Private Equity in Deutschland [PDF]

Corporate Finance Transactions under German Law: Private and Capital Markets Transactions Lectures, Lomonossov State University Moscow 7 – 11 November 2016

Prof. Dr. Dr. Jan-Hendrik Röver, LL.M. (LSE), FRSA 1

Introduction Part 1: Fundamentals of investment banking and corporate finance Part 2: Fundamentals of German law Part 3: Specific types of transactions

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Introduction 1: Lecturer

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Introduction 2 • Course syllabus  Part 1: Fundamentals of investment banking and corporate finance  The notions of investment banking and corporate finance  The story of investment banking and corporate finance  Economic fundamentals of corporate finance  General framework  Legal sources  Due diligence  Part 2: Fundamentals of German law

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Introduction 3  Part 3: Specific types of transactions

 Mergers & Acquisitions – Private transactions – Capital markets (public) transactions  [Private Equity]  Acquisition financing – Bank financing – Capital markets financing  Project financing – Bank financing – Capital markets financing  Securitisation 5

Introduction 4 • Limitations  So-called M&A- and corporate finance business, not capital markets business  Mainly perspective of German law (partly perspective of English law)  No tax issues • Goal  After the lecture series participants shall be able to analyse in legal terms the types of transactions discussed during the lectures • Significant part of the work of large law firms, companies and financial institutions (notably banks)

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Introduction 5 • Investment banking is integral part of business studies  So far it has received little attention in legal training • Note study offers at law faculties:  Augsburg University  English law at the University of London (King‘s College / Queen Mary College)

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Introduction 6 • Legal understanding of investment banking complicated by two issues:  Economic terminology (e.g. junk bonds, mezzanine financing)  Adaptation of Anglo-American legal thinking und terminology (e.g. sale and purchase agreement) • Teaching approach  Systematic approach (not just adaptation of terms used in practice)  Clear distinction between contractual and proprietary issues in the context of a „sale“ of companies (as required by German law)  Comparative law approach: may help to improve understanding of Russian law!  Implementation in practice  Economic background taken into account 8

Introduction 7 • Lecture materials will be shared via the homepage  Print 2 slides per page!

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Introduction 8 • Lecture times: 7 November until 10 November 2016  Monday, 7 November  2.45 pm - 4.15 pm (room 214B)  4.30 pm - 6.00 pm (room 314B)  Tuesday, 8 November  10.45 am - 12.15 am (room 125B)  12.30 am - 14.00 pm (room 125B)  Wednesday, 9 November  9.00 am - 10.30 pm (room 225B)  10.45 am - 12.15 pm (room 225B)  Thursday, 10 November  9.00 am - 10.30 am (room 110B)  10.45 am - 12.15 pm (room 110B) 10

Bibliography 1: Legal sources • Schönfelder, Deutsche Gesetze. Sammlung des Zivil-, Straf- und Verfahrensrechts, Munich (lose-leaf)  For English translations e.g. of BGB see the website of the German Federal Ministry of Justice and Consumer Protection (www.gesetzeim-internet.de/englisch_bgb) • Beck-Texte im dtv, Bankrecht (with an introduction by Franz Häuser), 42th ed. (Munich 2015) • Sir Roy Goode, Herbert Kronke, Ewan McKendrick and Jeffrey Wool (eds.), Transnational Commercial Law. International Instruments and Commentary, 2nd ed. (Oxford 2012)  See also collection of legal instruments without commentary (Oxford 2007)

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Bibliography 2: German banking law 1 • Ann-Kristin Achleitner (ed.), Handbuch Investment Banking, 3rd ed. (Wiesbaden 2002) • Ann-Kristin Achleitner and Georg F. Thoma (eds.), Handbuch Corporate Finance: Konzepte, Strategien und Praxiswissen, 2nd ed. (Cologne 2002) • Stephan Eilers, Nils M. Koffka and Marcus Mackensen (eds.), Private Equity. Unternehmenskauf - Finanzierung - Restrukturierung – Exitstrategien, 2nd ed. (Munich 2012) • Bernd Fahrholz, Neue Formen der Unternehmensfinanzierung. Unternehmensübernahmen, Big ticket-Leasing, Asset Backed- und Projektfinanzierungen (Munich 1998)  Announced for 2017: Fahrholz, Röver and Meissner, Formen des Unternehmenskaufs und der Unternehmensfinanzierung, 2nd ed. (Munich) 12

