the RAG-Stiftung by acquiring thyssenkrupp elevators from thyssenkrupp.

Since 2020, German infrastructure has become a popular target for investors seeking to acquire pandemic-independent businesses such as energy supplies, fibre businesses and electro-mobility. One of the most prominent infrastructure transactions was the sale of Deutsche Glasfaser, Germany's fastest growing provider of gigabit internet connections, by KKR to EQT and OMERS. The German mobile market is also shaken up radically by the entrance of a new fourth mobile network operator (1&1), seeking to challenge the incumbent mobile network operators Deutsche Telekom, Vodafone and Telefónica. For this purpose, 1&1 recently entered into national roaming and frequency lease agreements with Telefónica that enable 1&1 to offer its customers nationwide mobile services during the rollout of its own 5G-mobile network as well as agreements on the rollout and operation of its network with the Japanese e-commerce giant Rakuten. Together with Rakuten as prime contractor, 1&1 will build Europe's first fully virtualised mobile network based on innovative OpenRAN technology. It is also no surprise that the target set by the German government of renewable energies having a share of 65 per cent by 2030 promotes new businesses and investment models that not only attract billions of public funding but also German and foreign investors.

At the same time, the technology, media and telecommunications (TMT) sector undergoes a promising change driven by new technologies such as 5G. The German industry players' and the government's increased efforts to promote Industry 4.0 plus the launch of the rollout in Germany of 5G networks, which enable the use of new technologies like IoT or M2M, are expected to further stimulate M&A activity in the TMT sector.

ii Key trends

Since 2020, a new investment model is making the headlines, in particular in the United States and Europe: SPACs (i.e., companies with no commercial operations that are formed to raise capital through an IPO with the purpose of then merging with an operating target company to enable its quick public listing). The number of SPACs exploded in early 2021 mainly in the United States with 274 new listings in the first quarter and more than US$80 billion raised in the first half-year. However, since then, the creation of SPACs has slowed down considerably, also as a result of changes in regulation by the SEC. The number of SPACs listed on German stock exchanges is negligible as the corporate governance of German stock corporations has not proven to have sufficient agility to exploit the investment logic behind SPACs. However, there are many SPACs (currently close to 400) that have yet to identify a target, creating a lot of opportunities, also in Germany, for startups striving to access the equity capital markets, financial sponsors seeking an exit to the public and corporations looking to divest business units.

The capital and financial markets were shaken up by the insolvencies of Wirecard and Greensill and the reaction of the German legislator resulting in a much tighter supervision regime by the German financial supervisory authority BaFin especially with respect to financial reporting. The new law also picked up the global trend calling for a separation of audit and consulting within the large accounting firms with additional rules to strengthen the independence of auditors. It is in the best interest of the relevant companies to take the lessons learnt from the Wirecard accounting fraud seriously and to review their internal reporting, auditing and compliance systems accordingly.

Another trend with tremendous impact on both corporates and society is the public commitment to sustainability (i.e., environmental, social and governance (ESG)) and the awareness that becoming more inclusive and diverse is a strategic imperative for any successful employer. ESG criteria are not only influencing the M&A due diligence process but are increasingly driving boardroom decisions,10 particularly when it comes to divestment plans for business units that no longer fit into the business portfolio given the performance target on the various sustainability-related metrics. Institutional investors and public opinion will amplify the relevance of ESG and diversity and inclusion topics, such as the importance of ESG ratings or the advantages of a diverse composition of management and executive boards. In addition, deals involving companies that do not have a good ESG rating might have a harder time finding financing (see Section VI below).

It is also generally expected that, at the latest once the multi-billion covid-19 stabilisation measures are substantially cut back, the numbers of restructurings, distressed financings and distressed M&A transactions will increase as many companies need to increase liquidity and reduce debt. Even though the availability of (relatively cheap) financing is still very high, a lot of companies were hit hard by the covid-19 restrictions and do not (yet) have a business model that fits in the post-covid-19 era. In addition, an increased volatility in financial markets, the further rise of inflation, the high burden of debt of many states and, as a result, increased financing costs, are expected to increase the number of restructurings as well as insolvencies even of companies not substantially affected by the pandemic.

iii Hot industries

Pandemic-resilient sectors including technology, media and telecommunications, healthcare (pharmaceuticals, medical and biotech) and e-commerce have proven to be a recipe for the rapid recovery of the M&A market following the initial covid-19 state of shock. They will continue to be key drivers of the transaction market as their importance is pushed by significant changes in society such as demographic change, digitalisation of business models, etc. Thus, transactions in these sectors are strategic and growth-driven and not focused on short-term profits (e.g., German medical technology company Siemens Healthineers's completed takeover of US group Varian for US$16.4 billion).

In addition, the energy sector is expected to remain one of the most active fields for M&A, partly as a result of the switch in Germany from both coal and nuclear power to renewables.

