General Procedure for M&A

Transactions in Germany
 The life of an M&A transaction at a glance 4
contents
Current trends of the German M&A market 5
Managing risks in M&A transactions 6
Types of acquisitions 7
M&A transaction at a glance 8
The life of an M&A transaction: Preparatory phase 9
The life of an M&A transaction: Pre due diligence phase 10
Deep dive: Confidentiality / non-disclosure agreement 11
Deep dive: Release and reliance letters 12
The life of an M&A transaction: Due diligence phase 13
Deep dive: Due diligence 14
Deep dive: Letter of intent 15
The life of an M&A transaction: Negotiation & signing phase 16
Deep dive: SPA – deal structure, MAC and purchase price 17
Purchase price in SPAs 18
Deep dive: SPA – representations and warranties 20
Deep dive: SPA – remedies / limitation of liabilities 22
Deep dive: SPA – indemnities and closing conditions 23
Deep dive: SPA – covenants and other provisions 24
The life of an M&A transaction: Closing and post-closing 25
Deep dive: Post-closing 26
The life of an M&A transaction at a glance

The M&A process is not a “one size fits all” process and the amount of work and the
time required for the individual steps may vary substantially. Also the level of
involvement of different advisors (legal, financial, strategic etc) depends on the phase
of the transaction and on the particular deal. Furthermore, the steps to be taken by the
companies involved depend on whether one is acting as a buyer or as a seller and
whether there is a structured auction process or a one-to-one sale.
The preparatory phase of an M&A Transaction involves, inter alia, the selection of a potential target or a potential buyer, the evaluation
of different options and strategies, the analysis of possible synergies, the selection of teams of advisors, informal talks with potential
counterparts (often facilitated by the investment banks involved). The preparatory phase also encompasses a pre-due diligence phase,
with preliminary structuring considerations, and, on the seller side, often also the preparation of an information memorandum, the set-
up of a data room and potentially also a review of the target through a vendor due diligence exercise. In this phase, there may also be
some preliminary negotiations between the parties, which usually lead to the conclusion of a confidentiality agreement.

The next step is the due diligence phase, during which the potential purchaser may conduct an investigation of the target business so
that a decision can be made whether (and under which conditions) or not to proceed with the acquisition. The findings are generally
summarised in a due diligence report. Although the seller sometimes may have undertaken a vendor due diligence and it may release
its report to the buyer, usually within the parameters set forth by release and reliance letters, most due diligence processes are
conducted from a buyer’s perspective. The due diligence phase also encompasses a Q&A process and management and expert
meetings and it generally ends with the submission of a final bid.

After the submission of the final bid, the seller and the prospective buyer enter into a negotiation phase, which may involve two or more
bidders for a certain time. The negotiation phase ends with the signing of the sale and purchase agreements (SPA). After the signing,
the preparation for closing begins, which generally includes collecting the necessary statutory and transaction-specific approvals.

Upon closing, there is often some restructuring work to do, which finally leads to the “integration” of buyer and target.

4
Current trends of the German M&A market

New challenges Material Adverse Change (MAC) Joint ventures / minority stakes
n Valuation Clauses / Break-up fees n Increased interest in joint
n Sellers continue to reject MAC ventures
n Financing
Clauses in favour of deal
n Increased interest in taking a
n Deliverability certainty
minority stake
n Risk management n Break-up fees are still an
n Family-controlled companies are
exception
willing to take on minority
investors

Auction processes are less
rigorously executed
n Greater opportunities for pre-
emptive bids
n Late entrants to a sale process
are possible
n Bidders that act quickly and
deliver certainty have a clear
advantage
Bridging the gap in valuation Regulatory challenges
n “Cherry-picking” assets, leaving n Sellers have become more wary
behind difficult-to-value / of execution risks
onerous assets thereby
n Strategic buyers volunteer to be
eliminating valuation challenges
responsible for the antitrust
n “Asset carve-out light”: analysis and offer to provide
Acquisition of specific intellectual undertakings to make necessary
property, R&D, distribution and divestitures early in the process
customers, leaving behind
n Bidders that are believed to
assets, such as the production
bring material antitrust risks are
site; seller engages in interim
excluded
manufacturing until the buyer’s
production is fully operational
n Earn-out clauses to bridge the
valuation gap, however many
buyers and sellers are wary of
the challenges of such clauses

5
Managing risks in M&A transactions

As the requirements on corporate governance and compliance grow, the risks

associated with non-compliance issues increase. In particular, buyers have to be aware
that M&A can be risky and they must engage in all necessary measures and steps to
reduce and manage potential risks.

