LEADERS LEAGUE: Is the due diligence process viewed as important in Germany?

Jörg Luft: Many of the numerous medium-sized German family businesses are open to selling all or part of their business shares in view of a pending generational change from the company founder to the children or from the next generation to the grandchildren. Before a foreign company decides to buy a German company, e.g. a GmbH (limited liability company), and all purchase documents, as well as the necessary notarisation, are prepared with considerable financial and time expenditure, the German target company will normally be thoroughly examined by specialist lawyers within the scope of a legal due diligence. This legal due diligence usually focuses on corporate law, labor law, tax law, balance sheets, contracts and, if applicable, environmental law.

Should particular attention be paid to German labor law?

Ulrich Martin: Experience has shown that many prospective buyers from France, for example, underestimate the considerable differences between German and French labor and social security laws.

Generally speaking, labor and social security in Germany is somewhat less regulated and tends to be more employer-friendly than in France. Nevertheless, it is still possible that the buyer of a German company may be exposed to not inconsiderable financial risk.

For example, most prospective buyers from abroad are not aware of the fact that in Germany, unlike in France, for example, the dismissal of an employee does not more or less automatically lead to the termination of the employment relationship against payment of a severance package. If, in the event of a dispute, a judge assumes that there is no reason for a dismissal, the employment contract with the employee who was actually dismissed simply continues to exist. Also, a German employment contract does not automatically end when the employee reaches the statutory retirement age. Moreover, the fact that the employee has reached the statutory retirement age does not even constitute grounds for dismissal.

German commercial tenancy law has some distinctive features as well, doesn’t it?

Jörg Luft: In Germany, commercial tenancy is much less regulated than it is in France. For example, the obligatory 3/6/9-year fixed duration is nonexistent in German law, and the pas de porte is not very common.

In comparison, German lessors and lessees have quite a lot of freedom in the negotiation of commercial leases under German law. Thus, in the case of a company takeover, the commercial leases of the target company may conceal unusual clauses which could have economic consequences for the potential buyer.

In general, for many contracts, especially supply contracts or loan agreements, it’s prudent to verify whether there is a special right of termination by the supplier or the bank in the event of the sale of a shareholding (change of control clause).

What is the equivalent of a fonds de commerce in Germany?

Ulrich Martin: It should be noted in this context that the legal concept of a fonds de commerce has no true equivalent under German law. However, the assets of a German company can also be acquired in an asset deal, which is a type of transaction involving only certain assets or activities of the company. With this type of sale agreement, it is essential to specify and describe in detail each of the assets being sold.

The asset deal also allows for the automatic transfer of existing employment contracts. In this case, it is important to observe all the formalities provided Here are the main differences between a share deal and an asset deal in Germany, as well as their legal and tax effects. for by the law. On the other hand, existing contracts with third parties can only be transferred to the purchaser in the context of an asset deal with the agreement of all parties involved. Accordingly, due diligence in an asset deal must take into account its particularities. The findings from the due diligence often lead to further discussions about the adjustment of the purchase price.

Interview with

JÖRG LUFT and ULRICH MARTIN

German French Lawyers

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