GERMANY Law and Practice Contributed by: Michael Josenhans, Anouschka Zagorski and Christina Banz, Freshfields
5.3 Downstream, Upstream and Cross- Stream Guarantees It is generally possible for any entity to provide down- stream, upstream and cross-stream guarantees or security. However, if the guarantee/security provider is a Ger- man limited liability company or a limited partnership with a limited liability company as its general part- ner, upstream and cross-stream guarantees/security may result in personal and criminal liability for the managing directors, to the extent that the granting or enforcement of such a guarantee/security would lead to a breach of capital maintenance rules ( Kapitalerh- altungsregeln ). The capital maintenance rules prohibit the direct and indirect repayment (where this term includes pay- ments pursuant to guarantees or security in favour of obligations of a direct or indirect shareholder) of the registered share capital of a German limited liability company to its shareholders. Accordingly, by way of so-called limitation language in the respective guaran- tee/security document, enforcement of an upstream and/or cross-stream guarantee/security will be lim- ited (subject to certain exceptions) if and to the extent that payments under the guarantee or enforcement of the security would directly or indirectly cause the net assets ( Reinvermögen ) of the guarantee/security pro- vider (or, in the case of a partnership, the net assets of the respective general partner) to fall below the amount of its respective registered share capital and, hence, to create personal or criminal liabilities for the management directors. If there is a stock corporation ( Aktiengesellschaft or Societas Europaea ) involved, the general prohibition of repayment of contributions ( Verbot der Einlagen- rückgewähr ) under the German Stock Corporation Act ( Aktiengesetz – AktG) also warrants designated language, aimed at limiting enforcements of upstream and cross-stream security in such cases. 5.4 Restrictions on the Target The granting of guarantees, securities or financial assistance is not generally prohibited under German law but is subject to certain restrictions, depending on
the legal form of the target, to the extent that it quali- fies as a payment to the shareholders of the target. Restrictions for Limited Liability Companies and Limited Partnerships If the target is a limited liability company or a limited partnership with a general partner that is a limited liability company, the granting of security or guaran- tees is subject to the capital maintenance rules set out in 5.3 Downstream, Upstream and Cross-Stream Guarantees . Restrictions for Stock Corporations If the target is a stock corporation, capital mainte- nance rules provided in the AktG generally strictly pro- hibit payments to shareholders that qualify as a return of capital, unless a fully recoverable repayment claim against the shareholder(s) exists. Solutions There is no white-wash procedure in Germany, though the following procedures are – subject to certain requirements being met – usually implemented to avoid the legal consequences potentially arising from a breach of capital maintenance rules: • inclusion of so-called limitation language in the financing documentation (see 5.3 Downstream, Upstream and Cross-Stream Guarantees ); • a so-called debt push-down – ie, an assumption of the debt by the target company; • a merger ( Verschmelzung ) of the target with the acquisition vehicle; or • the conclusion of a domination and/or profit and loss transfer agreement ( Beherrschungs- und/oder Ergebnisabführungsvertrag ) between the target and its shareholder(s). 5.5 Other Restrictions The articles of association of entities to be pledged sometimes include provisions requiring the approval of all shareholders for pledges and/or a sale of any shares ( Vinkulierungsklausel ). In such cases, share- holder consent for the pledge and for a potential future enforcement of such pledge should be obtained. Ide- ally, the deletion of such provision is requested and implemented prior to, or at least shortly after, the execution of the pledge agreement. Other restric-
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