The Mergers & Acquisitions Review: Germany

Overview of M&A activity

2018 was, seen globally, a very good year for the M&A market, with aggregate volumes of M&A deals reaching an estimated US$3.5 trillion, an increase in comparison to 2007 of almost 12 per cent. According to Merger Market, 2018 was thus the third-biggest year in terms of volumes and the second-highest in average deal sizes. Global buyout activity reached US$557 billion, the highest total in a decade and 3.7 per cent more than 2017 (US$537 billion). M&A deals driven by private equity or financial investors or sponsors who exited their investment reached the second-highest number of deals on record, registering 2,450 exit transactions compared to a peak of 2,592 in 2017.

The value of European M&A also reached a post-crisis high (US$989.2 billion) in 2018, which was also the highest share of global M&A (28 per cent) by value since 2014. However, it was a year of two halves: the first six months were very strong followed by an increasingly difficult environment, which caused the market to stall notably in the second six months.

Although Europe experienced 11 megadeals (greater than US$10 billion) in 2018, four more than throughout 2017, all of them had been announced by May. Firms have been forced to reconsider high-profile investments through a combination of rising protectionism, government intervention and continued uncertainty. Just 10 deals in excess of US$5 billion were recorded in H2. These included Hitachi's US$9.4 billion acquisition of ABB's power grids business and the US$7.1 billion Calsonic Kansei/Magneti Marelli deal. Concerned by the activity slowdown in H2, dealmakers are anxious about whether 2019 will see a return of the buoyant levels of recent years.

Brexit was a major factor. The protracted uncertainty about the UK's future relationship with the rest of the EU caused a market slowdown in M&A activity. This was acutely felt in the final quarter of the year as Theresa May faced battles on all sides of Parliament once her deal with the EU had been agreed.

The German M&A market (looking at transactions involving at least one significant German participant as buyer, seller or target) stalled or slightly dropped. Still, the German M&A market in 2018 ranked second in Europe after the UK. The clearly dominant transactions, both in Q1 and Q2, were the reorganisation of the German energy market caused by the acquisition of Innogy SE by E.ON, which accounted for more than one-third of the total 2018 deal value, and Vodafone's takeover of Liberty Global's assets in Germany and CEE. After a very strong beginning, increasing uncertainty let to a decline in market activity in Germany in the second half of the year, with deal values of US$15 billion and US$8.5 billion, respectively, in Q3 and Q4.

Nevertheless, a number of high-profile M&A deals were seen in the past year. The single most notable M&A transaction with German involvement was the acquisition by E.ON SE of Innogy SE with a deal volume of approximately €38 billion, combined with a swap of assets between E.ON and the previous majority owner of Innogy, RWE. Further top 10 German deals included:

  1. the acquisition by Vodafone plc of the German and Central European cable business of UnityMedia (including UnityMedia Hungary, Romania, Germany and the Czech Republic) from Liberty, for a total purchase price of €18.4 billion; the acquisition by SAP SE of Qualtrics, LLC from its previous (private equity) owners;
  2. the acquisition by Gebrüder Knauf Verwaltungsgesellschaft KG of USG Corporation for a purchase price of €5.3 billion;
  3. the sale by Macquarie of its participation in Techem GmbH, one of the German market leaders in usage tracking devices for households (in particular heating meters) for €4.6 billion;
  4. the acquisition by Procter & Gamble of the consumer health business from Merck KGaA (with a purchase price of €3.4 billion);
  5. the acquisition by Temasek Holdings BTE of a minority stake in Bayer AG (purchase price: €3 billion);
  6. the sale by Kühne Holding AG of its majority stake in VTG to Morgan Stanley Infrastructure Inc (€2.3 billion); and
  7. the acquisition by EQT Partners AB of Suse Linux GmbH from Microfocus International plc.

Given the sheer size of the single largest German M&A transaction (which was at the same time the third-largest M&A transaction worldwide), that is, the acquisition by E.ON of Innogy, the energy, mining and utilities sector was the most targeted sector by value. This takeover, creating one of the biggest energy utilities with a strong focus on renewable energies, demonstrated the global shift towards cleaner and more efficient energy business. The deal will see E.ON focus on driving sales by growing its supply and networks coverage, while RWE will consolidate its power generation assets and build its renewable capacity.

