Mergers & Acquisitions / Private Equity22.09.2020 Newsletter

DEAL POINTS.

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Dear readers and business partners, 

We are pleased to send you the second issue of DEAL POINTS, Oppenhoff's newsletter on M&A and private equity. Whereas our publications in the first half of the year mainly dealt with acute issues concerning the COVID-19 pandemic, the improved situation now means that we can turn our attention again to future transactions in these special times.  

In this issue, we are reporting on the peculiarities of tech dealsdue diligence in times of the coronavirus, Covid-19-specific developments in W&I insurance and giving you an update on GmbH law. You will also find current judgments and an introduction to our new Frankfurt finance partner Wolfgang Kotzur .

We wish you, your families and your companies good fortune and, above all, good health over the coming months.


Your Oppenhoff M&A team

 

1. Current M&A topics 

1.1 Why Tech-Deals are different 

1.2 Due Dilligence - Focus in times of Corona 

1.3 Covid-19 Exclusions in W&I Insurances 

1.4 Covid-19 legislation update: simplified adoption of resolutions by written circulation procedure at GmbHs

2. Latest judgements

2.1 Liability for the acquisition of a commercial business under self-administration

2.2 Admissibility of a "voluntary" electronic list of shareholders

2.3 Private Equity: Higher Regional Court of Munich deems leaver clauses invalid

3. Oppenhoff Faces - Partner Dr. Wolfgang Kotzur

4. Deal-News

1. Current M&A topics

1.1.  Why Tech-Deals are different

Anyone who thinks that investments in technology companies can be structured and handled like any other corporate acquisition is making a fatal mistake. The standards used in many companies, for example for due diligences, are unproductive here and often miss the mark. This is because the assets that make up the value of the company are not even remotely comparable with those of traditional business models. The risks faced by tech companies are not generally environmental pollution on properties or the age and maintenance condition of production machinery. Rather, they are intangible risks arising from copyright infringements, patent and license infringements and data protection violations.

Often, the most valuable asset of a technology company is not a tangible asset but the source code of a software. In order to ensure that this is actually owned by the target company, that no third party has access rights or opportunities to access it and that the software does not violate any third-party rights, completely different parameters have to be queried and topics highlighted in a due diligence request list than those which correspond to standard practice today. The IT company is bought because of the software it has developed. The software, however, was developed by people on behalf of the company. The company paid for it, but does it also own the comprehensive rights to the software because of this? This can be questionable if the developers were not employed there as employees, but for example as freelancers, doctoral students or, as is not unusual for technology start-ups, as managing directors. The rights to which the company is entitled can only be determined by taking an expert look at the contracts with the developers. Incompletely formulated license clauses make it possible for withdrawn managing directors or freelancers to subsequently hold out their hands for money. If the developers used open source software (software codes available free of charge on the internet that make life easier for programmers) when programming the software, this creates another stumbling block. Should this software code fall under the widespread copyleft licenses, then beware! If the software created using a copyleft code is distributed, the copyleft rules apply to the entire software (e.g. free access for all). If these rules are not observed, the right of use is cancelled. This can overturn an entire business model. A scan of the software for open-source components by specialized providers - e.g. Black Duck - should therefore be undertaken as a matter of course when purchasing software companies.

Caution is also advised against patent trolls. They buy up patents for the sole purpose of taking action against third parties. Since patents are increasingly being granted for internet-based software applications, especially in the USA, and business models can simultaneously be marketed worldwide via the internet, the consequences can be disastrous. Investors in tech companies should therefore always conduct freedom-to-operate research for important target markets as part of the due diligence process. This applies in particular when smaller companies (e.g. start-ups) are acquired by financially strong strategists.

In the case of data-driven business models, the increased risk of breaches of data protection law also must be taken into account. As we all know, fines under the GDPR can amount to up 4% of the group's annual worldwide turnover. If the due diligence is conducted sloppily, the investor can buy into very significant risks, as happened in the case of Marriott's acquisition of the Starwoord hotel chain. In this case, the UK authorities announced a fine of EUR 110 million (based on the turnover of the entire Marriott Group). In terms of data protection law, firstly formalities have to be queried in the course of the due diligence and, secondly, data flows and processes, such as deletion routines, which are frequently not depicted in documents. 