However, the industries hit hard by the lockdowns (in particular, tourism, aviation, hospitality, etc.) should not be underrated. Even though they are currently characterised by restructuring and stabilisation measures, they will likely celebrate a comeback driven by the strong desire of customers to experience some pre-pandemic 'normality' and to catch up on some of the amenities that were prohibited during the lockdowns.

Depending on the future political environment, it is likely that the European Union, and in particular Germany, will champion further consolidation of European or German banks to create European counterparts to the dominating global banks hailing from the United States and China. This would lead to a number of large deals with European banks in the near future. In 2019, Germany's largest private credit institutions, Deutsche Bank and Commerzbank, started negotiations about a merger of their businesses. Even though the negotiations were terminated without success, the vision of many bankers and politicians to create one leading German bank to keep up with large foreign competitors is still alive and it would not come as a surprise if the negotiations between both institutions were continued.

Financing of M&A: main sources and developments

Throughout 2019 until the beginning of 2020, acquisition financings continued to be available at generally borrower-friendly terms, including low pricing and relatively relaxed financial covenants, as a result of the continued low-interest environment and high amounts of liquidity in the market seeking deployment. At the beginning of 2020, concurrently with the immediate downturn of the M&A market as a result of the outbreak of the covid-19 pandemic, the numbers and the volume of M&A-related financing went down in parallel.

On the other hand, the onset of the pandemic had immediate consequences for a number of existing acquisition financings and called for creative solutions.

One of the major challenges for existing leveraged financings was the impact of the downturn in activity and turnover for a significant number of borrowers, in particular in industries depending on travel or leisure, resulting in an increase of actual net leverage, which is still commonly used as the most frequent financial covenant and tested at regular intervals (usually quarterly). In many cases, waivers or covenant holidays or suspensions had to be discussed with lenders.

Also, the state supported loan programmes (mostly administered through the Kreditanstalt für Wiederaufbau - KfW) that had been in existence for a long time, were significantly increased and extended to support businesses that were particularly hard hit by the pandemic. Subsidised loans under these programmes were, in principle, also available for companies forming part of the portfolios of financial investors. Two programmes, sponsored by the KfW, were predominantly used for companies with leveraged financings, namely the programme for entrepreneurial loans, providing for back-to-back loans to banks who would on-lend the funds provided by KfW to the relevant borrowers. In addition, a more complex programme was set up to allow the KfW (or KfW-backed financial institutions) to directly participate in existing syndicated financing facilities. In the case of companies owned (indirectly) by financial sponsors, these programmes, however, usually came with strings attached, in particular in the form of strict limitations on dividend distributions. Also, the integration of state-sponsored loans in the often-complex financing packages for acquisition financings resulted in significant challenges both for the existing lenders and the borrowers.

From the second half of 2020, both M&A activity and related acquisition financing transactions recovered significantly, albeit not immediately to pre-pandemic levels. Liquidity in the market continued and continues to be very high, and acquisition financings continue to be available with rather borrower-friendly covenants; at the same time, pricing has slightly increased.

On the lender side of the acquisition financing market, debt funds – who had already become important players prior to the pandemic – have increased their market share in acquisition financings again significantly. While debt funds usually require higher margins than bank lenders, they are able in many cases to provide much higher volumes of financings than any single bank, thus making it easier for borrowers to negotiate terms and conditions with only one or a very small number of debt funds. Also, debt funds (unlike bank lenders who usually require at least a part of their facilities to be amortising) are usually able to offer acquisition financings with a bullet repayment that favours financial sponsors with a buy-and-build strategy. Debt funds will, however, usually not be able to provide any revolving or working capital facilities to portfolios for regulatory reasons. For that purpose, even in debt fund financed acquisition financing transactions it is usually still required for the target to receive additional working capital or revolving facilities from banks who frequently require to be super senior to the debt funds.

As a very recent development, the trend towards 'green finance', or more generally ESG-compliant finance, has also made itself felt in the acquisition financing market. This development is both driven by banks' and debt funds' interest in sustainable financing as well as by sponsors' desire to hold their portfolio companies to strict ESG standards. For the documentation of acquisition financings, this has in many cases resulted in complex and often time-consuming negotiations about specific and tailor-made key performance indicators, the ongoing measurement of compliance with the agreed indicators, and the resulting adjustments in the margin depending on the degree of compliance.

In acquisition financings for very strong and attractive target companies, with often very competitive bidding processes, there have been a high number of transactions that required certainty of funds at an early stage of the bidding process. While the criteria for certainty of funds for competitive private M&A transactions are not necessarily as strict as for public M&A transactions, the competitive situation often forced bidders to press for a fully negotiated, signed and to a large extent unconditional financing documentation in the early stages of the M&A process.