The total number of initial public offerings (IPOs) in Germany in 2018 in the prime standard segment of the German stock exchanges doubled in comparison to 2017 to a total of 16, thereby reaching their highest number since the outbreak of the financial crisis in 2007. The volume of IPOs increased as well, tripling to almost €12 billion (in 2017: approximately €3 billion). The main drivers for this positive development were the IPOs of Siemens Healthineers, Knorr-Bremse and DWS that, with a total aggregate IPO volume of €9.5 billion, accounted for more than 80 per cent of the total volume. Siemens Healthineers, with an IPO volume of €4.5 billion, achieved the single biggest IPO in Europe.


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General introduction to the legal framework for M&A

The main source of regulation for public takeovers in Germany is the Takeover Act, as amended in 2006 to implement the EU Takeover Directive, as well as the German Stock Corporation Act, which provides the general framework of the corporate legislation pertaining to German stock corporations. In addition, provisions of the German Securities Trading Act, including provisions on the disclosure of holdings of listed securities and certain other instruments, are relevant in connection with any public takeover relating to German target companies (or, in some respects, companies with securities that are listed at a German stock exchange).

Further provisions relevant for the implementation of a public takeover and potential further steps after the completion of a takeover are set out in the German Act on Corporate Transformation, the Stock Exchange Act, the Offering Prospectus Act and the Commercial Code.

The Takeover Act creates a comprehensive legal framework that enables public takeovers to be conducted fairly and transparently. The Takeover Act is also designed to protect the financial interests of minority shareholders and employees of target companies. It contains, inter alia, provisions dealing with takeover bids and mandatory bids, including provisions on pricing and procedure, and requirements in relation to the contents of 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. On the other hand, the areas of insider dealing and market manipulation, which were addressed previously in the Securities Trading Act as well, are now regulated on a European level on the basis of the Market Abuse Regulation (MAR);2 see Section III.i.

The Act on Corporate Transformations 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, since 2011, provisions allowing the majority shareholder of a stock corporation (which itself has to be a stock corporation holding at least 90 per cent of the registered share capital of the target company) to squeeze out the remaining minority of up to 10 per cent by implementing a merger between the target and the shareholder (for the shareholder as surviving corporation).

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

The Commercial Code 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 and dismissal 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.

Strategies to increase transparency and predictability

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Developments in corporate and takeover law and their impact

i EU Market Abuse Regulation

A notable change to the capital markets laws that has had a significant effect on M&A transactions on a number of levels is related to the immediate applicability in all EU Member States of the MAR, effective as of 3 July 2016. The provisions of the MAR have replaced a number of capital markets regulations of individual Member States and, in many cases, significantly increase and strengthen compliance obligations. In particular, any issuers with securities that are traded, at the initiative of the issuer, in the regulated unofficial markets, will in the future be subject to obligations to disclose inside information ad hoc, to maintain insider lists and to comply with regulations on directors' dealings. In addition, rules restricting insider dealings and market manipulations will be significantly more strict, and potential sanctions in the case of infringements will be strengthened and more severe.

Two years after the coming into effect of the MAR, the assessment of its impact has yielded mixed results, and the Regulation itself as well as its application by the German regulator have also drawn significant criticism. According to a recent survey,3 the MAR has in fact not yet led to greater legal certainty, but has instead decreased clarity in areas such as ad hoc disclosure duties. At the same time, while the bureaucratic hurdles faced by issuers have grown, investor protection has not improved.

The complicated ad hoc rules not only cause uncertainty among companies in the mid to long-term, but could also develop into a considerable disadvantage for Germany as a jurisdiction in which to undertake M&A transactions.

If companies postpone ad hoc disclosure early on as a precautionary measure, then they must simultaneously ensure that insiders no longer trade in the relevant securities. At an early stage, however, not all members of the management and supervisory boards are routinely informed. In practice, postponement can usually only be maintained for a short time.

In a fiercely competitive M&A environment, the rules result in a clear disadvantage for listed companies. Privately held companies or companies from non-EU jurisdictions with more business-friendly rules, on the other hand, can exploit advantages in an M&A situation.

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 disclosure, 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 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 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 a target, any amounts available for distribution must always be determined on the basis of the annual accounts of the immediately preceding fiscal year. In the case of targets in the form of a limited liability company (the most frequent corporate form in Germany), it remains unclear (and it has so far not been decided by any court) if these restrictions impose restrictions on capital or dividend distributions in addition to the statutory restrictions under the Limited Liability Company Act, in particular the capital maintenance rules. Furthermore, the GIC restricts the repurchase of own shares by a target acquired by a fund regulated pursuant to the GIC.

