GERMANY Trends and Developments Contributed by: Anselm Lenhard and Philipp Büchler, LARK
Key documentation Acquisition financings in Germany are typically documented by a facilities agreement, an inter- creditor agreement or subordination agreement, and security agreements for each asset class over which security is being granted. Given the international lender/investor base for this type of financing, facilities agreements and intercreditor agreements for acquisition financ- ings in the mid-market segment are usually drafted in English and based on Loan Market Association (LMA) forms, adjusted to German law and further adapted to reflect the specifics of the transaction and the requirements of the target group’s business. In the case of sponsor- backed transactions, agreed sponsor prece- dents are also frequently used, which provide for more borrower-friendly terms than the cus- tomary LMA template. In line with this approach, the borrower’s counsel also usually drafts the facilities agreement and the intercreditor agree- ment in these transactions. In the German small- and lower mid-cap seg- ment, facilities agreements and intercreditor/ subordination agreements are often in the Ger- man language and, while generally following the structure of LMA facilities agreements, are in abbreviated form. The documentation is usually drafted by the lender’s counsel in this segment. The drafting dynamic may also shift in distressed or special situations where interested lenders will be fewer and therefore have a stronger bar- gaining position, to ensure that their counsel takes the lead on tighter and more prescriptive documentation. Unless the acquisition financing is for a strategic buyer who obtains financing for the acquisition on the back of the consolidated balance sheet of
the existing group, the closing security package of the acquisition financing for a German target usually consists of three items. • Share pledges: a typical acquisition struc- ture consists of two German limited liability companies where the holding company ( “HoldCo” ) grants a pledge over its shares in the acquisition company ( “AcquiCo” ), ensur - ing a single point of enforcement for the lend- ers at this level as the lenders’ most impor- tant security. As it is possible under German law to grant pledges over future rights, the AcquiCo will also grant a pledge over the shares in the target, which it will acquire upon completion of the acquisition. • Account pledges: in addition, both the Hold- Co and the AcquiCo have to grant pledges over their bank accounts, which require notice to the account bank(s) to be valid. • Security assignment of receivables: the HoldCo and the AcquiCo also have to grant security over their receivables under share- holder/intra-group loans by way of security assignment, and the AcquiCo customarily has to assign its potential receivables against the vendor under the acquisition agreement, against due diligence report providers, and against insurers (in particular, under any war- ranty and indemnity insurance obtained for the acquisition, if applicable) as security. The security package to be granted by the tar- get group after completion of the acquisition depends on various factors, such as the lend- ers’ risk appetite, the potential default risks and the asset heaviness of the target group. It can range from just strategic security (ie, pledges over the shares in material subsidiaries, account pledges by material subsidiaries and security assignments of intra-group loans by material subsidiaries) to security over all (or substantially
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