Both public and private M&A play an important role in Germany. While some recent IPOs and public takeover attempts have attracted significant media attention, private deals continue to dominate the rankings due to their sheer number. This is mainly due to the fact that many German companies are in family or investor hands and are not listed on the stock exchange.

Public M&A transactions are regulated at both the federal and European levels. At the federal level, public M&A activities are primarily regulated by the German Securities Acquisition and Takeover Act, the German Stock Corporation Act and the German Securities Trading Act, with the German Federal Financial Supervisory Authority (BaFin) acting as the competent supervisory authority. At the European level, the regulatory framework for public takeovers has been subject to continuous change through the implementation of harmonizing legislation, such as the Transparency Directive or the Market Abuse Regulation.

In contrast, acquisitions of private companies are not subject to any legal process (other than regulatory approvals). They are a matter of negotiation between the bidder and the seller, as most of the relevant legislation is not mandatory. However, depending on the legal form of the target company, some key aspects of the sale and transfer of shares may be subject to specific corporate law, such as the German Limited Liability Company Act.

Both private and public transactions are subject to German merger control. In addition, the German Federal Ministry of Economics and Technology (BMWi) has the authority to review direct or indirect foreign investments in German companies. Other regulatory requirements include EU regulations on foreign subsidies, industry-specific regulatory approvals, and sustainability regulations.

Despite the challenging macroeconomic situation, the number of deals with German participation remained stable in 2023. As of mid-December 2023, there were 2618 deals completed or announced, a decrease of -4.3% year-on-year, but still +52.9% above the long-term historical average since 1998. The decline in deal activity is mainly due to a decrease in inbound cross-border deals (-16.7%), while outbound deals decreased by only -4.8%. In contrast, the German domestic M&A market grew by +7.9%, with 82 more deals than last year. However, a backlog of unfinished deals and an uncertain economic outlook led German dealmakers to predict a relatively quiet period until 2025.

As in previous years, by far the most transactions in 2023 took place in the TMT sector. However, the TMT sector also experienced the strongest absolute transaction decline in comparison to the previous year, with -74 transactions. In contrast, the Energy sector, driven by Germany’s energy transformation, recorded the highest relative growth with +10.8%. Seven out of the top 30 transactions occurred in the TMT sector, followed by the Automotive industry (five transactions), and Energy and Healthcare, each with four deals.

We expect M&A activity in Germany to be heavily influenced by political and geopolitical uncertainty. Recent conflicts and developments demonstrate the volatility of the global political situation and require ongoing risk assessment, making fractured globalization become a trend. Key elections in 2024 will also influence global M&A activity. In addition, economic headwinds caused by historically high interest rates have a direct impact on company valuations. Finally, megatrends such as ESG and digital transformation will continue to be a driver for M&A activity.

Publicly traded companies can be acquired via block trades or public offers.

The German Securities Acquisition and Takeover Act defines three types of public offers: ordinary acquisition offers, takeover bids and mandatory offers.

Ordinary acquisition offers are made to buy shares without acquiring control (defined as the ownership of at least 30% of the voting rights in the target company) or to increase an already existing controlling position.

Takeover bids are aimed at the acquisition of at least 30% of the voting rights in the target company. They can be made subject to the condition that a certain minimum acceptance rate is achieved but must offer minimum prices based on the volume-weighted average price over the previous three months and the price paid to any previous purchasers.

A mandatory offer is required when the 30% threshold is reached for the first time other than by means of a takeover bid. The minimum price rules apply, too.

Germany has a comprehensive and publicly accessible digital commercial register. The commercial register is an official directory in which basic information about each registered company is collected. Registration is mandatory for partnerships and corporations. The commercial register collects all company data, such as the official company name, the legal form of the company, its registered office, information on directors or board members, powers of attorney and capital contributions. In addition, the articles of association of each company can be accessed via the commercial register.

Listed companies in particular must comply with strict disclosure rules. In addition to the information published in the commercial register, a wide range of information on listed target companies is available on their websites and in the Federal Gazette (Bundesanzeiger). Publicly available information includes annual reports and financial statements, mandatory publications and notices, information on the composition of the management board and supervisory board, minutes of general meetings, information on corporate governance and information on the shareholder structure. Notwithstanding the foregoing, an acquirer will generally place a high priority on obtaining access to non-public information.