iii Foreign Trade and Payments Ordinance

The Foreign Trade and Payments Ordinance governs foreign direct investment (FDI) control in Germany. Generally, acquisitions of 25 per cent or more of the voting rights of a German company by non-European Economic Area investors are subject to foreign investment control by the Federal Ministry for Economic Affairs and Energy. Under new legislation introduced in December 2018, this threshold has been lowered to include minority acquisitions of at least 10 per cent if the target company operates in the area of critical infrastructure and related technology or manufactures certain military-related products or technology. The government had already broadened the scope of FDI control in July 2017 when it introduced a filing obligation for investments in the area of critical infrastructure and doubled the applicable review period. Despite these amendments, certain cases raised national security concerns, but were outside the scope of German FDI control because the investor did not reach the 25 per cent threshold. One such notable case was an attempt by a Chinese investor to acquire a minority stake in German power transmission network operator 50Hertz. Against this background, lowering the jurisdictional threshold to 10 per cent was seen as the government's reaction to a hike in foreign acquisitions in certain sensitive sectors in Germany.

In conjunction with tighter FDI controls around the world, cross-border transactions may require separate FDI reviews in more than one jurisdiction. Currently, it is too early to make an assessment of the practical impact of the increased supervision. It is generally noted, however, that this corresponds to a global tendency towards protectionism, aimed (not explicitly, but nevertheless clearly) against attempts of Chinese companies (in particular state-owned enterprises) to gain footholds in Western key industrial sectors.

Us antitrust enforcement: the year in review

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Foreign involvement in M&A transactions

Germany continues to be one of the most attractive target jurisdictions in Europe, with 478 inbound transactions in 2018 (France: 287, Italy: 264, Netherlands: 259). Only the UK attracted more inbound deals, with 672 transactions in 2018.5

Outbound activity of German buyers acquiring target companies or businesses outside Germany dropped once again by about 52 per cent from US$77 billion in 2017 to US$37 billion in 2018.6

Significant transactions, key trends and hot industries

i Significant transactions

The single most significant German M&A transaction was the acquisition of Innogy, which occurred only a few years after the spin-off of the renewables energy business from RWE to Innogy, thus creating the by-far largest utility company in Germany and one of the biggest players in renewable energies Europe-wide. Other significant transactions also involved energy, and in particular the renewable energy sector. Most notably, Copenhagen Infrastructure Partners sold its equity and mezzanine loan stake in Veja Mate, a German offshore wind park. Due to considerable challenges to the German utility industry following the government's decision to exit both coal energy generation and nuclear energy, it is to be expected that, as the sector of renewable energies grows and diversifies, significant M&A transactions will remain in the pipeline.

Another significant transaction was the acquisition by Vodafone of Unity Media in Germany and Central Europe. For Germany, this transaction marked another round of the consolidation of the German telecoms and media cable network. The increasing efforts of German industry players and the government to promote Industry 4.07 and the expected introduction in Germany of the 5G network, following the announced auction of the relevant licences, is expected to spur further M&A activity in the telecoms and media sector.

ii Key trends

The reinstatement of US sanctions against Iran garnered much attention in 2018. For M&A markets, as well as for the financing of acquisitions, it is in the divergence between US and EU sanction policies, best reflected in their approaches to Iran, where the EU continues to try to salvage the deal that led to the relaxation of sanctions while the US reimposes sanctions. Many companies wish to trade freely worldwide, but where this is impeded, they desire certainty as to where they can trade without sanctions being imposed.

With the US sanctions having the effect that most trade by European companies with Iran risks the imposition of sanctions, and the EU legislating to seek to prevent European business changing their behaviour to comply with US sanctions, businesses often face a difficult choice between (potentially) losing access to the US markets and building business with country targets of US sanctions. Any weakening of EU and US relations over the coming years may well be reflected in the sanctions sphere with further divergence in other sanction programmes, such as the sanctions against Russia.

The unresolved situation regarding Brexit continues to make itself felt also in the M&A market and the market for acquisition financings, with many participants fearing that a drift between UK and Europe, including a drift between the applicable laws, may impede the globalisation of the M&A market and acquisition financing market, and lead to a fragmentation and regionalisation of these markets.

It is generally expected that the general slowdown of economic activity in Germany and the eurozone in general may result in increased numbers of restructurings, distressed financings and distressed M&A transactions in the near future. In the years following the immediate aftermath of the financial crisis, total numbers of restructurings and distressed financing cases decreased, partly (as is believed) as a result of the high availability of (relatively cheap) financing. An increased volatility in financial markets, the potential uptake of inflation and, as a result, increased financing costs, are expected to increase the number of restructurings as well as insolvencies, in particular in Germany.

iii Hot industries

The automotive industry, still the most important traditional industry in Germany, has remained in the focus also of M&A activities and is expected to generate significant additional M&A activity in the future. Worldwide, the automotive industry has increased investment in electro mobility and automated driving; very often, this investment takes the form of the acquisition of start-up companies. At the same time, due to the receding significance of traditional petrol and fuel motors, the automobile industry is in parts expected to significantly shrink and to divest. Finally, also due to the challenges faced by the automotive industry, combined with the slowdown in economic activity in the eurozone and Germany in particular, it is expected that the number of restructurings, and thus the potential for distressed M&A transactions, will increase specifically in the automotive and automotive supplier industry.