Employment law

The most notable developments in German employment law in 2020 and 2021 (so far), that may be of particular relevance in an M&A context, essentially concern temporary agency workers, business transfers, minimum wage and an implementation of gender quotas for executive board members. Other noteworthy topics include application of collective bargaining agreements, effects of contractual trust arrangements (CTAs) in company insolvency scenarios, employee data protection and covid-19-related developments.

i Temporary agency workers

Although the last fundamental amendments to the German Act on Temporary Agency Work were enacted in 2017 (the 2017 Act), 2020 and 2021 have again brought about a number of judgments clarifying and sharpening contested aspects of the law. The German Federal Labour Court essentially ruled on aspects of equal treatment and related items. The German Federal Civil Court decided on details of commission claims by agencies against employers entering into employment with individuals previously hired out. And the German Federal Constitutional Court clarified that agency workers may not be hired to fill in for employees who are on strike.

A key item of 2020/21 Federal Labour Court decisions was the contested subject of equal pay: principally, this has to be provided to an agency worker from the outset of his or her engagement by a hirer. Collective bargaining agreements (CBAs) may provide for postponement for up to nine or, under limited circumstances, up to 15 months. Employers not bound by CBAs may adopt the rules of regional CBAs for their industry, for example by reference to employment agreements. However, per precedent of the Federal Labour Court, such reference must be to a CBA as a whole. Contractual variations from the content of a CBA will render the reference void unless these are beneficial to agency workers or concern subjects not regulated by the CBA. The standards in this respect are rigid: per the reasoning of the court, even variations that cannot be considered strictly beneficial (e.g., an increase of the provided weekly working time against more pay) will not be acceptable.

In a related decision, the Federal Labour Court has held that exclusion clauses in agency workers' employment agreements can effectively bar equal pay claims. Such clauses are common in German employment agreements. Per the decision, an exclusion clause providing for a three-month exclusion period will principally be acceptable if compliant with the further general requirements defined by earlier precedent.

In this context, it continues to be disputed whether the provisions of the 2017 Act, allowing for exemptions to equal treatment are in compliance with the EU Directive on Agency Work.11 In December 2020, the Federal Labour Court therefore requested a preliminary ruling on the subject from the Court of Justice of the European Union (CJEU). If the CJEU found these to be in violation of the directive, this would have far-reaching impact because such CBA-based exemptions are commonly made use of by the agency work industry in Germany. It further adds to the unease in the context that decisions by the CJEU regularly have retroactive effect. While the CJEU may declare individual decisions to apply from the time of its decision only, it is uncertain whether the court will consider the prerequisites therefore to be met. These are, namely, (1) a risk of massive detrimental economic effects, and (2) a previously existing objective and significant uncertainty regarding the content of the EU law. In light thereof, there is a risk that, further to increases of agency worker compensation ex post, substantial claims relative to past periods may arise. Enforcement of past-service compensation claims by agency workers may be time-barred short-term by exclusion clauses. However, this is not the case for claims to higher contributions by social security authorities, which may be brought up to four years in retrospect. Completed social security audits offer no protection in this respect as, according to earlier precedent by the Federal Labour Court, their results may be amended to an employer's detriment if a different assessment is subsequently mandated (e.g., in light of new court rulings).

Another still contested item in this context is how equal pay is determined. Recent decisions by the Federal Labour Court dealt with the issue of how to determine whether equal pay claims are founded. Pursuant thereto, the agency worker's pay has to be measured against the actual periodical pay of a regular employee of the hirer working a similar job during the agency worker's term of service for the hirer. Such regular employee may, however, also be the (former) agency worker himself if subsequently employed by the hirer in a similar job. The burden of proof for an equal pay claim lies with the agency worker. Irrespective of these decisions, many aspects of equal pay remain unclear.

Under the 2017 Act, further, a general 18-month limit on the use of individual temporary agency workers by a hirer applies. Longer maximum terms may be permitted by CBAs, or indirectly by shop agreements put in place on the basis of a CBA. A number of CBAs concluded in the meantime allow for longer terms; for example, of 48 months. Recent regional court decisions have dealt with questions regarding the calculation of this term (e.g., in case of temporary interruptions as a result of plant holidays).

Employers not legally bound by CBAs may adopt the maximum length permitted under a regional CBA that applies to their industry. In this context, CBAs commonly provide for a duty of the hirer to offer employment to an agency worker after a defined term of engagement, and oftentimes further provide that such duty can be excluded by conclusion of shop agreements regarding the use of agency work. Per precedent by the Federal Labour Court, shop agreements on any issues relating to the use of agency workers, as well as agreements between works council and employer that do not formally constitute shop agreements, may suffice. However, further cases challenging the compliance with EU law of extensions of the statutory maximum term by shop agreement are currently pending before the Federal Labour Court and expected to be decided in early 2022.

ii Business transfers

In the field of business transfers within the meaning of Section 613a of the German Civil Code, 2020/2021 brought about few Federal Court decisions.