Typical legal due diligence issues in Germany include corporate matters, commercial contracts, financing agreements, real estate, employment and pension matters, intellectual property, IT/software, data protection, regulatory/public law, environmental law, litigation as well as compliance issues such as anti-bribery, corruption, money laundering, sanctions, export controls and competition law.

In case of a public takeover, practices vary widely in both the scope of due diligence and the manner in which it is conducted. In most cases, the amount of information provided during due diligence depends on the target’s interest in the potential offer. If the offer is in the interest of the target company, the board may formally issue a letter of interest stating that a potential offer is in the best interest of the company and that due diligence is a prerequisite for the transaction. Such formal resolution allows the management board to share confidential business information, while protecting the target’s directors from potential liability. In a share-for-share offer, the target will normally insist on a reciprocal/reverse due diligence of the acquirer.

Most of the German listed companies are organized as German stock corporations (Aktiengesellschaft). The two-tier board system of German stock corporations consists of a management board and a supervisory board. The management board is appointed, removed and supervised by the supervisory board, not by the shareholders of the corporation. Therefore, the shareholders have no direct control or influence over the management board. The supervisory board can only remove members of the management board for cause, which includes, among other things, a vote of no confidence by the company’s shareholders.

The two-tier board system, which is obligatory for German stock corporations, does not apply to German limited liability companies (GmbH) which is the most common form for private companies in Germany and where there is much more flexibility as to the actual structure of the corporate governance. Private companies are usually managed by one or more managing directors, whereas with regard to certain measures they are obliged to obtain a prior approval of the shareholders or, if established, an advisory board consisting of shareholders’ representatives. In addition, the shareholders have an unrestricted right to issue instructions to the managing directors.

The German Securities Acquisition and Takeover Act establishes the principle that the management board and the supervisory board of the publicly traded target company must act in the best interest of the target company. In the event of a public acquisition, both the management board and the supervisory board of the target company must issue a reasoned opinion on the offer without undue delay after receipt of the offer document. It is customary for them to issue a joint statement within two weeks. The statement must address, in particular, the nature and amount of the consideration offered, the expected consequences of a successful offer for the target company, the employees and their representatives, the objectives pursued by the acquirer with the offer, and, to the extent that members of the management board and the supervisory board hold shares in the target company, their intention on whether they accept the offer. With regard to private companies both the shareholders and the managing directors are bound by fiduciary duties of acting in the best interest of the company.

The German Securities Acquisition and Takeover Act requires the management board of the publicly traded target company to inform the works council of the target company or, if there is no works council, the employees of the target company, of any public offer announced or made for the shares of the target company. However, the employees of the target company do not have to be consulted by the acquirer and do not have the right to oppose the offer at any stage. In addition, the Takeover Act requires the acquirer to state in the offer document its intentions regarding the future business of the target company. This includes, in particular, the acquirer’s intentions with regard to the target company’s employees, their representatives and the members of the target company’s management board, as well as any material changes to the employment conditions.

There are no specific approval or consultation rights of work council or employees with regard to the acquisition of private companies.

In private M&A, transaction certainty is one of the most important factors for sellers, along with the purchase price and limitation of liability. For this reason, transactions are usually only subject to merger control clearance by the relevant competition authorities, foreign investment control and other regulatory approvals such as EU foreign subsidies and industry-specific regulatory approvals.

In public M&A, as long as the offer is voluntary, the acquirer has a relatively wide discretion as to the terms of the offer. An offer will usually be subject to relevant antitrust conditions and, where applicable, other regulatory approvals. In addition, common offer conditions include the attainment of a minimum acceptance threshold (e.g., at least 50% or 75% of the voting rights) or the absence of a specified material adverse change and the failure of the target company to take defensive measures. Conditions must be clear and sufficiently specific and are not permitted if the acquirer can influence their fulfilment or if their occurrence cannot be objectively determined. In the case of mandatory offers, the only condition permitted is the granting of regulatory approval.

Although it is in principle permissible for the publicly traded target company to grant exclusivity, this may not be in the best interest of the company and may therefore violate the duties of the management board. Break-up fees to be paid by the target company if the takeover fails due to the intervention of a third party (e.g. in the form of a better offer) have been agreed in the past, but are unusual in Germany, since the circumstances under which a company may grant financial benefits to current or future shareholders are strictly limited.

