GERMANY Law and Practice Contributed by: Carsten Berrar, Florian Späth and Heiko Blaut, Sullivan & Cromwell LLP
dations for revenues, liabilities, employment terms, ongoing legal disputes, and IP rights. Financial due diligence centres on validating the completeness and accuracy of the company’s assumptions underlying its business plan, books and records and financial statements. Business due diligence explores the overarching eco - nomic outlook of the target company, examin - ing market trends, industry dynamics, growth opportunities, and revenue forecasts. In some instances (and unlike under, for exam - ple, US standard form NVCA documentation), founders assume personal liability for the repre - sentations and warranties made in transaction agreements. This liability is generally limited to the lower of: • the amount invested in the financing round; and • a cap equal to one to three times their annual salary. Representations tend to be subject to further restrictions such as “tipping baskets” . Unless an entire data room is deemed disclosed against the representations and warranties (which is market standard in German M&A practice), the company will table exceptions in a disclosure schedule, underpinning the critical role of man - agement in the due diligence process. 3.2 Process Timeline It typically takes between three and six months to raise a Series B round and the timeline is affect - ed by factors such as complexity of the business model, revenue potential, investor interest, legal set-up and macroeconomic conditions. In gen - eral, a preparation and planning phase (centred around Key Performance Indicators and finan - cial information) and the negotiation of financing
terms result in the entry into a non-binding term sheet or memorandum of understanding (MoU). Investors will conduct due diligence while, con - currently, long-form documentation such as subscription and shareholders agreements are negotiated. The process is typically significantly accelerated if the funding needs are covered by existing investors that have insights into the business due to (advisory) board representation and information rights. Relationship Between the Parties If a new investor enters the cap table, the role of existing investors in a financing round is typically limited in that they do not actively participate in or necessarily benefit from the results of the due diligence. That said, all investors’ consents are typically required in order to amend the share - holders’ agreement, which is the central docu - ment in most financing transactions. In terms of process, existing investors (and even all investors in early-stage financings) may share legal counsel to streamline and accelerate nego - tiations. In more sizeable rounds or structured transactions that involve a secondary compo - nent ( “exit opportunity” ), however, it is standard market practice to carefully review the need/ desire for separate legal counsel in light of pro - spectively (diverging) interests. Cost of counsel is less frequently charged to the company than is the case in many jurisdictions. Governance discussions typically evolve around exit rights and reserved matters/veto rights for commercially relevant measures, such as capi - tal increases or amendments to the articles of association (AoAs). With deviations from the “one share, one vote” principle rarely relevant in practice, the statutory default super-majority requirement of 75% for significant measures,
217 CHAMBERS.COM
Powered by FlippingBook