A particularly noteworthy 2021 decision by the Federal Labour Court concerned the liability of an acquirer of an insolvent company for pre-existing company pension obligations. Following a preliminary ruling from the CJEU, the court held that an acquirer is only liable for service-related company pension obligations relating to time periods following the opening of insolvency proceedings against the previous employer. This is essentially in line with past precedent on the subject. In principle, such past service obligations will fall within the responsibility of the mandatory statutory pension insolvency insurance (Pensionssicherungsverein (PSV)) provided they were vested, did not exceed certain value thresholds and were not channelled through a pension fund; otherwise, they are principally forfeited. In this context, the Federal Labour Court further ruled that PSV has to provide a certain minimum level of protection to employees: namely, employees may not be deprived of more than 50 per cent of their company pension rights, and PSV has to ensure that a loss of company pension rights caused by the employer's insolvency does not result in employees falling below the poverty thresholds as defined by EUROSTAT.

Other recent decisions in the context of business transfers concerned aspects of collective law: in earlier decisions, the Federal Labour Court held that a CBA applicable to a transferring business is replaced by a CBA on the same subject applicable at the acquirer irrespective whether the latter is less beneficial to the employees than the formerly applicable CBA.

Further, in a decision of substantial effect, the Federal Labour Court decided that rules established by shop agreement at a transferring business will retain their collective nature even if the transfer is to a business without a works council. As a consequence, if the employees of such business later pass to another acquirer by way of a second business transfer, such rules will be replaced by a shop agreement in place at the second acquirer as a matter of law. Further, the court ruled that shop agreements of a transferring business can be terminated by giving notice of termination to the acquirer's works council.

In a further notable decision, the Federal Labour Court declared that – in deviation from the general rules governing the fate of shop agreements in the event of a business transfer – a shop agreement of the transferring entity that governs company pensions will not necessarily automatically be replaced by a shop agreement on the same subject that is in place at the acquirer. Based on the argument that the rights of an acquirer of a business to effect such changes may not exceed those of the original owner, a company pension-related shop agreement will only be replaced by an acquirer's shop agreement if the corresponding amendments would be permitted under the three-tier rule restricting changes to company pension rights as established by earlier precedent of the court. If such prerequisites are not met, the rights under the original shop agreement remain in place. Per a closely related decision, company pension rights established by shop agreement at the transferring business will, however, be replaced by binding and comprehensive rules of a CBA legally binding on the acquirer. The court's line of argument being that CBAs constitute a higher-ranking source of law and therefore replace shop agreements on the same subject. This is irrespective of whether the CBA's content is less beneficial, as long as it is proportionate and complies with general principles regarding protection of trust. The three-tier test ordinarily restricting amendments to company pension regimes does not apply in this case.

iii Minimum wage

The minimum gross wage of employees across all sectors in Germany increased to €9.60 as of 1 July 2021 by regulation of the federal government, and will further increase in two semi-annual steps to a total of €10.45 effective 1 July 2022.

Per previous precedent by the Federal Labour Court, as a rule, all payments that are made in return for work performed, are unconditional and irrevocable count towards the minimum wage requirement. This excludes payments made in reward of other purposes or for which statutory law defines a specific other purpose. In this context, the CJEU has found daily allowances to count towards minimum wage unless intended to compensate for costs of deployment of an employee sent to work abroad by his or her employer. Per the same decision, employees deployed to work abroad may challenge violations of minimum wage regulations of the receiving country in that country's courts or in the courts of their home country provided those courts have competence for claims against employers. This applies irrespective of the national law governing their employment.

A law introducing minimum compensation requirements for apprentices entered into force in 2020. It established minimum monthly compensation amounts for apprentices. Currently, this is €550 gross per month in their first year, with prescribed increases in the next two or three years of their apprenticeship, respectively. The first-year minimum amount increases to €620 in 2023. Exceptions shall be permissible, based on CBAs.

Another notable aspect in this context is that a principal is liable for compliance of his or her contractors (and their subcontractors, if any) with the minimum wage law (Section 13 German Minimum Wage Law).

iv Board member gender quotas and related items

By federal law taking effect in August 2021 (2021 Act), the rules on mandatory gender quotas and target gender representation in German companies forming part of the private sector have been substantially extended. First introduced in 2015, mandatory gender quotas of 30 per cent applied to supervisory boards of large listed companies. Those and certain other companies further had to define target numbers for female representation on their supervisory and executive boards, as well as the next two lower management levels. Corresponding reporting requirements applied. The 2021 Act has extended the mandatory gender quotas to executive and administrative boards of listed corporations and SEs subject to mandatory equal co-determination at company level, provided that board has more than three board members. These boards have to be staffed with at least one man and one woman; appointments in violation of this quota and taking effect starting 1 August 2022 will be void. Already-begun terms of office may, however, be completed without change.