In contrast, in private M&A, negotiation exclusivity is one of the provisions typically included in term sheets and letters of intent. Although break-up fees are not very common, they are sometimes agreed, particularly in cases where one party has to incur significant costs in order to progress negotiations to the point of signing definitive transaction agreements.

The most common and straightforward way of trying to protect a public M&A deal is to tie up as much of the target’s shares as possible before the offer is announced. In fact, other than disclosure requirements, insider trading rules, foreign investment and antitrust approvals, there are no restrictions on building shareholdings before an offer is made.

One way to achieve this is through the outright purchase of target shares. Alternatively, the acquirer may be interested in obtaining commitments from significant shareholders of the target company to irrevocably undertake to accept the offer if it is made. Shareholders are often more interested in an irrevocable undertaking than in a direct sale of shares because it allows them to benefit from any increase in the offer price.

In private M&A transactions, cost coverage is sometimes agreed in term sheets, but is not the rule.

While most takeover bids for publicly traded German companies have been cash offers, in recent years the offer of shares as consideration has increased, both in the form of pure exchange offers and in the form of combined offers. The shares offered in exchange for the target company’s shares do not necessarily have to be the acquirer’s shares, although this is by far the most common case. Foreign acquirers, in particular, often avoid share-for-share offers because of the relative complexity of the documentation and the potential obligation to prepare separate prospectuses in other jurisdictions.

Under the Securities Trading Act, notification is required when a person’s shareholding in a publicly traded company reaches or exceeds certain thresholds, the lowest of which is 3%. This includes both direct and indirect ownership, taking into account the voting rights of subsidiaries, trustees and persons acting in concert. The same notification requirement applies to financial instruments such as call and put options, swaps, cash-settled forward transactions, contracts for difference and irrevocable undertakings. Once the 5% threshold is reached, voting rights arising from shares and other financial instruments must be aggregated. In addition, if a shareholder acquires 10% or more of the voting rights from shares, it must notify the issuer of its objectives in making the acquisition and the source of the funds used.

As public bids generally have a significant impact on the share price of the target company, listed companies must disclose them to the public without undue delay under European ad-hoc publicity rules. However, a company may exempt itself from this requirement if immediate disclosure would be likely to prejudice its legitimate interests, a delay in disclosure is not likely to mislead the public and the company is able to ensure the confidentiality of the inside information. Normally, a target should be able to rely on this exemption until the acquirer announces the offer. A target may also disclose an acquirer’s approach immediately as part of its defense strategy to defeat a hostile takeover.

Similarly, once an acquirer has decided to make an offer, it must promptly disclose its decision, including whether the offer is a full or a partial offer. Other details such as the offer price need only be disclosed if they have already been determined and constitute price-sensitive information about the acquirer’s securities. Before announcing its decision to launch a bid, the acquirer must notify BaFin and all relevant German stock exchanges.

The German Securities Acquisition and Takeover Act sets out a timetable for the publication of certain documents by both the acquirer and the target. This prevents the target’s management from being exposed to an offer indefinitely and limits market uncertainty. However, the starting point of the official timetable is the acquirer’s formal decision to make an offer, not any prior contact with the target.

As soon as the acquirer decides to make an offer, it must inform BaFin and the board(s) of the stock exchange(s) and publish its decision. Within four weeks, the acquirer must prepare the offer document and submit it to BaFin for review and approval. In exceptional cases, BaFin may extend this period by up to four weeks. The acceptance period set for the target company must be between four and ten weeks from the publication of the offer.

The minimum price offered by an acquirer depends on the nature of the offer. In the case of a partial offer, the acquirer is free to determine the amount and nature of the consideration as long as all holders of target securities of the same class are treated equally. In the case of a takeover offer or a mandatory offer, the consideration must be at least the higher of the weighted average price of the target company’s shares during the three months preceding the decision to make the offer or the highest price paid by the acquirer or its affiliates during the six months preceding the publication of the offer document. In exchange offers, the value of the shares offered is determined by the average market price of the shares during the three months preceding publication of the offer.