We must therefore urgently warn against the use of standard due diligence request lists and processes when acquiring technology companies. At the latest with the advance of digitalization in all areas of economic life, these will have to be adapted to the new developments and circumstances.

Myriam Schilling is a partner at Oppenhoff. She is specialised in advising German and foreign clients on national and cross-border M&A transactions and joint venture projects (myriam.schilling@oppenhoff.eu).

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1.2 Due Diligence - Focus in times of Corona

The SARS-Cov-2-virus has strongly affected the M&A market. Companies face corona-specific challenges which also have an effect on due diligences. The following overview will help you detect the most common “corona-specific” findings.

I) Additional corona-specific questions for the due diligence

Corporate law

The purpose of the corona-specific corporate law due diligence is to provide information as to whether the target company has retained its capacity to act at management level during the pandemic. Here, you need to examine whether, for example, important shareholder resolutions have not been passed (despite the simplified possibility of circular resolutions) and whether the target company has secured the operative management bodies by ensuring an adequate number of managing directors/authorized signatories, and possibly their exemption from the restrictions of § 181 German Civil Code [Bürgerliches Gesetzbuch - BGB].

Finance & subsidies

Of particular relevance to the due diligence here are loans from state development banks (KfW instant loans, etc.). Existing credit agreements should be examined as to possible covenant effects. This is because, under certain circumstances, the drawdown of additional state loans could also lead to termination rights on the part of the lenders of existing loans. Balance sheet ratios of the borrower regularly influence the termination rights of the lenders. Insofar as outstanding loan instalments have to be repaid prematurely due to the termination of a loan, this may trigger additional prepayment penalties ("breakage costs").

When examining subsidies that have been received, please note that they often have to be repaid if projects are discontinued or if sites are (temporarily) shut down. Similarly, as is the case with existing loans, government loan provisions may trigger an obligation to repay subsidies that have already been granted.

Commercial & insurance

Here, the focus should be on special (unilateral) grounds for termination and contract adjustments. So-called "force majeure" clauses might also apply in the event of corona-related performance disruptions, for example, if it is impossible to meet agreed delivery times.

A further current problem for many target companies is the securing of supply chains and possibilities for switching to alternative suppliers / logistics service providers.

In particular, but not only food-processing target companies have been ordered to close their plants due to corona. In this case, a closer look needs to be taken at corresponding business interruption insurance policies. Not all insurance policies cover loss of income due to a pandemic.

Real estate

The extent to which officially ordered closures or other restrictions of the tenant's operations affect contractual rental payment obligations is highly controversial in the absence of case law. The decisive factor, however, is which rental party must bear the operational risks and whether a classification as a disruption of the business basis is possible. It may also be appropriate to mobilize assets through sale and leaseback arrangements in order to secure liquidity.

In practice, in the retail and catering trades, solutions are currently mainly being negotiated on the basis of mutual agreements and concessions. Especially in the case of single-tenant constellations and anchor tenants, landlords have a keen interest in maintaining the tenant's performance capacity. Deferrals of the rent until the end of 2021 or waivers of the rent of up to 75% are regularly being agreed for the months April to June. In return, the rental period is often being extended by up to 3 years.

A termination on the basis of the rent arrears accumulated for this period has been ruled out by the emergency legislation until 30 June 2022. In sectors not directly affected by official closures, such as the industrial sector, the legal (argumentation) options for tenants are much more limited and landlords are less interested in a compromise.

Please also note that any and agreements concerning the amount of rent and the rental term which exceed one year must be made in writing. Otherwise, it is possible that the rental agreement as a whole can be terminated

Labor law

Setting up a comprehensive home office system in the shortest possible time was and remains a major challenge for many companies. Companies have to provide the necessary infrastructure (e.g. via VPN tunnels) for working from home. In addition, the home office must be designed in such a way that data security is also guaranteed during the performance of work in the home office. Moreover, in many cases there has not been a (sufficient) labor law basis to date that would enable the employer to unilaterally order the employee to work from home.