The duty to define target numbers for gender representation on boards and certain management levels as well as target dates for reaching these has also been made mandatory for additional companies. Companies that choose zero as a target number (not an uncommon strategy in the past) have to name and publish the reasons. Non-compliance is a fineable administrative offence.

Another particularly noteworthy item is the newly introduced right of executive board members, SE directors and managing directors of limited liability companies (board members) to take sabbaticals similar to employee maternity, parental and family care leave. If the relevant board has more than one member, board members have a right to revocation of their appointment for such reason and an ancillary time-limited right to re-appointment. Requests based on maternity have to be granted; all others may only be refused for cause. Further, longer sabbaticals may be granted on a voluntary level.

v Other noteworthy items

Other noteworthy Federal Labour Court decisions handed down in 2020 and 2021 concerned the following subjects:

  1. CBAs may not define additional requirements for their applicability between parties bound to them as a matter of law, based on their respective membership in a workers' union and in an employers' association or on a company's agreement with a workers' union. Provisions to such effect are void.
  2. Two-tier CTAs put in place to externally fund company pension obligations will continue to be in place in the event of insolvency of the company. Although the funds of the CTA do initially become part of the insolvency estate, they must be turned over to the trustee at his or her request and cannot be claimed by PSV. The Federal Labour Court further ruled that a CTA may prioritise the protection of rights not protected by PSV.

In 2020 and 2021, several lower and regional court decisions dealt with employee data protection issues; mostly in the context of damages claims. Particularly noteworthy among these is a lower court decision that limited employee information rights, holding the effort entailed in providing a copy of all employee data processed by the employer was grossly disproportionate to the interests of the claimant to obtain that information. In the decided case, the claimant requested provision of all data processed outside of the company, having been granted electronic access to his data stored in the company's files. The decision contrasts with a 2018 regional labour court ruling in favour of a far-reaching information right including the provision by the employer of copies of information stored outside of the regular files of the business. Copies could only be withheld for reason of protection of business secrets. Biding a decision by the Federal Labour Court on the subject, the scope of the information right remains unclear.

Finally, similar to countries all over the world, work health and safety-related laws and regulations were enacted in Germany in the context of the covid-19 pandemic. The 2020/21 strict lockdown, requiring employees to work from outside of their regular workplace if feasible, has led to a substantially increased acceptance of concepts of remote working that is expected to survive in post-pandemic Germany. Other noteworthy aspects that continue to apply to date, and may result in additional cost to be taken into account in an M&A context, are legal obligations of the employer to establish hygiene concepts aiming to protect employees from infection, including measures to reduce contacts at the workplace and obligations to offer cost-free covid-19 testing to employees. Although employers may adapt hygiene concepts if sufficient numbers of their employees have been vaccinated, by law, they may not request employees to disclose their vaccination status with very limited exceptions to this rule (e.g., for employees of a hospital).

Tax law

The most notable developments in German tax law from the previous edition to date that are of relevance in an M&A context concern the repatriation of German-sourced profits, new legislation on the German-controlled foreign corporations regime, German real estate transfer taxes and the introduction of a 'check the box' system.

i Repatriation of German-sourced profits and the anti-treaty shopping rule

Dividend distributions carry, in principle, a 25 per cent German withholding tax (WHT) burden (plus the still-existing solidarity surcharge of 5.5 per cent thereon). German domestic law offers a reduction down to 15 per cent if the recipient is a foreign corporation and the EU Parent–Subsidiary Directive or an applicable double tax treaty might provide for a lower, or even a zero, rate.

This is all, however, subject to the rather harsh German anti-treaty and directive shopping regime (Section 50d, Paragraph 3 of the German Income Tax Act). The respective WHT reduction will only be granted under very narrow conditions, especially requiring economic activities with sufficient substance. If an investment is made (as usually through, for example, a Luxembourg or Dutch HoldCo) with low (but sufficient) substance, these conditions are always a major issue. While tackling abusive structures is obviously legitimate, the German substance requirements go beyond that, and the CJEU has held in two ground-breaking decisions (Deister/Juhler and GS) that the previous and existing German anti-treaty and directive shopping regimes were in violation of both the freedom of establishment (Article 49, Treaty on the Functioning of the European Union) and the Parent–Subsidiary Directive. In 2019, the CJEU issued a combined decision on four cases (N Luxembourg 1, et al) that contains rather explicit guidelines on what the CJEU considers as abusive, which criteria should be applied when testing an abuse, and who has the burden of proof.