The target company and its subsidiaries may not provide financial assistance to the acquirer, including advances, loans or guarantees for loans. German stock corporation law prohibits the granting of benefits to shareholders, except for dividends, thus restricting the use of the target company’s funds both before and after the acquisition. Therefore, transactions related to the financing of the acquisition after the acquisition of the target shares would also be void. To overcome this restriction, the corporation can be converted into another corporate form, such as a limited liability company, or it can enter into a profit and loss transfer agreement. Such agreements are common in acquisitions by financial investors and are often the initial objective of the acquirer.

Although German law allows for a choice of governing law, share purchase agreements involving German targets are generally governed by German law under the jurisdiction of German courts or arbitral tribunals. If arbitration is agreed, usually either the German Rules of Arbitration (DIS) or the ICC Rules of Arbitration will apply, in most cases with Germany as place of arbitration.

The offer document must contain all the information necessary for shareholders to make an informed decision on whether to accept the offer. Over time, an almost uniform standard has evolved for the information published in offer documents, including, in particular, basic information about the acquiror and the target company, the terms and conditions of the offer, details of the financing of the offer and its expected impact on the acquiror’s financial position, the acquiror’s intentions regarding future operations, as well as comprehensive information about the acquiror. Depending on the complexity of the transaction, the offer document may be in excess of 100 pages, and even more in the case of an exchange offer.

Under German law, the formalities for transferring shares vary depending on the type of target company.

In the case of a publicly traded company, the extent of legal documentation required for the acquisition of shares depends on the type of shares being acquired. German listed companies may have either registered or bearer shares, although the use of registered shares has increased recently. This type of share requires notification and registration in the company’s share register before the acquirer can exercise any ownership rights.

The acquisition of shares in a German limited liability company requires notarization. This can present additional challenges in cross-border transactions, particularly in terms of timing and formal requirements such as notarially certified and apostilled powers of attorney and certificates of representation. Notary fees are usually paid by the buyer.

In terms of taxation, the transfer of shares is in principle exempt from VAT but subject to capital gains tax. In addition, the transfer of shares in a company holding German real estate may trigger RETT. In any event, the parties should be aware that, depending on the structure of the transaction, German law contains some employment and tax law related peculiarities which may be of great importance for the completion of the transaction.

Although German law does not require the acquirer to contact the target company before publishing its offer, such unannounced offers are unusual in Germany and rarely occur. In practice, an acquirer will usually contact the management board of the target company, as the company’s main decision-making body, prior to the publication of the offer in order to negotiate its recommendation or the conclusion of a business combination agreement. In most cases, the management board of the target company is not so much focused on opposing the acquiror as on negotiating the best price for the shareholders and will ultimately support the offer.

While the management board of the target company is generally prohibited from taking any action that could impede the success of the bid, there are certain exceptions. These exceptions include actions that a prudent manager would have taken in the absence of an offer, the search for a competing bidder (‘white knight’), and actions within the management board’s authority that are approved by the supervisory board as being in the best interests of the company. In addition, shareholders may, subject to certain limitations, authorize the management board to take actions within the powers of the shareholders’ meeting prior to and independent of a takeover offer. Finally, if the target company decides that the offer is not in its best interest, it can refuse to cooperate with the acquirer and explicitly lobby and act against the offer.

The ownership of 30% of the voting rights in a listed company is considered “control” under German takeover law. Anyone who, directly or indirectly, is about to exceed or has reached this threshold must make a public takeover offer by means of a formal offer document. The acquirer must disclose the percentage of shares it holds in the target company and make a mandatory offer for all remaining shares. Voting rights attached to shares held by third parties are attributed to the acquirer’s percentage in the case of concerted action.

Even after a successful takeover, it is likely that a number of shareholders will not have tendered their shares. The acquirer then has several options to integrate the target into its own company and to strengthen its control over the target. In all cases of a squeeze-out (please see below), all shares held by minority shareholders are transferred to the acquirer by operation of law. In return, the minority shareholders are entitled to receive adequate cash compensation as determined by an independent expert. In an appraisal proceeding, former minority shareholders can have the adequacy of the cash compensation reviewed by a court.

If the acquirer holds at least 95% of the shares of the target company, it can request a general meeting to decide on the transfer of the minority shareholders’ shares. The squeeze-out resolution becomes effective upon registration in the commercial register and all shares held by minority shareholders are automatically transferred to the acquirer. Minority shareholders must then be offered adequate cash compensation as determined by an independent expert.