As a reaction to a significant, temporary loss of work, the granting of vacation and claims to time-off in lieu are also valid bridging means for companies. Insofar as such a system exists, however, these regulations regularly require the co-determination of the works council.

It is particularly important that target companies have established occupational health and safety measures to ensure the health of its employees. In the event of cases of illness at the business, the statutory right to the continued payment of remuneration also exists if the employee contracts corona. In the event that an official work prohibition has been imposed on the employee at the same time or the closure of the entire business has been ordered, a refund for the loss of earnings can be paid at the employer’s application within three months.

Agreed waivers and deferrals of salary and/or social security contributions as well as the introduction of short-time work also have a liquidity-preserving effect for target companies.

The collection and storage of employee data in connection with the corona pandemic - for example, through fever measurements and the use of thermal imaging cameras - entails considerable data protection risks, which can sometimes lead to the imposition of fines, claims to damages for pain and suffering by the persons concerned or criminal sanctions. In companies where a works council exists, the use of such means is otherwise subject to co-determination.

II) Important topics for management calls and management meetings

Personal contact with the management and employees of the target company by means of so-called "management meetings" is usually a good opportunity to discuss topics that are too complex or too data-sensitive to be put in writing. Here, the buyer can obtain a comprehensive explanation of how the management assesses the future viability of the target company and which strategy concepts are available. Important topics include measures such as outsourcing, protection against the loss of management personnel or precautions to ensure the continuity of the business. Additionally, this also makes it possible to gain a quick impression of how (well) communication with important contractual partners of the company is being carried out or what effects are to be expected on the market environment/competitors and restructuring plans of the target company as a whole.

Sarah Scharf is a partner atOppenhoff and advises on all aspects of corporate law, especially liability and intra-group reorganisations (sarah.scharf@oppenhoff.eu). 

Sebastian Gutmann is an asssociate at Oppenhoff and provides legal support during national and international M&A transactions (sebastian.gutmann@oppenhoff.eu).

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1.3 Covid-19 Exclusions in W&I Insurances 

Since the beginning of the Covid-19 pandemic, W&I insurers have been careful to address the occurred and expected effects of Covid-19 separately in their policies, therewith excluding any associated risks. As the pandemic persists, this process is also being continuously adapted.

With the outbreak of the pandemic in the Western Hemisphere, the initial reaction was a general tendency of W&I insurers to include a broad and comprehensive Covid-19 exclusion in their policies. In principle, all losses resulting from risks related to Covid-19 were thus excluded:

The Insurer will not pay for any Loss arising out of, resulting from or to the extent it is increased by (i) the presence, transmission or threat of a novel coronavirus, including the coronavirus disease (Covid-19) or any evolution thereof, and/or (ii) any mandatory or advisory restriction issued, or action ordered or threatened, by any public authority, regulatory body or government in connection therewith.

Individual W&I insurers have also made attempts to integrate in their policies a de facto exclusion of Covid-19 through the loss definition, which additionally shifted the burden of proof from the insurer to the policyholder.

This original approach has since undergone a pragmatic change at many W&I insurers towards more targeted, case-specific exclusions. To this end, W&I providers very swiftly incorporated specific questions on the impact of Covid-19 in relation to the target company's business in their underwriting questionnaires. In this context, the insurers attach increased importance to the fact that the contractual parties have dealt pro-actively and decisively with the Covid-19 issue throughout the entire due diligence and negotiation process, in particular that the buyer is kept informed by the seller about any effects of Covid-19 throughout the entire sales process. Where the parties have not done so, it is to be observed that W&I insurers are increasingly insisting on disclosure in specific areas, for example whether Covid-19-specific financial implications exist at the target company.

The risks identified in this way during the underwriting process are then reflected in the cover position concerning the specific warranties affected in the individual case. In addition to the financial impact, W&I insurers pay particular attention to the areas material agreements, supply/delivery relationships, compliance with health & safety regulations and business continuity. For example, any warranties qualified by a material adverse effect relating to the target's business activities are supplemented or modified by a phrase such as "other than interruptions or alterations that have similarly affected businesses operating in the same sector as the target".