In reaction to this jurisdiction and with effect from 2 June 2021, the German WHT regime has been reformed, also including a revision of the anti-treaty shopping rules. However, the amended Section 50d, Paragraph 3 of the German Income Tax Act does not provide for the expected easing and instead even increases the requirements for receiving a relief under an EU directive or according to applicable double tax treaty provisions. Under the new rule, the recipient of dividends or royalties is only entitled to any relief to the extent (1) the recipient has shareholders who would also be entitled to the same treaty or directive relief assuming they would directly receive the payment; (2) the source of income has a significant connection with a genuine economic activity of the foreign recipient; (3) the recipient proves that obtaining a tax advantage is no main purpose for the interposition of the foreign recipient; or (4) the foreign recipient is a publicly traded company listed on a recognised stock exchange. This is a significant tightening of the anti-treaty shopping rule, limits the circumstances in which non-resident companies may qualify for WHT relief and even applies in cases where a double tax treaty already includes a specific anti-abuse rule. It has to be expected that in many cases in which full WHT relief was available so far, relief will be denied under the new rules.

As a result, there is still a great deal (probably even more) uncertainty when it comes to tax-planning considerations on the repatriation of German-source profits. Alternative routes, such as share buybacks and distributions out of a corporation's contribution accounts (if available and accessible at all), must still be examined. Receiving dividend distributions through a German partnership might also be an option on the back of the promising jurisprudence of the Federal Fiscal Court.

ii Revised German-controlled foreign companies rules

As part of Germany's obligation to implement the rules of the EU Anti-tax Avoidance Directive into German law, the German rules on controlled foreign companies (CFCs) have been revised. The new rules have a wider scope than the previous regime (i.e., not only the holders of shares but also the holders of certain equity instruments could qualify as related parties for CFC purposes and non-tax resident shareholders can be subject to the new CFC rules if they hold shares in a foreign corporation in a German permanent establishment). Furthermore, dividend income constitutes passive income if the payments are tax deductible at the level of the payer or if the taxpayer does not own at least 10 per cent of the shares in the payer. Most significantly and heavily criticised, the threshold for low taxation remains at 25 per cent. The new CFC rules will apply from tax year 2022 onwards.

iii Amendment of the real estate transfer tax rules

German real estate transfer tax (RETT) becomes due not just 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 or partnerships. The year 2021 has seen a long-expected change to German RETT rules. With effect from 1 July 2021, RETT is levied:

  1. on the direct or indirect transfer of 90 per cent (or more) of the interests in the assets of a real estate-owning partnership within a ten-year watching period (Section 1, Paragraph 2a of the RETT Act, Partnership Rule);
  2. if 90 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 of the RETT Act);
  3. if a person (including related persons) holds, as a result of a transaction, directly or indirectly, 90 per cent (or more) of the shares or partnership interests in a real estate-owning company (Section 1, Paragraph 3 of the RETT Act);
  4. if a person holds, as a result of a transaction, a direct or indirect economic interest of 90 per cent (or more) in a real estate-owning company (Section 1, Paragraph 3a of the RETT Act); or
  5. if there is a direct or indirect transfer of at least 90 per cent of the shares in a real estate-owning corporation within a ten-year watching period to (any number of) new shareholders (Section 1, Paragraph 2b of the RETT Act, New Corporation Rule) whereby changes in shareholders that take place in listed corporations on the stock market within the EU or European Economic Area will not be taken into account for purposes of the New Corporation Rule.

In practice, share deals were often structured in a way to not trigger RETT. This has become at least more difficult by lowering the threshold from 95 to 90 per cent, extending the watching period from five to ten years and, in particular, by introducing the New Corporation Rule.

iv Introduction of a 'check the box' system

With Section 1a Corporate Income Tax Act, in effect from 1 January 2022, Germany will introduce a corporate income tax option, allowing partnerships in Germany to be taxed similarly to a corporation, especially to strengthen the international competitiveness of family businesses. Exercising (as well as revoking) this option is deemed a change of legal form according to the German Reorganisation Tax Act. In principle, the new rules also apply for options exercised (and revoked) by partnerships held by foreign investors, thereby raising complex questions of corporate and reorganisational taxation.

Competition law

In 2020, the Federal Cartel Office (FCO) reviewed about 1,200 merger control notifications, slightly less than in 2019, when the overall number amounted to about 1,400 notifications. Between January and the end of June 2020, only 505 transactions were notified, which is 20 per cent less than in the same period of the previous year. In May 2020, the number of filings was more than 50 per cent lower than in May 2019, likely as a result of the covid-19 pandemic. In 2020, the FCO cleared almost all notified transactions (more than 99 percent) within the Phase I deadline of one month. Only nine of the transactions that were filed during 2020 raised competitive concerns and were being reviewed in more detail (Phase II proceedings), which is slightly less than last year (14 transactions). Of the nine Phase II transactions that the FCO reviewed in 2020, four were cleared unconditionally, three were cleared with conditions, and no transactions were prohibited. The parties of two transactions withdrew their filings after the FCO expressed competitive concerns.

