GERMANY Law and Practice Contributed by: Carsten Berrar, Florian Späth and Heiko Blaut, Sullivan & Cromwell LLP
that equity-based incentives are the critical tool of aligning stakeholder interest in a start-up and therefore should be available in adequate quan- tum.
those who did exercise their ROFR are entitled to acquire the residual ( “unexercised” ) shares in a second round, set within a specific timeframe; (ii) only if the ROFRs are not fully exercised for all shares subject to the sale in such second round, may the selling shareholder then proceed in a transaction with a third party, which sale would still be subject to existing co-sale rights. Tag-Along Rights Co-shareholders would typically have the right to demand from the selling shareholder that the sale be only carried out if their shares are (reflec - tive of their pro rata stake in the company) sold alongside the selling shareholders’ shares and subject to the same conditions. If the co-sale requirements are not complied with, there is no obligation to consent to the sale and the shares remain subject to existing transfer restrictions. Drag-Along Rights Co-shareholders may compel the sale of shares under predetermined conditions. Often, so- called drag-along rights are not confined to share deals, but extend to other exit routes, notably change-of-control transactions that take the form of mergers or the divestiture of sub - stantially all assets (asset deal). However, share deals remain the most prevalent form of M&A transaction in the German marketplace and drag rights are primarily geared towards this situation. While drag-along rights are usually contingent upon obtaining a qualified majority, there are occasionally drag sales granted as a unilateral option – eg, in scenarios where key milestones have not been met. Notwithstanding the con - tractual position, enforcement of drag rights in practice may be challenging and depend on management’s willingness to endorse, or at least permit, an orderly sales process which may be
6. Exits 6.1 Investor Exit Rights Share Transfer Restrictions
To safeguard existing shareholders, a GmbH’s publicly available AoAs typically incorporate transfer restriction clauses ( Vinkulierung ), a vio - lation of which will render a purported transfer null and void. These clauses reflect requirements set out in the shareholders’ agreement and may either restrict the transfer of shares without the company’s authorisation or bestow pre-emptive rights to existing shareholders or the company (redemption at a discount). Pre-Emptive Rights/Right of First Refusal (ROFR) A shareholder seeking to dispose of shares is under market standard shareholders’ agree - ments obligated to offer its shares to sharehold - ers (albeit not – as tends to be the case in other jurisdictions – the company) for their acquisition in proportion to their relative stakes in the com - pany at the conditions offered by a third party within a specified acceptance period ( Andie- nungspflicht ). These rights tend to be structured as so-called “Rights of First Refusal – ROFR” , which permit existing shareholders to take “last look” and not only to put forth a price they would be willing to pay; this would then set the floor for a third-party transaction (so-called right of first offer). Rights of first Refusal can be structured in a mul - ti-stage process: (i) unless all existing sharehold - ers have exercised their ROFR in a first round,
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