Bibliography 3: German banking law 2 • Thorwald Hellner and Stephan Steuer (eds.), Bankrecht und Bankpraxis (BuB), 5 vols., Cologne (lose-leaf)  Formerly: Bankgeschäftliches Formularbuch edited by Erich Trost  I.a. Andreas Früh/Constanze Müller-Arends • Heinz-Josef Hockmann and Friedrich Thießen (eds.), Investmentbanking, 3rd ed. (Stuttgart 2012) • Jörg Risse, Florian Kästle and Olaf Gebler, M & A und Corporate Finance von A-Z (Munich 2006) • Jan-Hendrik Röver, Vergleichende Prinzipien dinglicher Sicherheiten. Eine Studie zur Methode der Rechtsvergleichung (Munich 1999) • Jan-Hendrik Röver, Secured Lending in Eastern Europe (Oxford 2007)

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Bibliography 4: German banking law 3 • Jan-Hendrik Röver, Kreditfinanzierung, in: Ulf R. Siebel, Jan-Hendrik Röver and Christian Knütel (eds.), Rechtshandbuch Projektfinanzierung und PPP, 2nd ed. (Cologen, Munich 2008), pp. 581-710 • Jan-Hendrik Röver, Realsicherheiten und Direktvereinbarungen, in: ibid., pp. 762-812 • Herbert Schimansky, Hermann-Josef Bunte and Hans-Jürgen Lwowski (eds.), Bankrechts-Handbuch, 2 vols., 4th ed. (Munich 2011)  Excellent für banking law issues; less illuminating for corporate finance business • Hans-Peter Schwintowski (ed.), Bankrecht. Commercial Banking – Investment Banking, 4th ed. (Cologne, Berlin, Bonn and Munich 2014) • Klaus Spremann and Pascal Gantenbein, Finanzmärkte, 3rd ed. (Constance, Munich 2014)  Economic introduction to financial markets 14

Bibliography 5: Model contracts 1 • Beck’sches Formularbuch Bürgerliches, Handels- und Wirtschaftsrecht (edited by Michael Hoffmann-Becking and Alexander Gebele), 12th ed. (Munich 2015) • Florian Kästle and Dirk Oberbracht, Unternehmenskauf - Share Purchase Agreement (Beck‘sche Musterverträge vol. 49) (Munich 2005) • Klaus J. Hopt (ed.), Vertrags- und Formularbuch zum Handels-, Gesellschafts- und Bankrecht, 4th ed. (Munich 2013)

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Bibliography 6: Model contracts 2 • Münchener Vertrags-Handbuch (edited by Rolf A. Schütze and Lutz Weipert), vols. 2-4: Wirtschaftsrecht I-III, 6th ed. (Munich 2006-2009); Münchener Vertrags-Handbuch (edited by Gerrit Langenfeld), vols. 5-6: Bürgerliches Recht I, II, 6th ed. (Munich 2007) • Wolfgang A. Münchow, Andreas Striegel and Thomas A. Jesch, Management Buy-Out (MBO) (Beck‘sche Musterverträge vol. 59), (Munich 2008) • Christoph H. Seibt (ed.), Beck‘sches Formularbuch Mergers & Acquisitions, 2nd ed. (Munich 2011) • Carl Wurm, Hermann Wagner and Hugo Zartmann (ed.), Das Rechtsformularbuch, 17th ed. (Cologne 2015)

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Bibliography 7: International business law • Wolfgang Fikentscher, Wirtschaftsrecht, vol. I: Weltwirtschaftsrecht, Europäisches Wirtschaftsrecht, vol. II: Deutsches Wirtschaftsrecht (Munich 1983) • Herbert Kronke, Werner Melis and Hans Kuhn (eds.), Handbuch Internationales Wirtschaftsrecht, 2nd ed. (Munich 2016) • Patrick Ostendorf and Peter Kluth (eds.), Internationale Wirtschaftsverträge, 2nd ed. (Munich 2016)