A decision of fundamental importance concerned the acquisition of the German shunter manufacturer Vossloh Locomotives GmbH by the Chinese rolling stock manufacturer CRRC Zhuzhou Locomotives Co, Ltd. The specificity of this case was that it involved the acquisition of a European company by a Chinese state-owned company with a still quite weak position on the European market. The FCO therefore examined very carefully whether the transaction posed a threat of low-price and dumping strategies and the cost advantages resulting from CRRC's state-subsidised activities in many other markets. The deal was cleared without remedies in April 2020 after an in-depth examination and the FCO stated in its annual report that 'although Chinese state-owned companies enter markets with strong economic power, they cannot be assessed as a general threat to competition'.

One of the transactions the FCO reviewed in Phase II proceedings was the proposed acquisition by the XXXLutz KG of 50 per cent of the shares and joint control of Roller GmbH & Co KG and other companies of the Tessner Group. This transaction was initially filed with the European Commission. However, the European Commission partly referred the case to the FCO. While the European Commission reviewed the transaction with regard to the EEA-wide procurement markets for furniture, the FCO reviewed the German regional retail markets for furniture. The transaction was cleared by the FCO in November 2020 with conditions. The FCO had serious competitive concerns in relation to 23 locations, as customers would have only had a limited choice between different retailers in the low-cost furniture sector. In its review, the FCO took into account all brick and mortar and online furniture retailers. However, the FCO set its main focus on the low-cost sector. Despite the transaction being cleared, XXXLutz lodged an appeal with the competent court as a result of the narrow market definition and excessive obligations applied by the FCO. The court proceedings are still pending.

In recent years, the number of notified transactions in the hospital sector has continued to increase. From 2003 until 2020, the FCO reviewed 335 transactions in the hospital sector. Seven of these transactions were prohibited, 284 were cleared, and two notifications were withdrawn during Phase II proceedings. From January 2020 until April 2021, all of the notified 24 transactions were cleared. Due to the increased number of hospital transactions, the FCO even conducted a sector inquiry into the hospital sector, which was concluded in September 2021. As a result of the tenth amendment to the German Act against Restraints of Competition (GWB), which entered into force on 19 January 2021 (for further details see below), transactions in the hospital sector are exempted from merger control review under certain circumstances based on a new provision in the law that applies until the end of 2027.

The retail sector remains a focus area of the FCO, which also reviewed many retail-related transactions that could be cleared in Phase I, in part after lengthy informal guidance proceedings. In several of the reviewed transactions, the competitive pressure from the online trade was in the focus of the FCO. In December 2020, the FCO cleared the acquisition of Flaschenpost SE, a beverage retailer operating solely online, by the Radeberger Group. According to the FCO, the transaction did not raise serious competitive concerns as a result of the limited number of geographic overlaps as well as the competitive pressure exercised by beverage retailers both online and offline. The FCO also noted that traditional brick and mortar beverage retailers have access to online platforms and the technology required to conduct their business online. Similarly, the FCO cleared the acquisition of SportScheck GmbH by Signa Retail GmbH (Austria) in February 2020. Although the acquisition resulted in the creation of Germany's leading sports and outdoor retailer, the transaction did not give rise to significant competitive concerns as the parties' combined market shares did not exceed 15 per cent in Germany. The FCO also considered an alternative narrower market definition including brick and mortar sales only. Even in these narrow, potentially relevant markets, the parties' combined shares did not exceed 30 per cent. According to the FCO, the acquisition could be cleared because specialist retailers and online retailers or the manufacturers' online shops exert sufficient competitive pressure. Moreover, the FCO has dealt with the sale of the real stores in several proceedings. In this context, METRO had sold all real stores to SCP Retail Sàrl, a Russian investment company. The European Commission had cleared this transaction in March 2020. The FCO then examined the further sale of the real stores from SCP to EDEKA, Kaufland, Globus and V-Markt (Georg Jos Kaes). In this context, the FCO launched two in-depth examinations, in which it closely examined the transaction's effect on the sales market and the procurement market. The acquisitions by Globus and V-Markt of 24 and two real stores, respectively, were cleared without conditions. However, after Phase II proceedings, the FCO only cleared the acquisition of up to 92 real stores by Kaufland instead of the envisaged 101 as a result of competition concerns. Similarly, the acquisition by EDEKA was only partly cleared, as EDEKA could only acquire 45 real stores without conditions instead of the envisaged 72. The FCO prohibited the acquisition of 21 real stores as a result of competition concerns and regarding the remaining six stores, carved out retail space has to be given up to competitors or alternatively these stores have to be closed.