Despite this change, many W&I insurers are fundamentally keen to use the broadest possible exclusions with respect to Covid-19. In this context, formulations such as "relating to" or "in any way related to" Covid-19 are to be found. Other W&I insurers, in contrast, are offering narrower formulations such as "directly arising out of" or "directly from" Covid-19. Elsewhere, general exclusionary formulations such as "The insurer will not pay for Loss arising out of or resulting from" are contrasted with more balanced arrangements such as "that portion of Loss" or "to the extent", which limit potential damage in a Covid-19-specific manner.

As an emerging trend, due to expected corresponding demands from buyers, W&I insurers will find themselves increasingly confronted with material adverse effect qualifications, especially for breaches of warranties in connection with Covid-19 occurring between signing and closing, which require particularly intensive assessment due to their increased risk content.

Depending on how the pandemic develops and how it can be controlled, the topic of Covid-19 exclusions will certainly continue to accompany us in the foreseeable future. From the policyholder's point of view, it is important to achieve full transparency in the course of the due diligence and to discuss the issue with the W&I insurer as individually and industry-specific as possible, in order to avoid the futility of the policy as a whole due to a Covid-19 exclusion.

Dr. Markus Rasner is a partner at Oppenhoff and he specializes in advice on domestic and cross-border M&A and private equity transactions (markus.rasner@oppenhoff.eu).

Moritz Schmitz is an associate at Oppenhoff and advises on national and cross-border M&A transactions, private equity transactions and on corporate law (moritz.schmitz@oppenhoff.eu). 

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1.4 Covid-19 legislation update: simplified adoption of resolutions by written circulation procedure at GmbHs

In the light of the Covid-19 pandemic, the legislator facilitated the decision-making process of shareholders of a German limited liability company [Gesellschaft mit beschränkter Haftung – GmbH] by means of a circulation procedure. Such shareholder resolutions can now also be adopted without the consent of all shareholders.

With the German "Act on Measures in the Laws governing Companies, Cooperatives, Associations, Foundations and Condominium Ownership to Combat the Effects of the COVID-19 Pandemic" [Gesetz über Maßnahmen im Gesellschafts- Genossenschafts-, Vereins-, Stiftungs- und Wohnungeigentumsrecht zur Bekämpfung der Auswirkungen der COVID-19-Pandemie] of 27 March 2020 (German Federal Gazette [Bundesgesetzblatt - BGBl.]  I 2020 p. 569 [570], hereinafter "COVMG"), the legislator has, among other things, simplified the formal requirements for resolutions of shareholders of a GmbH by way of written circulation proceedings. The aim of the regulation in Sec. 2 COVMG is to facilitate the adoption of resolutions outside a classic shareholders' meeting in times when personal contact should be limited. However,  in difference to stock corporations, the COVMG does not facilitate the holding of shareholders' meetings of a GmbH by way of telephone or video conference - the permissibility of such meetings remains subject to a regulation in the articles of association.

Previously: consent of all shareholders required

Pursuant to Sec. 48 para 2 of the German Limited Liability Company Act (GmbHG), a resolution by written circulation procedure was previously only possible if all shareholders agreed to the resolution, or at least to the procedure of the vote by circulation, even if they rejected the resolution as such. The consent had to be declared in text form, for example by e-mail or SMS.

Now: circular resolutions possible with a majority

In contrast, according to Sec. 2 COVMG, circular resolutions of a GmbH can now be passed without the consent of all shareholders. This initially applies until 31 December 2020, but can be extended by decree until 31 December 2021. However, this facilitation only applies if the statutes do not contain any special provisions on the written circulation procedure. Otherwise, the statutes must be given priority, even if they only repeat the (previous) regulation.

The fact that written resolutions can now also be passed against the will of individual shareholders raises questions regarding the formalities and the appropriate protection of minorities. Under the previous regulation – which required approval by all shareholders - such were not required. Nonetheless, the COVMG does not address these aspects.