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

Financing of m&a: main sources and developments

The availability of M&A-related financing generally continued to be strong in 2018, given the still very low interest environment and competition for banks from alternative lenders such as debt funds on leveraged buyouts.

However, after years of nearly uninterrupted strength, the credit markets have shown volatility and signs of weakness recently. As a result, many acquirers seeking to finance their M&A deals in the debt markets have faced challenges rarely seen in recent years.

Different financing sources may have markedly different views of the risk that any particular financing transaction presents, and as a result may offer significantly divergent terms. Even in normal times, financial institutions (and particularly different types of financial institutions: money-centre commercial banks, investment banks or alternative lenders) have different risk tolerances, but recent volatility and unpredictability in the financing markets have resulted in greater differentiation in the terms that individual financing sources are willing to offer potential borrowers.

The Euro Overnight Index Average (EONIA) and the Euro Interbank Offered Rate (EURIBOR) are about to be either replaced or transformed, because neither complies with the recently introduced EU Benchmarks Regulation (BMR).

EURIBOR and EONIA are critically important interest rate benchmarks for the eurozone. The race is on to reform EURIBOR so that it complies before the BMR authorisation deadline of 1 January 2020. No attempt will be made to reform EONIA, however, and transition to a new overnight reference rate will be required.

European authorities have established an industry working group tasked with recommending alternative euro risk-free rates and a plan for adopting them. The European Central Bank is simultaneously developing Euro Short-Term Rate (ESTER), a new euro unsecured overnight interest rate, a possible alternative to EONIA and, potentially, to EURIBOR.

While regulators are supportive of the EURIBOR reform process, its success is not guaranteed. There are scenarios where the volume of transactions in the market that EURIBOR is meant to reflect prove insufficient even for a hybrid methodology. This could leave industry needing to adopt (as yet, undefined) new reference rates for new business from as early as January 2020.

Capital markets, in particular the high-yield bond market in Germany, has remained at a relatively low level. Only a few German-domiciled or headquartered issuers tried to tap the high-yield bond market, and some of them turned directly to the more liquid US market.

As a result of the impending Brexit (and the uncertainties around the immediate and long-term consequences of Brexit), financing banks and other lenders have become increasingly aware of the potential risks involving the choice of English law for financing transactions. So far, the vast majority of syndicated financing in Europe is still expressed to be governed by English law. However, unless the EU and the United Kingdom agree otherwise, court decisions rendered in the United Kingdom will, once the United Kingdom has effectively left the EU, no longer enjoy the benefit of direct enforceability under the EU Regulation8 on jurisdiction and the recognition and enforcement of judgments in civil commercial matters (repast). Increasingly, financial players are therefore looking at potential alternatives to English law as the governing law for financial products. Increasingly, in particular in smaller or mid-size transactions with a limited number of syndicate members, German law and German court jurisdiction are chosen in financing contracts.

Employment law

The most notable developments in German employment law in 2018 that may be of relevance in an M&A context essentially concern temporary agency workers, business transfers and the minimum wage. Additionally, in May 2018, the EU General Data Protection Regulation entered into force, further tightening the rules on data processing and imposing additional information and documentation requirements on employers.

i Temporary agency workers

In the aftermath of the 2017 fundamental amendments to the German Act on Temporary Agency Work (the 2017 Act), 2018 was a year of consolidation, characterised by court decisions, mostly those of local and regional courts, aiming to clarify and sharpen the interpretation of the new law. A number of these issues are pending on appeal before the federal courts. Key questions at issue relate to the counting of agency workers regarding statutory law thresholds, equal pay and duties to offer actual employment to agency workers.

As per the 2017 Act, agency workers count towards the thresholds for co-determination and works constitution purposes, provided that their term of service in an establishment exceeds six months. It remains unclear whether length of service has to be determined individually for each agency worker, or whether the relevant factor is that a given job has been occupied by (one or several consecutive) agency workers for a time period exceeding six months. Recent lower and regional court decisions have taken different positions on the issue.

