GERMANY Law and Practice Contributed by: Georg Linde and Kamyar Abrar, Willkie Farr & Gallagher LLP
8.4 Restrictions on Manager Shareholders It is customary for management shareholders in pri - vate equity transactions to agree to restrictive cov - enants such as non-compete, non-solicitation, and non-disparagement undertakings. These covenants are designed to protect the value of the investment and prevent managers from undermining the business post-departure or during a competitive process. These covenants are typically reflected in both the employment contract and the shareholders’ agree - ment. The employment contract outlines restrictions during the period of employment and for a limited time afterwards, while the shareholders’ agreement may impose wider constraints related to the ownership and sale of equity. German law imposes specific limits on enforceability, especially for post-termination non-competes: • post-employment non-compete clauses are enforceable only if they are appropriately limited (maximum two years) and accompanied by finan - cial compensation of at least 50% of total remu - neration; • non-compete clauses in shareholder agreements, especially for non-employee managers, may be broader and more flexible, but they must still be reasonable in scope, duration (usually max. two years), and geographic reach to be enforceable; • non-solicitation and non-disparagement clauses are generally enforceable if drafted and propor - tionate, particularly when tied to the protection of confidential information or legitimate business interests. In practice, restrictive covenants are a standard part of the overall management equity and employment package, but they must be carefully tailored to avoid invalidation under German labour or competition law. 8.5 Minority Protection for Manager Shareholders Minority protections for management shareholders are typically contractual and narrowly circumscribed. These may include limited veto rights over funda - mental matters such as amendments to the articles of association, capital restructurings, or changes to
the business purpose. However, broader governance rights, such as board representation or consent rights over exits, are rarely granted unless management holds a substantial stake or has significant negotia - tion leverage. Anti-dilution protections are not standard, but lately often granted in cases of significant reinvestment. Generally, the private equity sponsor retains full discretion over the exit process, with management required to cooperate and roll over equity when man - dated under the shareholders’ agreement. 9. Portfolio Company Oversight 9.1 Shareholder Control and Information Rights Private equity funds typically exert significant control over their portfolio companies through a combination of governance, contractual rights, and information asymmetry. Board Appointment Rights Private equity funds typically secure the right to appoint one or more members to the portfolio compa - ny’s board of directors or supervisory board, depend - ing on the jurisdiction and company structure. This enables the fund to actively influence the company’s strategic direction and oversee key operational deci - sions. Reserved Matters Requiring Shareholder Approval Private equity investors generally negotiate a wide range of reserved matters that require their prior con - sent before the company can proceed. These typically cover fundamental corporate actions such as changes to the capital structure, including: • share issuances, dividends, or buybacks; • major transactions like acquisitions, disposals, or significant investments; • the approval of annual budgets and business plans; • material financing arrangements; and • decisions relating to the appointment or dismissal of key executives.
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