Mapping & Assessing Quality of Related Party Complex Ownership

Information Transactions Structures

Criminal Legal / IP /
Covering & Preventing Tax Exposures
behaviour Regulatory

Weak Internal Local Market / Corporate

Addressing & Remedying Controls / Systems Culture Governance

n Conduct an appropriate level of due diligence in connection with transactions

n Incorporate a risk-based level of compliance due diligence (risk profile, key personnel interviews, review)
n Identify, address and resolve “red flags”
n Adjust transaction structure if necessary
n Obtain robust representation, warranties, indemnities and covenants; ensure appropriate remedies in case of breaches and
provide for adequate substance (e.g. escrow)
n Ensure any prior misconduct shall be remedied post-transaction
n Implement any required policies, procedures and internal controls to ensure strong corporate governance and compliance

6
Types of acquisitions

Friendly
Takeovers
Hostile

One potential buyer

Classical acquisition
Auction

Private Equity
Financial
Buy-Outs
Industrial

Financial

Venture Capital Industrial

Business Angels

7
M&A transaction at a glance

Looking for
Decision and targets / buyers
Preparatory definition of and approaching
phase scope parties

Draft teaser and Release vendor

Pre-due information Release DD reports on
Confidentiality
diligence memorandum; information the basis of
agreements
set up data room; memorandum release (and
phase vendor DD reliance) letter

Q&As /
Due management
1st phase due Binding offer /
diligence diligence
Letter of intent meetings / confir- final bid
phase matory DD

SPA, in Parallel Post-signing:

particular reps Signing: Notarial
agreements may prepare filings /
Negotiation & warranties recording may
be needed (eg. prepare transfers /
& signing indemnities, be necessary
shareholders obtain funds
purchase price for signing
agreement, etc.)

Pre-closing, Fulfilment of
closing Closing: Transfer Post-closing Post-closing
closing & of shares / assets
conditions restructuring convenants
post-closing

8
The life of an M&A transaction: Preparatory phase

Decision and Looking for targets /

Preparatory
definition of scope buyers and
phase approaching parties

n M&A processes are generally steered by the M&A or Business Development department
n Involvement of investment bank / strategic advisors / consultants
n Legal advisors are generally not involved (at least not in-depth) in the preparatory phase

Seller side Buyer side

n Decision to sell and preparation of the transaction n Evaluating the business objectives – decision to buy

n Choosing advisors and deciding which type of deal is n Choosing advisors

envisaged (asset or share deal)
n Identifying and approaching potential targets (if
n Identifying and approaching potential buyers to be transaction is not seller-driven)
invited for the process (if transaction is not buyer-driven)

9
The life of an M&A transaction: Pre-due diligence phase

Draft teaser and Release /

Pre-due information Confidentiality Release
reliance letter
diligence memorandum; agreements information
for vendor due
set up data room; memorandum
phase diligence report
vendor DD

n Latest point in time to involve legal advisors

n The steps taken in the pre due diligence phase depend to a great extent on whether the process is seller-driven or buyer-driven
and whether the M&A transaction takes place as a one-to-one transaction or is carried out in the form of a structured auction
n Seller-driven processes require more preparation and demand a higher degree of legal advice as of the start