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Bibliography 8: English banking law 1 • David Adams, Banking and Capital Markets 2015 (CLP Legal Practice Guides) (Guildford 2015) • Anu Arora, Banking Law (Harlow 2014) • Colin Bamford, Principles of International Financial Law, 2nd ed. (Oxford 2015) • Joanna Benjamin, Financial Law (Oxford 2008) • Allen N. Berger, Philip Molyneux and John O. Wilson (eds.), The Oxford Handbook of Banking (Oxford 2015) • Christoph Graf von Bernstorff, Einführung in das englische Recht (Munich 2011) • Jan Hendrik Dalhuisen, Dalhuisen on Transnational, Comparative Commercial, Financial and Trade Law, 3 vols., 5th ed. (Oxford, Portland/Oregon 2013) 18

Bibliography 9: English banking law 2 • E.P. Ellinger, E. Lomnicka and C. Hare, Ellinger's Modern Banking Law (Oxford 2010) • Eilis Ferran and Look Chan Ho, Principles of Corporate Finance Law, 2nd ed. (Oxford 2014) • Geoffrey Fuller, The Law and Practice of International Capital Markets, 3rd ed. (Edinburg 2012) • Louise Gullifer and Jennifer Payne, Corporate Finance Law. Principles and Policy, 2nd ed. (Oxford, Portland/Oregon 2015) • Andrew Haynes, The Law Relating to International Banking. Law and Practice (Hayward Heath 2010) • Ewan McKendrick, Goode on Commercial Law, 4th ed. (London 2010) • Joan Wadsley and Graham A. Penn, Law and Practice of Domestic Banking, 2th ed. (London 2000) 19

Bibliography 10: English banking law 3 • Graham Penn and Andrew Haynes, Law and Practice of International Banking, 2nd ed. (London 2002)  See also Andrew Haynes • Mark Hapgood (ed.), Paget's Law of Banking, 14th ed. (London 2014) • Alastair Hudson, The Law of Finance, 2nd ed. (London 2013) • Andrew McKnight, The Law of International Finance (Oxford 2008) • Colin Paul and Gerald Montagu, Banking and Capital Markets Companion, 6th ed. (Oxford 2014) • Dan Prentice and Arad Reisberg (eds.), Corporate Finance Law in the UK and EU (Oxford 2011) • Charles Proctor, The Law and Practice of International Banking, 2nd ed. (Oxford 2015) • Ravi Tennekoon, The Law and Regulation of International Finance (London 1991) 20

Bibliography 11: English banking law 4 • Volker Triebel, Martin Illmer, Wolf-Georg Ringe, Stefan Vogenauer and Katja Ziegler, Englisches Handel- und Wirtschaftsrecht, 3rd ed. (Heidelberg 2012) • Volker Triebel and Stefan Vogenauer, Englisch als Vertragssprache (Cologne 2015) • Philip R. Wood, Law and Practice of International Finance (London 1980) • Philip R. Wood, International Finance, 7 Bde., 2. Aufl., London 2007  3rd ed. announced for 2017-2018  See also: The Law and Practice of International Finance. University Edition, London 2007 (one volume) • Philip R. Wood, Maps of World Financial Law, 6th ed. (London 2008) • Richard Wight, Warren Cooke and Richard Gray, The LSTA's Complete Credit Agreement Guide (New York etc. 2009) 21

Bibliography 12: European banking law 1 • Sue Wright, The Handbook of International Loan Documentation, 2nd ed. (Houndmills 2014) • Robert Baldwin, Martin Lodge and Martin Cave (eds.), The Oxford Handbook of Regulation (Oxford 2012) • Jens-Hinrich Binder and Christos Gortsos, The European Banking Union. A Compendium (Munich 2015) • Giuseppe Boccuzzi, The European Banking Union. Supervision and Resolution (Houndmills 2015) • Danny Busch and Guido Ferrarini (eds.), European Banking Union (Oxford 2015) • Juan E. Castañeda, David G. Mayes and Geoffrey Wood (eds.), European Banking Union. Prospects and Challenges (London 2015) • Ross Cranston, Principles of Banking Law, 2nd ed. (Oxford 2002)  3rd ed. has been announced for some time 22

