GERMANY Law and Practice Contributed by: Michael Josenhans, Lucas Lengersdorf and Beatrice Zobel, Freshfields
granting or enforcement of such a guarantee/security would lead to a breach of capital maintenance rules ( Kapitalerhaltungsregeln ). 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 and Stock Corporations If the target is one of the mentioned corporate forms, the granting of security or guarantees is subject to the restrictions set out in 5.3 Downstream, Upstream and Cross-Stream Guarantees . 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 a pledge should be obtained. Ideally, the deletion of such provision is requested and implemented prior to, or at least shortly after, the execution of the pledge agreement. Other restric - tions, such as pre-emption or redemption rights are less common but could be included in the articles of association. German insolvency law provides for certain hardening periods which would especially need to be consid - ered in release-and-retake scenarios and distressed financings. For further details see 7.5 Risk Areas for Lenders . 5.6 Release of Typical Forms of Security All types of security mentioned in 5.1 Assets and Forms of Security can be released by way of a release agreement, which can be executed by simple signa - ture (ie, no notarisation is required in respect of the notarised security rights). The release of a land charge/mortgage needs to be entered into the land registry in order to become effec - tive. All other security rights cease to exist at the time agreed in the release agreement. The release of the pledges and assignments is usually (but need not be)
64 CHAMBERS.COM
Powered by FlippingBook