Seller side
n Prepare teaser and information memorandum, generally with the assistance of an investment bank; assistance of legal advisors
advisable to avoid legal risks
n Set up data room (and index) – process is usually lengthy; legal and financial advisors are usually involved
n Decide on the form of data room; trend: electronic data room coordinated either by investment bank or law firm
n If appropriate, set up due diligence team and carry out vendor due diligence
n Decide which documents are going to be released to buyer(s) – in which form (blackening of confidential issues) and in which
due diligence phase; establish ‘red’ data room
n Prepare confidentiality agreements
n Prepare process letter and data room rules for due diligence
n Release information memorandum and data room index
n If appropriate, release vendor due diligence report on the basis of a release (and potentially also reliance) letter

Buyer side
n Sign confidentiality agreements
n Review teaser and information memorandum as a first basis to decide whether to proceed with the transaction
n Set up due diligence team
n Determine material thresholds for upcoming due diligence exercise
n Buyer may submit to seller a due diligence check list (or request list), listing the documents which it would ideally like to review in
the due diligence phase. The submission of such request lists prior to the due diligence exercise is however becoming more rare

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Deep dive: Confidentiality / non-disclosure agreement (NDA)

Purpose
n Secure seller’s / target’s interest in business secrets / confidential Trends
information Penalty / damage clauses
n Avoid publication of intention to sell target n Unusual
n Good market practice to avoid
n Listed companies: Avoid disclosure requirements under capital markets
laws
Standstill arrangements for listed companies
n Usual
Typical Content
n Obligation to maintain confidentiality of disclosed information
Non-solicitation of seller’s / target’s directors
n Limit use of confidential information to a specific purpose (evaluation of and employees
the target) n Usually included in NDAs but not enforceable
under German law
n Specify terms of permitted disclosure to third parties and responsibility
– Co-investors, banks and other finance providers Back-to-back with banks / advisors / other
– Advisors and boards (also of parent companies) third parties
n Usually required
– Regulators, courts and other disclosure required by law or stock
exchange rules n Certain professions being obliged to maintain
confidentiality (e.g. lawyers) were formerly
n Listed companies: Stand-still arrangements excluded but are nowadays generally required
n Non-solicitation of seller’s / target’s directors and employees (not to counter-sign
enforceable)

Pitfalls
n Unclear or very broad definition of “Confidential Information” (scope of
confidentiality agreement)
n Loopholes through permitted disclosure without defined responsibility
n Onerous back-to-back requirements with banks, advisors and other third parties
n Stand-still arrangements (in particular for banks and larger groups)
n Exclusivity / commission obligations towards brokers

11
Deep dive: Release and reliance letters

Advisors prepare due diligence reports for the beneficiaries only. Generally, the
beneficiaries are the clients. It is also not uncommon to address the reports to a third
party, such as the financing bank, so that this third party is treated as beneficiary of the
report and may rely on it. In all other cases, if the beneficiary wants to pass the report
on to a third party, a release letter will have to be issued. By signing a release letter, the
recipient commits to not disclose any information contained in the report to third parties
and to use the report solely for the purpose of assessing the relevant transaction.

Release Letters
n Permit one party (usually the client of the report provider) to disclose the Trends
report to another party, e.g. a seller to disclose the vendor due diligence Release letters
report to a bidder and at the same time impose confidentiality and non n Typically with exclusion of liability of report
disclosure obligations to further third parties provider towards third party
n Exclude any liability of the report provider to the other party (non-reliance
basis) Reliance letters
n Market practice is divided between providing
Reliance Letters and not providing reliance letters (Clifford
In addition, the advisors of the party passing the report on to a third party Chance provides reliance letters)
may also issue a reliance letter conferring the new recipient the right to rely n Usually only for successful bidders
on the facts presented in the report (under certain conditions). n Limited aggregate liability of report provider
towards client and all further beneficiaries
n Permit a third party (a beneficiary) to rely on the due diligence report
n Create liability of the report provider towards the third party for the
content of the report
n Scope of due diligence: Remains as agreed between the client and the report provider
n Oblige the other party to not further disclose the report to third parties
n Usually contain a limitation of the report provider’s aggregate liability to the client and to all beneficiaries
n Exclude obligation of report provider to update the report report may be outdated
n Need to carefully assess the actual value of relying on a report prepared for a third party

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The life of an M&A transaction: Due diligence phase