Bibliography 13: European banking law 2 • Peter Derleder, Kai-Oliver Knops and Heinz Georg Bamberger (eds.), Handbuch zum deutschen und europäischen Bankrecht, 2nd ed. (Berlin, Heidelberg 2008) • Horst Eidenmüller, Mathias Habersack and Lars Klöhn, European Banking Regulation (Munich)  Announced for March 2017 • Eilis Ferran, Niamh Moloney and Jennifer Payne (eds.), The Oxford Handbook of Financial Regulation (Oxford 2015) • Matthias Haentjens and Pierre de Gioia-Carabellese, European Banking and Financial Law (London 2015) • Matthias Herdegen, Bankenaufsicht im Europäischen Verbund/Banking Supervision Within the European Union (Berlin, New York 2010) • Niamh Moloney, EU Securities and Financial Markets Regulation, 3rd ed. (Oxford 2016) 23

Bibliography 14: European banking law 3 • Christoph Ohler, Bankenaufsicht und Geldpolitik in der Währungsunion (Munich 2014) • Thomas Martin Pflock, Europäische Bankenregulierung und das „Too big to fail-Dilemma“ (Berlin 2014) • Anton K. Schnyder, Europäisches Banken- und Versicherungsrecht (Heidelberg 2005)

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Introduction Part 1: Fundamentals of corporate finance 1. The notions of investment banking and corporate finance 2. The story of corporate finance 3. Economic fundamentals of corporate finance 4. General framework 5. Legal sources 6. Due diligence

Part 2: Fundamentals of German law Part 3: Specific types of transactions

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Layman‘s view of investment banking

Gordon Gekko, Wall Street (actor: Michael Douglas, real life model: Ivan Boesky)

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Terminology 1 • Institutional notion of investment banking: type of bank  Investment banking (US) or merchant banking (UK)  US-American investment bank: traditionally only advisory of corporates  British merchant bank: Corporate advisory and corporate finance-, other investment banking, portfolio management and several other bank services  Commercial Banking (US) or Clearing Banks (UK) provide general banking services such as payment services and lending  In Germany traditionally universal bank principle

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Terminology 2

Investment bank (US) Issuer/ Borrower

Bank and capital market

Investor Capital offering

Capital demand Lender

Saver

Commercial bank

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Terminology 4 • Functional notion of investment banking: term on function  Today the notion of „investment banking“ covers  Specific types of advisory services to companies (e.g. sell-side or buy-side M&A)  All types of structured financings of corporates (i.e. special types of financings of corporates in contrast to traditional financings of corporates) and  Structured capital markets products (which may ultimately also be offered to private clients)

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Investment banking transactions 1

M&A

Financing

Advice on acquisition Structured Financing, in and sale of particular companies - Acquisition financing Advice in defence - Project Measures financing

Capital markets (sales & trading)

Equity capital markets

Risk management

Derivatives

Debt capital markets

Research - Equity - Fixed income (debt)

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Hierarchy in investment banks

Managing Director Executive Director/ Director/Senior Vice President Associate Director/Vice President – 3 years Associate – 3 years

Analyst – 3 years Titles vary from institution to institution 31

Economic functions of investment banking 1 • Investment banking achieves financial intermediation • Financial intermediaries have  Function of capital collection  Traditional US investment banks used to arrange only collection of capital without providing capital themselves  Function of capital distribution  Financial sector is a „truth mechanism of society“ (Christian von Weizsäcker)  Function of risk distribution

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Economic functions of investment banking 2 • Global financing has important functions  Financing of large companies  By way of capital collected  At relatively low costs  Facilitates distribution of risks • Empirical proof  Countries with large financial industries in 1960 grew in the following three decades more quickly than those without  Cf. Martin Wolf, Fixing Global Finance (New Haven 2008)  This relationship should not be falsified even following the financial crisis of 2008

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Financial system in modern market economies: Commercial bank and other financial intermediaries • Capital allocation in market economies largely by financial intermediaries (credit institutions and „shadow banks“), in particular Credit institution (bank), § 1 (1) 2 No. 2 KWG = most investment ”banks”

Investment funds, KAG*

Financial companies (Finanzunternehmen) = financial transactions, § 1 (3) KWG

(Life)Insurance companies, Insurance Supervision Act (VAG)