Right of initiative, period for consideration

This applies, for example, to the question of who is entitled to initiate the resolution procedure and how much time the shareholders must be allowed to consider the proposed resolution and to cast their vote. Sec. 2 COVMG does not adress these questions. With regard to the deadline for casting the votes, the one-week period stipulated in Sec. 51 para. 1 sent 2 GmbHG for the convention of a shareholders' meeting or a longer minimum period imposed by the articles of association, must certainly be taken as the basis for the minimum consideration period. In line with Sec. 49 para. 1 GmbHG, the right of initiative should generally lie with the managing directors, unless the articals also authorize the shareholders to convene a shareholders' meeting. Minority shareholders with a share of at least 10% should, in accordance with Sec. 50 GmbHG, be able to request the initiation of a written resolution procedure and, if this is unlawfully denied by the management, be able to do so themselves.

Participation quorum and majority requirements

If the articles stipulate a minimum participation quorum for the shareholders' meetings, this also applies accordingly to the participation in the written resolution, as the purpose of such stipulation would otherwise be jeopardized. If a quorum is reached, the resolution is passed by a simple majority of the votes cast in due form and time, unless a larger majority is required by law or the articles. As in a physical shareholders' meeting, the majority does not refer to all existing shareholders and votes, but only the votes which are validly cast.

Consequences in practice

Due to the priority of the articles and the numerous unanswered follow-up questions, the scope of the facilitation under Sec. 2 COVMG is likely to be limited in practice. However, the new regulation gives companies some reason to review and, if necessary, adjust the provisions of their articles on resolutions adopted by written circulation procedure as well as the holding of shareholders' meetings by telephone or video conference.

Dr. Günter Seulen advises national and international companies and groups of companies on corporate law, in particular stock corporation and capital market law, on company and group restructurings as well as on questions of D&O liability and compliance structures (guenter.seulen@oppenhoff.eu).

Philipp Heinrichs advises and represents German and foreign companies on all aspects of corporate law (philipp.heinrichs@oppenhoff.eu).

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2. Latest judgements 

2.1 Liability for the acquisition of a commercial business under self-administration

The German Federal Court of Justice [Bundesgerichtshof - BGH] recently ruled in a decision of 3 December 2019 (docket No. II ZR 457/18) that the liability arising from the continuation of the company name pursuant to § 25 (1) sentence 1 German Commercial Code [Handelsgesetzbuch - HGB] also does not apply to the acquisition of a commercial business in insolvency if the sale is not carried out by the insolvency administrator but by the debtor in self-administration. § 25 HGB provides that, even in case of an asset deal, the acquirer of a commercial business [Handelsgeschäft] is also liable for existing liabilities if it continues the company name of the acquired business.

The insolvency debtor had commissioned the subsequent claimant to carry out electrical installation work, which the latter also did. The insolvency debtor then sold the entire assets belonging to its business operations to the subsequent defendant. A dispute arose over the defect-free/defective execution of the work and the hired contractor subsequently filed a legal action against the acquirer of the commercial business and its managing director. The Local Court [Amtsgericht - AG] of Döbeln and the Regional Court [Landgericht - LG] of Chemnitz ruled in the claimant’s favor and each declared the acquirer of the insolvent enterprise to be liable under the aspect of the continuation of the company name. The defendant's appeal on points of law before the Federal Court of Justice was directed against this ruling.

The Senate first refers to its consistent case law, according to which § 25 (1) sentence 1 HGB does not apply to a sale by the insolvency administrator. The underlying aspects and motives there also apply in the present case of self-administration: A fundamental principle of insolvency is that no creditor is preferred. However, the application of § 25 (1) sentence 1 HGB would precisely lead to preferential treatment of the claims of the contractual partner of the insolvency administrator over the other creditors of the insolvency debtor. Another point to be borne in mind is that the application of § 25 (1) sentence 1 HGB would make a sale by the insolvency administrator more difficult. In particular, the applicability of § 25 (1) sentence 1 HGB to the self-administrator cannot be based on any comparability with the former sequestration proceedings. Rather, the position of the self-administrator is comparable to that of the insolvency administrator. A self-administrator exercises the same powers as an insolvency administrator, so that it is in the interests of the insolvency proceedings ordered and conducted insofar for § 25 (1) sentence 1 HGB not to apply.