Q&As /
Due 1st phase due
management Binding offer /
diligence diligence / Letter of intent
meetings / final bid
phase Q&As
confirmatory DD

n The due diligence phase generally demands considerable advisory efforts and is rather intensive in terms of time
n Generally, the seller sends the potential buyer(s) a first draft of an SPA in the course of this phase, often shortly before the
submission of a final bid by the potential buyer(s) the request to include a first buyer mark-up in the final bid documentation
has became common

Seller side Buyer side

n Open data room for buyer(s) with first set of documents
(more confidential documents are often released in a
second phase)
n Review questions – generally the process is coordinated by
the investment bank – and provide answers to the extent
possible and decide on whether to provide further
documentation prior to the submission of a letter of intent
involving legal advisors in the Q&A process may avoid
pitfalls
n Review first set of documents
n Discuss findings and ascertain which information is
required for submitting a letter of intent; potentially also
request for clarification of open issues (ask questions and
request documents)
n Advisors to prepare a preliminary report with findings
n Submission of a letter of intent
n Confirmatory due diligence

n Review letters of intent submitted and, as the case may be,
short-list bidders
n Release second round of documents and, if appropriate,
red data room
n Discuss findings and ascertain which information is required
going forward; if necessary, request for clarification of open
issues (ask questions and request documents)
n Participate in management meetings

n Organize management meetings n Advisors often review report with findings

n Circulate draft SPA n Decision on whether to submit a final bid and as the case
may be, submission of final bid, potentially also including
n Review final bids
a first mark-up of the SPA and in certain cases asking for
n Decide which bidder(s) stays in the process exclusivity
n Consider any employee information issues n Consider any employee information issues

13
Deep dive: Due diligence

Aims
n Assessing the value of the target and identifying risks Trends
n Developing a custom-tailored catalogue of representations and Electronic data rooms
warranties to mitigate potential risks that result from defects of the target n Currently standard
n Most documents not printable
Background
n Developed from the rule of “caveat emptor” under US law, under which Documents with sensitive data
the buyer could not recover from the seller for defects in the property n Usually disclosed in data rooms with sensitive
that rendered the property unfit for ordinary purposes data blacked out

Scope Particular sensitive documents (red data

n Separate due diligence for different areas (legal, tax / financial, rooms)
environmental, commercial, insurance) n Later disclosure in the second due diligence
phase, generally to a limited group of people
n Legal due diligence generally referred to as legal review excludes
only
non-legal matters such as environmental, accounting, financial,
insurance, etc. n Highly confidential matters (state affairs,
documents subject to bank secrecy, etc.) may
Process need to be held in trust
n Examining the documents in the data room
Material threshold for review
n Questions and answers n Material threshold of usually 0,1% to 0,5% of
n Preparing the due diligence report (legal review report) company value

n Discussing the results of the due diligence Limitation of liability of law firm
n Standard in reports
Depth of review
n Spot check n Limitation to the value of the transaction (max.
EUR 100,000,000)
n Exhaustive due diligence of all documents (rather rare)

Format for reports

n Red flag / by exception reports are nowadays the most common although some clients still prefer full summaries of certain or all of
the documents reviewed
n Table format with action points and recommendations is common

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Deep dive: Letter of intent (LoI)

Purpose
n Documentation of a basic understanding or intent to Trends
– express and confirm one’s interest to the other party LoI in a structured auction process
– reduce the risk of misunderstandings n Structured auction processes often without
letter of intent
– avoid either party stepping back on key elements later on
– define a process for the transaction and allocate responsibilities LoI in a traditional sale process
– (sometimes) grant exclusivity, preferred bidder status or cost coverage n In traditional sales processes LoIs are more
common
Legal effect
n Usually non-binding declarations of “intent” or documentation of Binding effect
preliminary agreement but legal effect depends on the wording – no rule n Depends on wording and form
of law
Exclusivity
n Drafting needs to be careful and precise n Exclusivity clause often drafted as a binding
n Should expressly and clearly specify legal effect of individual elements provision

n Form requirements to be observed, if binding, preliminary agreement is Break Fees

intended n Very unusual in Germany
n Specific provisions may be drafted so that they are binding, e.g.
confidentiality, exclusivity / preferred bidder status for a certain period or
cost coverage

