GERMANY Law and Practice Contributed by: Carsten Berrar, Florian Späth and Heiko Blaut, Sullivan & Cromwell LLP
many, the most frequently observed key docu - mentation includes: • Investment and shareholders’ agreement ( Beteiligungs- und Gesellschaftervereinba- rung ): both agreements are either combined or entered into as separate contracts. The investment agreement outlines the primary investment amount and corresponding own - ership stake purchased by each investor in the financing round. It specifies the form and timing of fund disbursement to the company; additionally, milestone agreements may be established, linking the release of investment tranches to the achievement of specific goals by the company. Typically, the shareholders’ agreement covers governance matters – eg, board composition, shareholder majorities and exit rights (IPO, tag- and drag-along rights). Since the investment and share - holder’s agreement, in addition to the obliga - tion to carry out a capital increase, regularly includes provisions to share assignments, pre-emption rights, co-sale rights and obliga - tions or vesting regulations, it does require notarisation in the case of start-ups operating as an Entrepreneurial Company (with limited liability ( Unternehmergesellschaft (haftungs- beschränkt ), or UG) or GmbH. • Articles of association: the independent regulatory content of the AoAs is limited, as all essential agreements between founding shareholders and VC investors are typically addressed in the investment-and sharehold- ers’ agreement. Nonetheless, the articles remain a mandatory component of VC invest - ment documentation, and are publicly filed with the commercial register. The AoAs are renegotiated and adopted in each financing round to align with the investor’s participation and to ensure consistency with the share - holders’ agreement. The resolution of the
shareholders’ meeting to amend the AoAs requires notarisation. • Corporate resolutions, which are necessary for capital increases and the exclusion of existing shareholders’ subscription rights, are resolved upon by the shareholders’ meeting and need to be notarised (Section 55 of the Act on Limited Liability Companies ( Gesetz betreffend die Gesellschaften mit beschränk - ter Haftung , or GmbHG)). By making use of authorised capital (Section 55a GmbHG), the shareholders can empower the management of the company in advance, under certain conditions and within certain limits, to decide on the increase of the share capital by issuing new shares to existing or new VC investors. This allows for the swift collection of addi - tional equity when needed. The resolution requires a majority of 75% of the sharehold - ers for a GmbH (75% of the capital repre - sented for an AG). • Preliminary documentation in an initial stage of a transaction includes non-disclosure agreements and term sheets/MoUs. Typical contents of a term sheet are agreements on the investment amount, the valuation of the start-up and investor rights (eg, veto rights Statutory subscription rights entitle existing shareholders (by default) to subscribe for a pro rata number of newly issued shares in any capi - tal increase. Additional anti-dilution protection, notably in a down-round scenario, is imple - mented by providing (additional) subscription/ pre-emption rights within the shareholders’ agreement. Around 50% of investors require anti-dilution clauses in early-stage investments. The most common form of anti-dilution protection is the and liquidation preference). 3.5 Investor Safeguards
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