In practice, the decision means that the sale of a commercial business, including the continuation of the company name, which is often a considerable added-value factor, also remains an option in case of an insolvency under self-administration that facilitates the best possible realization of the assets. The continued use of the company name, in particular, can be a considerable added-value factor, which is remunerated accordingly by the party assuming it. Avoiding liability is possible in principle by means of a corresponding entry in the commercial register, but is relatively complicated and fraught with uncertainty. A sale for purposes contrary to the purpose of insolvency serves to prevent liability for breaches of duty by the self-administering debtor or its manager by analogy to §§ 60, 61 German Insolvency Code [Insolvenzordnung - InsO].

Moritz Schmitz is an associate at Oppenhoff and advises on national and cross-border M&A transactions, private equity transactions and on corporate law (moritz.schmitz@oppenhoff.eu). 

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2.2 Admissibility of a "voluntary" electronic list of shareholders

According to a decision of the Higher Regional Court [Oberlandesgericht - OLG] of Düsseldorf dated 17 April 2020 (3 Wx 57/20), it is permissible to submit to the Commercial Register [Handelsregister - HR] an updated version of the list of shareholders previously kept in paper form without changes in the persons who are shareholders or the scope of their shareholdings, together with the extended information pursuant to the revised version of section 40 German Limited Liability Companies Act [Gesetz betreffend die Gesellschaften mit beschränkter Haftung - GmbHG], if the information required under section 20 German Money Laundering Act [Geldwäschegesetz - GwG] has neither been communicated to the Transparency Register [Transparenzregister] nor can be retrieved electronically from the Commercial Register.

In January 2020, the sole shareholder-managing director of a GmbH intended to replace a list of shareholders already deposited in paper form in 1999 with a new list. Without any change in the identity of the shareholder, the new list of shareholders was extended only by the sole shareholder’s percentage share and his date of birth, and this was submitted to the Commercial Register. With regard to the obligation to notify the Transparency Register pursuant to section 20 GwG, it is necessary that lists of shareholders can be submitted to the electronic register folder even without any changes in the existing shareholder status in order to fulfil its obligations under the GwG. The register court refused to include the entry in the Commercial Register on the grounds that there were no changes in relation to the 1999 list. In addition, this was opposed by section 8 of the Introductory Act to the German Limited Liability Companies Act [Einführungsgesetz zum GmbHG - EGGmbHG], according to which, in case of companies entered in the Register as at 26 June 2017, section 40 (1) sentences 1 - 3 GmbHG only has to be observed if a new list has to be submitted due to a change in the identity of the shareholders. Its purpose was to prevent the register courts from being "inundated" with lists of shareholders. The appeal against the decision of the register court was admitted by the OLG Düsseldorf.

The Senate stated that in the present case there was no obligation to submit a list of shareholders. According to section 40 GmbHG, such obligation exists only in the case of changes in the persons of the shareholder. There had been no such change at the company in question and the register court had also proceeded on the correct basis. However, the OLG made it clear that the register court could not refuse to include the list of shareholders in the register folder on the grounds that this was not a case of section 40 GmbHG. The fact that a new list has to be submitted to the register in the cases regulated by section 40 GmbHG does not mean that they may only be submitted in such case and not submitted in any other cases; in particular, no prohibition of submission could be derived from the provision. Pursuant to section 20 (1) GwG, legal entities under private law must submit the information on beneficial owners listed in section 19 (1) GwG without delay for entry in the Transparency Register. According to section 20 (2) No. 1 GwG, the obligation to notify the Transparency Register is deemed to be fulfilled if the necessary information is already available from documents and entries that can be retrieved electronically from the Commercial Register.