Legal consequences
n Binding obligations can be enforced by the other party
n Breach of binding provisions can result in liability for damages
n Unclear or “wrongful” statements may result in liability for damages

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The life of an M&A transaction: Negotiations & signing phase

Parallel Post-signing:
SPA, in particular Signing: Notarial
Negotiation agreements may Prepare filings /
reps & warranties recording may
be needed (e.g. prepare
& signing indemnities, be necessary for
transfers /
purchase price shareholders signing
agreement, etc.) obtain funds

n The negotiation / signing phase also includes certain measures which take place immediately after signing and which generally
start being prepared long prior to signing. These include not only efforts to obtain sufficient funds for payment of the purchase
price (which generally occurs at closing) but also the necessary steps for the actual transfer in rem as well as the preparation
of statutory / regulatory filings (see also pre-closing phase)
n The transfer of shares in German limited liability companies as well as the transfer of certain assets, such as real estate, need
to be recorded by a notary notary fees are usually borne by the buyer. The use of cheaper Swiss notaries is no longer
recommended due to current jurisprudence

Seller side Buyer side

n Seller generally provides the first draft of the SPA with very
limited representations and warranties
n Seller typically wishes to prepare general disclosure
schedules (e.g. the full content of the data room) against
precise representations and warranties in the SPA
n Employee notification duties
n Buyer generally starts working on the basis of the draft
SPA provided by seller
n Extension of draft representations and warranties to
provide sufficient comfort taking into account the findings
of the due diligence exercise
n Buyer generally prefers to work with vast set of
representations & warranties and generally wishes to
accept only specific information contained in specific
disclosure schedules against the representations and
warranties

Key issues in the negotiation phase

n Deal structure: Asset deal vs. share deal vs. merger (consider also particular employment law issues in connection with asset deals)
n Defining and structuring acquisition vehicle
n Pre-signing restructuring measures, such as carve-outs and pre-signing consents
n Negotiation of representations and warranties, indemnities, purchase price, closing conditions, etc.
n Duty to remedy defects prior to / after closing

16
Deep dive: SPA – deal structure, MAC and purchase price

Scope of the transfer

n Decision whether to structure a transaction as a share deal, asset deal or Trends
as a merger depends on a number of different factors, such as Asset vs. share deal
organisation and size of target and buyer, tax implications, employees’ n Most transactions structured as share deals
structure of the target, etc.
n Asset deals demand detailed description of
Structure: signing and closing assets in the SPA and give more room for
n Usually staggered in between parties fulfil closing conditions (statutory / “cherry picking”
regulatory and other transaction-specific conditions)
MAC clauses
n In rem transfer occurs at closing
n In approx. 1/5 of SPAs
Material adverse change (MAC) clauses
n MAC refers basically to an event that may cause a significant diminution
in the value of a business
n There is a very broad range of MAC definitions and substantial attention
must be paid to the drafting, in particular also to carve-outs from the
definition
n MACs are buyer-friendly and strongly rejected by sellers as they in effect often give the buyer an opportunity to renegotiate the
purchase price

Purchase price
n The purchase price in SPAs may be structured as a fixed price based on the financial accounts at a certain point in time (locked
box mechanism) or it can be subject to adjustments on the basis of the closing date balance sheet
n There are several mechanisms to adjust the purchase price, such as cash free / debt free models and working capital adjustments
n While the seller typically used to prefer the locked box model and the buyer a mechanism providing for subsequent adjustment,
locked box models are nowadays regarded to be advantageous also to buyers due to the certainty they offer and due to the
reduced post-closing efforts The current trend is towards an increase of the locked box approach