On a related issue, courts at both the local and regional levels have held that the cancellation of contracts for agency work does not count towards the number of terminations required to constitute an operational change within the meaning of Section 111 of the German Works Constitution Act. Their key argument is that agency workers do not form part of the workforce of the hirer for the purposes of such norm, since the termination of a contract between a hirer and an agency does not make the agency worker lose its employer. Whether this will be upheld by the Federal Labour Court remains to be seen. The Federal Labour Court, on the other hand, has requested a preliminary ruling by the European Court of Justice (ECJ) on whether agency workers count towards the thresholds relative to mass redundancy proceedings. A decision thereon will likely also impact the operational change issue.

Another key contested subject is 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. A challenge to such exemption as being in violation of the EU Directive on Agency Work has recently been rejected by a regional labour court. However, until decided by the ECJ, this will remain a source of uncertainty. Another contested item in this context is what elements count towards equal pay. The Federal Social Court has ruled that only compensation payments in the strict sense count, whereas payments compensating for costs incurred by an agency worker in connection with his or her engagement (e.g., travel cost reimbursements) do not. Nevertheless, many aspects of what exactly constitutes equal pay remain unclear. Finally, in this context, it is worth noting that per precedent by the Federal Labour Court, the results of social security audits conducted at an employer may be amended to his or her detriment if a different assessment is subsequently mandated, for example in light of a new precedent. The decided case concerned an agency that had to pay substantially higher contributions after a CBA applied by it had been declared void in court.

Under the 2017 Act, 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. 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 decisions of the regional labour courts, such shop agreements do not have to specifically deal with offers of employment; rather, agreements on any issues relative to the use of agency workers suffice. The issue has been appealed to the Federal Labour Court.

ii Business transfers

In the field of business transfers within the meaning of Section 613a of the German Civil Code, 2018 was yet another year of stability. The Federal Labour Court has essentially confirmed its stand on previously treated items and sharpened other aspects.

In one ruling, the Federal Labour Court denied the existence of a business transfer due to the lack of control over the business by the presumed new employer. In the given case, the original employer transferred its production equipment to a sister company, which agreed to and subsequently did act as toll manufacturer and agent for and in the name of the original employer. The Court held that the sister company failed to have control as it did not manage the business in its own name or act as owner of the business in relation to third parties. This was not overweighed by the fact that the company did act in its own name in relation to public authorities and workers' unions in the context of the employment relationships that had presumably transferred.

Further to that, several cases are currently pending before the Federal Labour Court regarding the liability of an acquirer for company pension rights in the event that a transferred business was acquired from a company subject to insolvency proceedings, and preliminary rulings thereon have been requested from the ECJ. Key questions raised are whether an acquirer will only be liable for future service-related obligations, or whether he or she may also be held liable for obligations relative to pre-transfer periods of service; and whether an acquirer may be held liable for obligations relative to past service in cases where an employee did not have a vested expectancy at the time when insolvency proceedings were commenced. So far, the German courts' stance has essentially been that an acquirer is not liable for past service-related obligations. In principle, these will fall within the responsibility of the mandatory statutory pension insolvency insurance provided they were vested, did not exceed certain value thresholds and were not channelled through a pension fund; otherwise, they are principally forfeited. If the ECJ were to find that the acquirer was liable for past service-related obligations, this would make the acquisition of businesses from insolvency substantially less attractive in cases where company pension obligations exist.

iii Minimum wage

The minimum gross wage of employees across all sectors in Germany, which was €8.84 per working hour in 2018, was increased to €9.19 as of 1 January 2019 by regulation of the federal government, and will further increase to €9.35 in 2020.

In notable decisions on the subject, the Federal Labour Court further clarified which kinds of payments count towards the minimum wage requirement. As per earlier precedent, payments by an employer only count if they are made in return for work performed and are unconditional and irrevocable. That is to say, generally, payments do not count if they are made as a reward for a purpose other than the actual performance of work or for which statutory law defines a specific purpose. In 2018, the Court declared that attendance bonuses in principle do count.

Further thereto, the Federal Labour Court has ruled that contractual exclusion clauses in employment agreements concluded after the Minimum Wage Law took effect on 1 January 2015 and that do not explicitly exclude claims to the minimum wage from their scope will be void. However, it remains unclear whether this also applies in the case of employment agreements concluded before such time. Regional labour courts principally upheld such clauses in 2018, declaring that they were merely void insofar as claims to the minimum wage were concerned. Nevertheless, until a decision by the Federal Labour Court on the issue, there still is a risk that such clauses could be found void in their entirety, thereby substantially increasing the time frame for bringing claims. On a related note, the Federal Labour Court decided in 2018 that, different from exclusion clauses in employment agreements, clauses in CBAs agreed after the Minimum Wage Law took effect that fail to exclude minimum wage claims from their scope will only be void in such respect, and otherwise remain applicable.