The digital sector remains another focus area of the FCO and also accounts for several decisions and investigations by the FCO. In 2020, the FCO reviewed transactions in relation to online dating platforms, online payment processes and digital health platforms, among others. In the context of digitalisation, it is also worth mentioning the FCO's sector inquiries regarding comparison portals, smart TVs, online user reviews and the ongoing sector enquiry regarding online advertising.

Digitalisation with its fundamental changes to economic activity also creates a considerable need for new regulation. Hence, one important driver for the tenth amendment to the GWB was to modernise the legal framework to face the challenges of digital competition with the main objectives being the implementation of the European Directive to empower the competition authorities of the Member States (ECNplus directive)12 and the modernisation of abuse control with a special focus on digital platforms. In this context, the FCO recently initiated proceedings against Facebook, Google, Apple and Amazon to examine whether they are subject to the new rules applying to undertakings of paramount significance for competition across markets (Section 19a GWB).

Apart from this, there were substantial amendments with regard to merger control. First, the domestic turnover thresholds were increased from €25 to €50 million and from €5 million to €17.5 million. The aim is to enable the FCO to concentrate on more complex cases. Besides, the amendment provides for an increased turnover threshold of €20 million (previously €15 million) for the minor market clause. The minor market clause is a provision according to which a merger cannot be prohibited despite the creation or strengthening of a dominant position if and insofar as a market is affected on which goods or commercial services have been offered for at least five years and on which turnover in the last calendar year did not exceed the €20 million threshold. Second, the total review period for merger control proceedings was extended from four to five months (Phase II proceedings).

In addition, Section 39a GWB was newly introduced. It enables the FCO to review acquisitions of smaller targets with revenues of at least €2 million (two-thirds of which is generated in Germany), if, following a sector enquiry, the FCO has indications of economically relevant restraints of competition. Pursuant to the new Section 39a GWB, the FCO may, by means of an order, oblige an undertaking to notify any combination of the undertaking with another undertaking in one or more specific sectors if the undertaking has a share of at least 15 per cent of the supply or demand of the relevant goods or services in Germany and if there are objectively plausible indications that future transactions could significantly impede effective competition in these sectors.

Outlook

In line with public studies, it is expected that Germany builds on the momentum and sees the highest growth in M&A deal activity in Europe (supplanting the UK and Ireland as the most active M&A markets)13 and further develops globally as a top investment destination14 within the next few months. New 'normality' with increasing vaccination coverage, increasing digitalisation, Industry 4.0, unsolved succession issues in Mittelstand (SMB), robust financial and capital markets, low interest rates and enormous liquidity in the markets will continue to be important drivers for M&A. Also, the outlook for economic growth in the EU is positive: the July 2021 forecast predicts a growth of 4.8 per cent for 2021 and 4.5 per cent for 2022. High levels of dry powder, combined with low interest rates and a scarcity of solid assets, facilitate M&A transactions and are likely to lead to a further increase of transaction multiples.

Also, higher levels of corporate distress and business reorganisations are expected as government-backed covid-19 financial support measures unwind and as companies further look to reassess strategies and redirect resources to focus on core competitive advantage.

Nevertheless, the pandemic-related risks in addition to other political and economic risks for the global economy are obvious. These factors also may have a significant impact on M&A activities. Among these uncertainties are the strong tensions between the United States and China as well as Russia, respectively, supply shortage of key products such as semiconductor products, an increasing drift in respect of foreign policies between the countries of the Western hemisphere and a potential slowdown, if not reversal, of the decades-long trend towards globalisation.

Footnotes

1 Katharina Hesse and Elisabeth Kreuzer are both partners at Hengeler Mueller Partnerschaft von Rechtsanwälten mbB. Thanks to Steffi Budde, Carsten Bormann, Markus Ernst, Sara Jungewelter, Heinrich Knepper, Vicki Treibmann and Isabella Zimmerl for their valuable input.

2 Data and figures in this section according to Mergermarket.

3 Regulation (EU) No. 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse.

4 Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No. 1060/2009 and (EU) No. 1095/2010.

5 Act on Corporate Due Diligence in Supply Chains published in the Federal Law Gazette, Part I, 2021, No. 46 of 22 July 2021.

6 Regulation (EU) 2019/4521 of the European Parliament and of the Council of 19 March 2019.

7 Mergermarket – Inbound (Germany, France, Italy, UK), excl. lapsed deals.

8 Mergermarket –DACH Trend Report H1 2021.

10 Allen & Overy M&A Insights H1 2021.

11 Directive 2008/104/EC of the European Parliament and of the Council of 19 November 2008 on temporary agency work.

12 Directive (EU) 2019/1 of the European Parliament and of the Council of 11 December 2018 to empower the competition authorities of the Member States to be more effective enforcers and to ensure the proper functioning of the internal market.

13 CMS Road to recovery: European M&A Outlook 2021.

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