17
Purchase price in SPAs
Fixed price vs. price adjustments

Locked box
n Purchase price calculated on the basis of the last audited annual accounts or of interim accounts locked box date

n Risks as well as opportunities resulting from potential positive or negative developments are transferred to buyer as of the
locked box date MAC clauses and covenants can mitigate such risks

n Maximum certainty due to fixed purchase price

n Accrual of interest on the purchase price until closing may be agreed, if a positive cash flow is expected
n Debt / cash and working capital adjustments have already been included in the calculation of the purchase price on the basis of
the accounts and as of the accounts date; no subsequent adjustment efforts, no closing date balance sheet
n Risk of adverse developments and chances economically transfers to buyer on signing
n Extensive due diligence required from a buyer’s perspective
n Requires tight pre-closing covenants to avoid “leakage” of cash or other value to the seller (no leakage covenant box needs
to be securely locked)

18
Adjustment based on closing date balance sheet
n Purchase price calculated generally on the basis of the last audited annual accounts, whereby potential adjustments pursuant to
certain reference values / milestones are taken into account. In case of subsequent deviations, the purchase price is adjusted

n Risks as well as opportunities resulting from potential positive or negative developments remain with the seller until closing

n Debt free / cash free concept: Purchase price = equity value: Applying a debt free / cash free mechanism means that the
Debt free / cash free

net financial liabilities are to be deducted from the purchase price

n Major difficulty is the definition of debt as it is not defined by law and needs to be precisely specified in the SPA. Particular
attention is to be paid to “debt-like items”
n Debt free / cash free mechanism does not provide full protection from changes in balance sheet positions. Therefore,
working capital adjustments are often combined with the debt free / cash free mechanism

n Working capital adjustment models are based on an agreed target working capital amount as of closing. Upon closing,
the buyer determines within a certain period of time the actual working capital, which may lead to a purchase price
reduction or increase (deviation must exceed a certain agreed percentage)
Working capital

n Working capital adjustment is used to compensate the respective party for growth or decline in working capital as measured
at closing relative to an agreed balance and serves as a protection against manipulation of cash items by the seller
n Although there is an usual definition of working capital, it is always subject to agreement in the SPA. When defining
working capital, any payables and receivables towards affiliated companies with working capital character should be
taken into account

19
Deep dive: SPA – representations & warranties

Representations & warranties

n Under German civil law, sellers are obliged to provide the sold “object” Trends
without “defects” (Sach- und Rechtsmängel) This German statutory Reference date for reps & warranties
regime of “defects” is not suitable for M&A transactions n Bring-down to closing in 60% to 70% of the
– Thus SPAs provide for representations and warranties in substitution cases
of the general statutory regime
De minimis for reps & warranties
n Representations and warranties typically depend on the scope of the due
n In approx. 50% of SPAs; number is increasing
diligence, which may be unreliable and generally cannot cover each
aspect of the business relevant for the buyer
Baskets for reps & warranties
– Ownership of shares and IP cannot be verified n In approx. 50% of SPAs
– Compliance issues such as data protection, anti-corruption or money n Basket amounts in 50% of the cases to > 1%
laundering of the purchase price
n Seller usually wants to disclose as much as possible against n When basket is agreed, recovery is on a first
representations and warranties, i.e. not give warranties in relation to all Euro basis in approx. two thirds of the cases
aspects disclosed to buyer in the bidding process may have adverse
effect on overall bid valuation Cap on reps & warranties
n Reps and warranties are typically subject to a time limit which n Most SPAs with reps & warranties contain
generally varies between 6 and 24 months. Title, tax and liability caps
environmental matters are often excluded from the limitation period or n In approx. half of the SPAs with caps on reps &
have a longer limitation period warranties, the liability cap amounts to > 50%
n Qualifications of the purchase price

– Knowledge qualifier: To the seller’s best knowledge / positive Carve-outs from liability caps
knowledge / no qualifier n Often exclusion of title, tax and less often,
– Disclosure: “Except as stated in Schedule XX” environmental issues

Insurance of reps & warranties

n Is getting more common

20
Deep dive: SPA – remedies / limitation of liabilities

Remedies for breach of warranties

n Primary remedy: Seller has to establish such condition of the sold business as described in the relevant representation or warranty
n Secondary remedy: Compensation in money usually considered as a reduction of the purchase price