In this case, the company in question had neither submitted information for entry in the Transparency Register pursuant to section 20 (1) GwG, nor could the information required thereunder be retrieved electronically from the Commercial Register. In this situation, the Senate was of the opinion that it made sense, or was in all events permissible, to submit to the Commercial Register an updated list of shareholders with the extended information according to the revised section of 40 GmbHG, even without changes in the identity of the shareholders or the scope of their shareholdings. Furthermore, section 8 EGGmbHG also did not oppose this. For the Senate, it was not evident to what extent the register courts were being "inundated" with lists of shareholders.

The decision can be welcomed as a practical guideline. On the one hand, it facilitates the fulfilment of the obligations arising from the GwG through the simple submission of a list of shareholders that meets the current requirements and the associated fiction of notification of sections 20 (2), 22 GwG. At the same time, on the other hand, it promotes the completion of electronic files in the Commercial Registers in general and the conversion to documentation that is fully available online. However, the fact that, in the year 2020, the help of the OLG was needed to implement such simple modernisations is a poor testimonial to the register court in question.

Marcel Markovic is an associate at Oppenhoff and advises on corporate law and cross-border M&A transactions. (marcel.markovic@oppenhoff.eu).

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2.3 Private Equity: Higher Regional Court of Munich deems leaver clauses invalid

A key element of any management participation by private equity investors is to secure the re-transfer of shares in the event that the manager terminates his services for the company.

A decision of the District Court [Landgericht] of Stuttgart published in 2019 had confirmed the validity of share transfer obligations in a constellation that corresponded to a management participation typical of private equity, thus - temporarily – made a contribution towards legal certainty. In contrast, in a recently published decision (7 U 1844/19), the Regional Court [Oberlandesgericht] of Munich questions the enforceability of standard share transfer obligations in leaver cases.

The Regional Court of Munich makes reference to the case law of the Federal Court of Justice [Bundesgerichtshof] on the removal of a shareholder by termination. This essentially states that provisions which enable one shareholder to force another shareholder out of the company without an objective reason are unethical and therefore void: they effectively force the concerned shareholder to subordinate himself to the majority shareholder.

In a landmark decision of 2005 the Federal Court had laid down an exception to this in case of the so-called "manager model". However, the manager model reviewed by the Federal Court did not concern private equity and, correspondingly, had little in common with the conditions usually agreed by private equity investors in management participation programs. In its current decision, the Regional Court of Munich measures the management participation of a private equity house against the criteria laid down by the Federal Court and comes to the conclusion that the leaver clauses usually agreed by private equity funds are invalid. Thus, private equity investors can no longer be confident that the typical leaver clauses secure access to a manager’s shares when the manager leaves the company.

One aspect for the result in this case was the – particularly high - participation of the manager with 25%. However, the Munich Court was also substantially guided by the fact that the manager had taken entrepreneurial risk by acquiring his shares at market value and at the conditions also applying to the private equity investor. The incentive by way of a capital gain instead of - as in the "manager model" – regular distributions, makes the manager an investor. Therefore, the Court concludes, that the manager’s shareholding cannot be withdrawn upon termination of his position in the company as there is no connection between the shareholding and the manager’s employment agreement.

In other words: what is desirable as an incentive in management participation models of private equity investors, namely the entrepreneurial participation of the manager and thus the alignment of the private equity investor’s and the manager’s interest, is – according to the Regional Court of Munich – extremely detrimental to the participation model as such. Following the decision, it is no longer assured that private equity funds can enforce their contractual rights under leaver clauses and recover the shares of a manager who quits his position in the company.

For future practice it is advisable to clearly define the motives for granting equity participations to managers in the shareholders’ agreement. It appears more necessary than ever to clearly refer to the incentive concept in the leaver clauses. However, only a decision by the Federal Court will provide legal certainty on the enforceability of leaver provisions.

Dr. Gabriele Fontane is a partner at Oppenhoff and advises M&A and private equity transactions and on corporate law with a focus on MBO/LBO transactions (gabriele.fontane@oppenhoff.eu). 

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3. Oppenhoff Faces

Partner Wolfgang Kotzur

Name: Dr. Wolfgang Kotzur, LL.B.

