GERMANY Law and Practice Contributed by: Gregor von Bonin, Natascha Doll, Andreas Ruthemeyer, Stefan Schröder and Mirko Masek, Freshfields
This means a takeover offer or business combination cannot by law be conditional on the bidder obtain- ing financing. By contrast, in business combinations outside the WpÜG regime, financing conditions are generally permissible (though parties will often nev- ertheless request certainty of funds prior to any com- mitment or announcement of the transaction). 4.10 Types of Deal Protection Measures In Germany, target companies are generally more restricted in granting deal protection measures com- pared to some other jurisdictions, primarily due to the strict fiduciary duties of the management and supervi- sory boards to act in the company’s best interest and ensure equal treatment of shareholders. While measures like break-up fees and matching rights can technically be used, their effectiveness and enforceability are often debated and limited by German corporate law principles. Break-up fees, in particular, are uncommon and frequently regarded as ineffective or even unlawful if they unduly restrict the board’s ability to consider a superior offer. For a break-up fee to be enforceable, it must be modest and proportionate (typically not exceeding 1-3% of the transaction value), while serving the legitimate inter- est of the company, not primarily that of the bidder. Force-the-vote provisions in a merger context are not typical. Non-solicitation provisions (no-shop clauses) may be agreed but they usually include a “fiduci- ary out” which allows the boards to engage with a superior unsolicited offer if deemed required by their fiduciary duties. The target company’s boards must meticulously consider the offer and its terms to ensure they do not breach their obligations to act prudently and in the best interest of the company and all its shareholders. 4.11 Additional Governance Rights If a bidder cannot obtain 100% ownership of a tar- get company following a takeover offer, they can still secure significant governance rights to exert influ- ence and control without full ownership. A substantial shareholding, for example, typically entitles the bidder to vote for representation on the supervisory board in Germany’s two-tier board system. This allows the bid- der to participate in strategic oversight, to appoint and
dismiss management board members, and to approve major corporate transactions. A common mechanism in Germany to integrate a sub- sidiary into a group and effectively control its manage- ment and profit distribution is the so-called domina- tion and profit-and-loss transfer agreement between the bidder and the target company. Establishing this agreement requires a 75% share- holder approval at the general meeting of the target company. Under such an agreement, the controlling entity can pass instructions to the target’s manage- ment board and the target’s profits are transferred to the controlling entity, which in turn must cover any losses of the target. This provides a high degree of operational and financial control. In exchange, remaining minority shareholders are offered fair compensation and an annual dividend guarantee. Both consideration and annual compen- sation must be determined in a similar way as in the case of the squeeze-out (see 4.8 Squeeze-Out Mechanisms ), and the fairness of both elements must be assessed by a court upon request of any minority shareholder. 4.12 Irrevocable Commitments It is common for bidders in Germany to try and obtain irrevocable commitments from principal shareholders of the target company to tender their shares in the offer and support the transaction. These commitments provide the bidder with increased deal certainty, help reach minimum acceptance conditions, and signal strong shareholder support to the market. The nature of these undertakings can vary. Typically, they involve a contractual commitment to accept the tender offer or vote in favour of a merger. However, these commitments can provide an “out” if a clearly superior unsolicited offer emerges that the target company’s board, acting in its fiduciary duty, recommends to its shareholders; in some situations though, a bidder will have the leverage to avoid such an “out”, in particular if the target has run an auction to determine which bidder to support. In any event, the specifics of such “out” clauses are negotiated, typically allowing the shareholder to withdraw its com-
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