Last, but not least, in May 2019, the federal government resolved to launch a new law introducing minimum compensation requirements for apprentices. If the law is adopted as it currently stands, from 2020 apprentices have to be paid a minimum of €515 gross per month in their first year, with prescribed increases in the next two years of their apprenticeship. In 2021, the first-year minimum amount shall increase to €550, and in 2023 to €620. Exceptions shall be permissible, based on CBAs.

iv Data protection law

In May 2018, the EU General Data Protection Regulation entered into force, further tightening rules on data processing and imposing additional information and documentation requirements on employers. Generally, the law makes data processing by employers more tedious and gives employees tort damages claims in the case of a violation of the duties thereunder. Employers now, inter alia, have to take organisational measures to ensure that no data is processed, stored or transferred in violation of the law. Employees have to be actively informed about the legal basis, purpose and duration of any data processing relative to them, as well as about recipients of their data, persons responsible for their processing, the data protection officer of the company, rights to raise complaints as well as revocation rights for any data processing permission. Further, employees can request information about the length of time that their processed data will be held and content of their processed data. And employers have certain information duties in relation to data protection authorities and affected employees in the case of violations of the law. Essentially the same applies in all EU Member States.

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 and new legislative developments on the German controlled foreign corporations regime and German real estate transfer taxes. Both legislative projects are still ongoing albeit being discussed for a long period.

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

Dividend distributions carry, in principle, a 25 per cent German withholding tax 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 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 withholding tax reduction will not be granted if, among other things, the ultimate parent would not qualify for the reduced rate and the interposed recipient of the dividend was either not established for sound economic reasons, or does not engage in general 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 rules are always a major issue. While tackling abusive structures is obviously legitimate, the German substance requirements go beyond that, and the ECJ has held in two recent and 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.

Does this also apply to third-country cases such as investments through, for example, a Swiss or US HoldCo, which only benefit from the free movement of capital? The answer should clearly be yes, as the German substance requirements apply irrespective of whether the investor has a controlling stake, so that freedom of establishment does not block free movement of capital according to the ECJ's established formula. German tax authorities have, not surprisingly, so far taken a very narrow view on how Deister/Juhler should be applied in practice, and it remains to be seen how the tax authorities and the German legislator will react to GS.

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.

Very recently, the ECJ issued a combined decision on four cases (N Luxembourg 1, et al) that contains rather explicit guidelines on what the ECJ considers as abusive, which criteria should be applied when testing an abuse, and who has the burden of proof. The legislator has to take this into account for the future of the German anti-treaty and directive shopping regime, which is, for the time being, in violation of EU law, and hence inapplicable.

ii German controlled foreign companies rules to be revised

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) must be revised. It is expected that the German legislator will take this opportunity for a more substantial review of the German CFC rules, which are widely perceived as outdated, for example, when it comes to passive activity and the threshold for low taxation. However, the exact content and scope of these revisions is still unclear, as legislation has so far only been leaked in an unofficial draft version.

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. In particular, RETT is levied:

  1. on the direct or indirect transfer of 95 per cent (or more) of the interests in the assets of a real estate owning partnership within a five-year period (Section 1, Paragraph 2a of the RETT Act, Partnership Rule);
  2. if 95 per cent (or more) of the shares or partnership interests in a real estate-owning company are directly or indirectly transferred to a single person (including related persons) (Section 1, Paragraph 3 of the RETT Act);
  3. if a person (including related persons) holds, as a result of a transaction, directly or indirectly, 95 per cent (or more) of the shares or partnership interests in a real estate-owning company (Section 1, Paragraph 3 of the RETT Act); or
  4. if a person holds, as a result of a transaction, a direct or indirect economic interest of 95 per cent (or more) in a real estate-owning company (Section 1, Paragraph 3a of the RETT Act).

The threshold of 95 per cent means that, in practice, share deals are often structured in a way that manages not to trigger RETT. However, there is now a broad political consensus across party lines to amend the RETT rules with the explicit intention of capturing a larger percentage of share deals. Hence, and as long-awaited, the German Federal Ministry of Finance unveiled recently a draft bill for a reform of the RETT Act. Under the draft bill, the scope of the German RETT provisions regarding the taxation of share deal transactions would be substantially broadened. The main changes are as follows.