Knowledge
n Buyer’s knowledge usually excludes seller’s liability. Thus seller’s best defense is proper disclosure prior to signing. Whether
“deemed knowledge” due to disclosure in the course of due diligence excludes liability depends on the agreement reached. In any
case, buyer’s knowledge is usually limited to the knowledge of certain individuals

No double counting
n Double counting is to be avoided, in particular from a seller’s perspective. Thus, links between liability for breach of
representations and warranties and purchase price adjustment (debt, working capital), indemnities and other SPA provisions, risks
already included in the purchase price calculation (known risks) and recovery from third parties, e.g. insurance or contractors,
should be taken into account

De minimis, thresholds, caps

n De minimis: Individual claim needs to exceed a certain value before being eligible for compensation
n Thresholds: Aggregate claims need to exceed a certain threshold before buyer can raise claims against the seller. May be in the
form of a deductible (seller only has to compensate amounts exceeding threshold) or on a “first Euro” basis (seller has to
compensate full damage including threshold amount)
n Cap: Overall limitation of seller’s liability. Typically not structured in the same way for all warranties / under the SPA

Buyer is obliged to mitigate damages

n Obligation to mitigate is a general duty under German law
n Specific duties in respect of certain liabilities can be addressed in the SPA

Process for claims

n Buyer is usually required to notify seller of claims in writing without undue delay
n The parties are obliged to adhere to the formalities and processes agreed in the SPA; the legal consequences of a breach of such
formalities are usually extensively discussed by the parties
n Seller usually retains control over defense against third party claims

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Deep dive: SPA – indemnities and closing conditions

Indemnities
n Indemnities are more buyer friendly than warranties: Whereas a warranty Trends
is a contractual declaration of the existence of a particular state of affairs, De minimis and thresholds in indemnity
an indemnity is a contractual promise to reimburse the other party for a clauses
particular type of liability, in case such liability arises n Often not subject to thresholds or de minimis
n Indemnities protect against risks and contingent liabilities which have not amounts
been taken into account in the calculation of the purchase price but
which have yet been identified as potential risks Cap on indemnity clauses
n Often uncapped
n Typical indemnities
– Taxes relating to pre-closing periods (but resulting from tax
assessments post-closing)
– Pending litigation
– Continuing liability from contracts with third parties with limited or no benefit to the buyer
– Environmental liability
n Mostly tailor made, no market standards except for tax indemnities
– Specific and clear definition of scope (particular events, liabilities, claims)
– Specifically address buyer’s cooperation and mitigation duties
– Seller usually retains right to defend against third party claims

Closing Conditions
n Closing is typically subject to certain closing conditions, which may be transaction-specific and / or such as required by law
n Statutory / regulatory conditions are in particular merger control approvals, regulatory approvals in particular in the financial sector
etc. Furthermore, the acquisition of at least 25% of the shares in German companies by non-EU / EFTA buyers is also subject to
clearance by the German Ministry of Economics and Technology
n Transaction-specific conditions may be third party waivers of rights to terminate material contracts for change of control (share
deal), third party consents to the transfer of material contracts or assets (asset deal), completion of material preparation actions by
the seller etc.

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Deep dive: SPA – covenants and other provisions

Covenants
n A covenant is an undertaking of a party to perform or refrain from performing Trends
an action during the period between signing and closing (pre-closing Post-closing covenants
covenants) or for a certain time after closing (post-closing covenants) n Relatively common
n Pre-closing covenants: After signing, the buyer is obliged to acquire the
business at closing. The buyer therefore has an interest in protecting the sold Non-compete covenant
business against material changes. Thus, the seller often undertakes to run the n In approx. half of the SPAs
sold business in the ordinary course and in accordance with past practice.
Typical measures requiring buyer’s prior consent Non-solicitation covenant
n Common but not enforceable under
– Change of articles of association
German law
– Conclusion of company agreements
– Reorganisation or liquidation of companies
– Sale or purchase of material assets
– Capital expenditures above a certain threshold
– Conclusion of high-volume or long-term agreements
– Entering into new financial debt positions
– Changes to the practice of collecting trade receivables or paying trade payables
– Changes to employment terms and conditions, shop agreements, pension arrangements
– Changes to accounting practice
– Further covenants required for locked-box concept (no leakage)
n Too tight covenants should be avoided as they could violate antitrust laws
n Typical post-closing covenants are the non-compete and non-solicitation clauses
– Seller undertakes to refrain from engaging in a similar business for a specified period of time
– Seller undertakes to refrain from soliciting seller’s / target’s directors and employees for a specific period of time; such covenant
is common but not enforceable under German law