Rechtsanwalt (German Lawyer) since: 2013

English solicitor since: 1999

Expertise: I specialize in advising on debt financing under English and German law, in particular the financing of real estate, acquisitions and companies as well as their restructuring. I have also gained considerable experience with other types of financing such as structured finance, project finance (especially renewable energies), consumer loans and infrastructure finance (harbors and airports).

Cooperation: Although I have only recently joined Oppenhoff, I have already had ample opportunity to work with colleagues, particularly in the real estate law and M&A practice groups. This cooperation has been excellent to date. 

Highlight: As a managing associate in London, I was once given the task of putting together a team of junior associates and trainees at short notice on a Wednesday evening to negotiate the entire financing documentation for a private equity sponsor's takeover of a car wash chain so that it could be signed on the Saturday morning. This was at a time prior to the financial crisis and LBO financing was very "attractive" at the time, which meant that the search for suitably motivated colleagues was not too difficult. However, none of them could have imagined that we would not get a wink of sleep for the next two nights. The cooperation with the lawyers of the lender was pragmatic in that, contrary to market practice, it was us, on the borrower’s side, who drafted a significant part of the documentation. Through the enormous commitment of all of the lawyers involved, the documentation was actually ready for signing on Saturday morning at 8.30 a.m. in the conference rooms provided for this purpose. At 10 a.m. the transaction could be celebrated in style with a glass of champagne. I subsequently went to bed, where I stayed until noon on Sunday!

Out of office: Playing with my children and dog, skiing, tennis, intercontinental travel

Profil im Web: Dr. Wolfgang Kotzur

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4. Deal-News

  • Oppenhoff advises CalixKlippan on the acquisition of Carbox
  • Oppenhoff advises nd industrial investments on the acquisition of a majority shareholding in the electric car manufacturer e.GO
  • Oppenhoff advises on the acquisition of CNP Group by capiton
  • Oppenhoff advises MVGM on the acquisition of VIVANIUM
  • Oppenhoff advises Banijay on complete takeover of Brainpool
  • Oppenhoff advises Family Trust on the acquisition of alphaQuest
  • Oppenhoff advises EnBW und RheinEnergie on the sale of their MVV shares to First State Investments
  • Oppenhoff amongst the top 10 law firms in Germany for the seventh time in a row

 

 Further news can also be found on LinkedIn.

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Dr. Markus Rasner

Dr. Markus Rasner

PartnerAttorney

Bockenheimer Landstraße 2-4
60306 Frankfurt am Main
T +49 69 707968 148
F +49 69 707968 111

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Myriam Baars-Schilling

Myriam Baars-Schilling

PartnerAttorney

Konrad-Adenauer-Ufer 23
50668 Köln
T +49 221 2091 210
F +49 221 2091 333

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Dr. Günter Seulen

Dr. Günter Seulen

PartnerAttorney

Konrad-Adenauer-Ufer 23
50668 Köln
T +49 221 2091 405
F +49 221 2091 333

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Till Liebau

Till Liebau

PartnerAttorney

Bockenheimer Landstraße 2-4
60306 Frankfurt am Main
T +49 69 707968 147
F +49 69 707968 111

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Sarah Scharf

Sarah Scharf

PartnerAttorney

Konrad-Adenauer-Ufer 23
50668 Köln
T +49 221 2091 408
F +49 221 2091 333

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Sebastian Gutmann

Sebastian Gutmann

AssociateAttorney

Konrad-Adenauer-Ufer 23
50668 Köln
T +49 221 2091 602
F +49 221 2091 333

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Philipp Heinrichs

Philipp Heinrichs

AssociateAttorney

Konrad-Adenauer-Ufer 23
50668 Köln
T +49 221 2091 654
F +49 221 2091 333

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Marcel Markovic

Marcel Markovic

AssociateAttorney

Bockenheimer Landstraße 2-4
60306 Frankfurt am Main
T +49 69 707968 146
F +49 69 707968 111

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Moritz Schmitz

Moritz Schmitz

AssociateAttorney

Bockenheimer Landstraße 2-4
60306 Frankfurt am Main
T +49 69 707968 216
F +49 69 707968 111

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