  1. Generally, the relevant threshold of currently 95 per cent will be lowered to 90 per cent.
  2. The general watching period of currently five years will be extended to 10 years.
  3. There will be a new provision that is modelled after the Partnership Rule and extends its scope to corporations. As a consequence, in the future a direct or indirect transfer of at least 90 per cent of the shares in a real estate holding corporation within 10 years to (any number of) new shareholders will trigger RETT (the New Corporation Rule). The threshold of 90 per cent for indirect transfers is generally calculated by a simple multiplication of the share and interest percentage. However, there is one notable exception: if there is a direct change of at least 90 per cent of the shares in a corporation holding shares in the real estate holding corporation, then 100 per cent of the shares held by the shareholder corporation would be deemed as transferred.

It remains to be seen how these draft measures will progress through the legislative procedure. For the time being, however, the draft bill should form the basis of any tax planning considerations, and in light of the temporal scope it might be worthwhile accelerating envisaged transactions in order to still come under the current, more beneficial rules. For the New Corporation Rule, this would require not just the signing but also the closing of the transaction.

Competition law

In 2018, the number of merger control notifications reviewed by the Federal Cartel Office (FCO) remained stable. As in 2017, the FCO reviewed about 1,300 merger control notifications, and cleared almost all notified transactions (more than 99 per cent) within the Phase I deadline of one month. Only 12 of the transactions that were filed during 2018 raised (or continue to raise) competitive concerns and were (or still are) being reviewed in more detail (Phase II proceedings), which is slightly more than last year (10 transactions).

To date, the newly introduced transaction value threshold, which entered into effect on 9 June 2017 as part of the Ninth Amendment of the Act against Restraints of Competition (ARC), has not led to a considerable increase in merger control notifications. Against the background of the Facebook/WhatsApp transaction, the Ninth Amendment provides for a new Section 35, Paragraph 1a of the ARC. Transactions whereby one party generates a turnover in excess of €25 million in Germany, but the turnover of any other party is below €5 million in Germany, are now nevertheless subject to merger control if the transaction value exceeds €400 million and the target company has significant activities in Germany. Focusing on technology and innovation-driven markets, the new threshold aims at preventing possible market foreclosure and barriers to entry as well as protecting the potential for innovation.

The new threshold raises two key questions: how to calculate the consideration and how to determine the local German nexus. To provide further guidance, the FCO and the Austrian Federal Competition Authority has published joint guidance on the interpretation of the new threshold. For the determination of the German local nexus, different criteria apply to different sectors and activities. As a definitive list of criteria cannot be provided, a case-by-case assessment remains necessary. The common denominator is that domestic activities must have market orientation despite the (intermediary) absence of monetisation, for example because a service is remunerated by means other than monetary payment, a service is (temporarily) offered free of charge but can be expected to be monetised in the future, or the activity consists of research and development of (future) products and services. Based on the purpose of the provision, the transaction value threshold shall cover those cases where the target shows a high degree of economic and competitive potential. It shall not address transactions where the (albeit small) generated turnover adequately reflects the market position and competitive significance.

Of the 12 Phase II transactions, three were cleared unconditionally and one was prohibited. The FCO did not allow Miba AG (Austria) and Zollern GmbH & Co KG (Sigmaringen, Germany) to launch a joint venture to pool their hydrodynamic plain-bearing production activities. With the merger, buyers in the respective industrial sectors in Germany and other European countries would have lost an important supply alternative. The two parties were the major competitors in an already highly concentrated market with high barriers to entry, as the latter would require extensive technology knowledge and high investments.

While two cases are still under investigation, the parties of six transactions withdrew their filings after the FCO expressed its competitive concerns: Bunkering Service Providers for inland waterway vessels Reinplus VanWoerden Bunker GmbH's and Nord- und Westdeutsche Bunker GmbH's supply areas overlapped, and the merger would have reduced the number of competitors from three to two. Furthermore, Reinplus was also vertically integrated in the upstream fuel trading markets. In its assessment of the merger of towbar suppliers Horizon Global Corporation (US) and Brink International BV (Netherlands), the FCO closely cooperated with the British Competition and Markets Authority. Both authorities exchanged information and analysis regarding the competition issues that each authority was investigating, including discussions of possible remedies. One key issue was the important technical edge the merged entity would have had compared to its smaller competitors. Thus, both authorities reached similar conclusions that made the parties decide to abandon the transaction. In an attempted acquisition of the licence for the German-language edition of National Geographic by Gruner + Jahr, the FCO looked at online, television and print competition for science magazines and concluded that, despite a decrease in magazine circulation, Gruner + Jahr's dominant position in print publications was not sufficiently controlled by television or online programmes. The other cases, in which a notification was withdrawn, involved acquisitions of hospitals and petrol stations (i.e., narrow local markets).