Responsibilities, long stop date, break fees

n Right to withdraw if conditions are not fulfiled on a defined long stop date
n Break-up fee / compensation in case of withdrawal depending on responsibility still an exception
Governing law
n Litigation or Alternative Dispute Resolution
24
The life of an M&A transaction: Closing and post-closing

Pre-closing, Fulfilment of
Closing: Transfer Post-closing Post-closing
closing & closing
of shares / assets restructuring convenants
post-closing conditions

n In the period between signing and closing the parties procure the fulfilment of the closing conditions necessary for the transfer
of the business to become effective
n Upon closing, the newly acquired company will need to be integrated into the corporate structure of the buyer group. Thus,
the corporate restructuring will almost always be inevitable

Seller side Buyer side

n Compliance with any post-signing covenants previously
agreed with the buyer; seller usually has to run the
business in accordance with past practice and is generally
dependent on buyer’s consent for certain transactions
n Whereas buyer is typically responsible for statutory and
regulatory filings necessary for clearance, both, seller and
buyer, may be responsible for the fulfillment of any
transaction-related conditions
n Receipt of purchase price and delivering confirmation
n Effect transfer agreements (notarisation may be necessary)
n Compliance with any post-closing covenants
n Follow up on potential purchase price adjustments
n Cooperation with seller regarding compliance with post-
signing covenants (e.g. consent for transactions should
not be unreasonably withheld)
n Statutory and regulatory filings required for closing
n Procure fulfillment of transaction related closing conditions
(jointly with seller)
n (Finalising) establishing acquisition vehicle
n Payment of purchase price
n Effect transfer agreements (notarisation may be
necessary)
n Tackle any restructuring and integration measures that
may be necessary – the end is also the beginning
n Drafting balance sheets as of the effective date if
applicable and follow up on potential purchase price
adjustments
n Be aware of limitation periods for representations and
warranties and indemnities

25
Deep dive: Post-closing

What needs to be done

n Strategic integration: The newly acquired company will need to be Best practices
integrated into the corporate structure of the buyer group. Hence, Restructuring and integration
corporate restructuring will almost always be inevitable. Corporate n Provide for sufficient resources
restructuring is frequently driven by tax considerations and will usually be
required to achieve the synergy effects targeted by the acquisition. The n Ensure that integration team also comprises
goal may, for example, be to optimise the financing structure or to members of the transaction team
reorganise group companies to simplify the overall group structure.
Typical post closing measures may be a merger, a change of the n Ensure sufficient flow of information from deal
corporate form, a delisting, a squeeze-out or the sale of a part of team to integration team
the target.
n Involve integration team during due diligence
n Operational: In the operational area, this is likely to extend beyond the exercise and contract negotiations
reorganisation of sales systems and logistic processes to include
n Address and resolve any due diligence issues
relations with customers and suppliers.
during integration
n Due diligence findings: The period immediately after closing will also be
the obvious time to remedy any weaknesses that may have come to light
in the legal review process - such as standard agreements or terms and
conditions of the business that are invalid or inappropriate.

n IT: The integration of IT systems will also call for a comprehensive review of all the relevant licenses, maintenance and service
agreements.

n Human resources: As regards human resources, the appointment of new managers, a realignment of organisational and
remuneration structures as well as a restructuring of the company’s pension scheme may be required.

n Regulatory issues: The period just after closing is also the right time to rectify any defects or gaps in regulatory permits and to
minimise any risk of existing pollution by actively engaging in environmental management.

26
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