In addition to these withdrawals, the FCO emphasised in its year-end press conference that companies often informally approach the FCO before filing, in particular in cases that may be critical. Some of the projects presented to the FCO on a confidential basis will then not even be notified. The FCO is open to confidential guidance proceedings, and increasingly engages with parties to a transaction before submitting a formal filing. Depending on the confidentiality of a transaction, the FCO may even start sending out requests for information to competitors or customers prior to, or at least on the day of, the formal filing, increasing the chance of a Phase I clearance in cases that require at least some kind of market testing. In the Karstadt/Kaufhof acquisition, the long and thorough preparation of the actual merger control proceeding allowed the case to be cleared during the one-month Phase I proceeding. The FCO sent out questionnaires to around 100 retail companies and suppliers on the day of the filing.

The Karstadt/Kaufhof deal was the most important transaction in the retail sector. Despite the fact that the two companies were the only German department store operators, the FCO did not assess the department store market, but focused on 20 different product categories, such as suitcases and bags, underwear, sports and outdoor, and household textiles. The FCO assessed the case under several possible market definitions ranging from a bricks and mortar-only perspective to the inclusion of online retailers, which the FCO described as an important shopping alternative providing for increasing competitive pressure. Competition between online and offline distribution was also important in the Douglas/Parfümerie Akzente and DocMorris/apo-rot Versandhandel cases. Douglas, the biggest brick-and-mortar perfume retailer, purchased Akzente Parfümerie, a strong online sales outlet. In the DocMorris case, the FCO explicitly concluded that mail order pharmacies compete with stationary outlets, which is why the combination of two mail order providers did not negatively affect competition.

The retail sector also accounts for one of 2018's most important judgments of the Federal Court of Justice in the competition field. After its takeover of the Plus stores in 2008, food retailer EDEKA had unilaterally demanded special conditions from its suppliers (also called 'wedding rebates'). A combination of demands with retroactive effect, cherry picking of individual preferential conditions granted to either of the parties and a request for substantial bonuses violated the Law on Tapping (Sections 19(1) and (2) and 20(2) of the ARC), because it asked suppliers to grant benefits without any objective justification. The Federal Court of Justice particularly emphasised that EDEKA not only compared conditions applicable at the time of the transaction. It also considered conditions that had applied only temporarily before the merger was completed.

Generally, recent merger control and antitrust cases have confirmed the FCO's focus on digital markets. Following a 2016 market power of platforms and networks paper, and a big data and competition working paper of October 2017, in 2018 the FCO published working papers on online advertising and on competition restraints in online sales after Coty and Asics. Access to data has become the key parameter in many industries, including the energy, banking and insurance sectors. The FCO also issued a decision against Facebook prohibiting the social network from combining user data from different sources. According to the FCO, Facebook abused its dominant position by violating German data protection provisions. The decision is not yet definitive.


We expect a significant increase in M&A activity in Germany within the next 12 months. Increasing globalisation, digitalisation, Industry 4.0, unsolved succession issues in Mittelstand companies, low interest rates and enormous liquidity in the markets will continue to be important drivers for M&A. Most German corporates are enjoying strong current trading in 2018. Solid balance sheets, double digit profitability margins and strong order backlogs facilitate M&A transactions and drive valuations. High levels of dry powder, combined with low interest rates and a scarcity of solid assets, are likely to lead to a further increase of transaction multiples.

Nevertheless, 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 unresolved questions around Brexit, increasing tensions between the United States and China, a drift in respect of foreign policies between countries of the Western Hemisphere and a potential slowdown, if not reversal, of the decades-long trend towards globalisation. While all these factors may in the short term even spur M&A activity, their long-term impact is in our opinion impossible to predict.


1 Heinrich Knepper is a partner at Hengeler Mueller Partnerschaft von Rechtsanwälten mbB. The information in this chapter was accurate as at August 2019.

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

3 Source: survey conducted by Hengeler Mueller Partnerschaft von Rechtsanwaelten mbB and Deutsches Aktieninstitut, an association that represents the interests of publicly traded companies, banks, stock exchanges and investors.

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 Source: Mergermarket – Deals with any German involvement.

6 Source: Mergermarket – German outbound deals.

7 A national strategic initiative of the government that aims to drive digital manufacturing forward by increasing digitisation and the interconnection of products, value chains and business models. It also aims to support research, the networking of industry partners and standardisation:

8 Regulation No. 1215/2012 of the European Parliament and of the Council.

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