VC-/Private equity funds, § 1 (3) sentence 1 No. 1 KWG

Pension funds, § 112 (2) VAG

Endowments (e.g. US university endowments), Endowment Acts of Federal States

Hedge funds, §§ 1 (3) sentence 1 No. 5 KWG, 283 KAG

Sovereign wealth funds (e.g. Norway, Russia, Singapore)

(Single oder Multi) Family offices

Financial service institute = capital market services, § 1 Ia KWG

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Introduction Part 1: Fundamentals of corporate finance 1. The notions of investment banking and corporate finance 2. The story of corporate finance 3. Economic fundamentals of corporate finance 4. General framework 5. Legal sources 6. Due diligence

Part 2: Fundamentals of German law Part 3: Specific types of transactions

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Leading international investment banks 1 • Barclays Capital (GB) • Bear Sterns (USA) (2008 acquired by JP Morgan) • Citigroup (nicht: Citibank = former brand of Citigroup’s German private customer business) (Salomon Smith Barney) (USA) • Credit Suisse (formerly CSFB) (CH) • Deutsche Bank (GER) • Donaldson, Lufkin & Jenrette Inc. (USA) • Dresdner Kleinwort Wasserstein (GER), since 2008 part of Commerzbank group • Goldman Sachs (USA) (in 2008 became bank holding company) • Hambros (GB) (today part of Société Générale) • JP Morgan Chase (USA) • JP Morgan Cazenove (GB) 36

Leading international investment banks 2 • Lazard (F) • Lehman Brothers (USA) (2008 insolvency protection pursuant to Chapter 11; parts aquired by Barclays and Nomura) • Merrill Lynch (USA) (2008 acquired by Bank of America) • Morgan Stanley Dean Witter (USA) (in 2008 became bank holding company) • N M Rothschild and Sons (GB) • Nomura International (J) • Sal. Oppenheim (GER) (since 2009 part of Deutsche Bank group) • Schroders (GB) (today part of Citigroup) • UBS Warburg (CH)

• Note group of so-called bulge bracket banks: largest investment banks 37

Leading international investment banks 3

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International financial markets 1 • Investment banking is international business  It is based on deregulated financial markets • Centralisation of international financial markets (and the main seats of investment banks)  New York (“Wall Street”)  London (“City of London”)  Tokyo  Hong Kong  Singapore

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International financial markets 2 • In addition a number of regionally important financial markets  Moscow  Frankfurt  Paris  Zurich  Mailand  Shanghai

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Investment legends 1 • Investments  Warren Buffett (Berkshire Hathaway)  Pupil of Benjamin Graham  „Intrinsic value“  Bruce Wasserstein („bid them up Bruce“) • Investment funds  Sir John Templeton (Templeton „Growth“ Fund)  Value strategy (developed by Benjamin Graham; applied by Warren Buffett)  Peter Lynch (Fidelity Magellan Fund since 1975)  Growth strategy 41

Investment legends 2 • Bond funds  Bill Gross (Pimco Total Return Fund) • Private equity funds  Stephen Schwarzman (Blackstone)

 Sir Ronald Cohen (Apax)

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Investment legends 3 • Hedge funds  George Soros (Quantum Fund 1969)  John Alfred Paulson (Paulson & Co. Inc.)

• Portfolio composition  David Swensen (Chief Investment Officer Yale University)

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Bibliography 1 • General books  Jonathan Barron Baskin and Paul J. Miranti Jr., A History of Corporate Finance (Cambridge 1999)  Niall C. Ferguson, The Cash Nexus. Money and Power in the Modern World 1700-2000 (London 2001)  Niall C. Ferguson, The Ascent of Money. A Financial History of the World (London 2008)  Fritz Stern, Gold and Iron. Bismarck, Bleichröder, and the Building of the German Empire (New York 1991)  Daniel Yergin and Joseph Stanislaw, The Commanding Heights. The Battle Between Government and the Marketplace That Is Remaking the Modern World (New York 1998)

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Bibliography 2 • M&A  Robert Slater, The Titans of Takeover (New York 1999)  Bruce Wasserstein, Big Deal. Mergers and Acquisitions in the Digital Age (Boston 2001)  Stanley Foster Reed, Alexandra Lajoux and H. Peter Nesvold, The Art of M&A. A Merger Acquisition Buyout Guide, 4th ed. (2007)  Brett Cole, M&A Titans. How the Pioneers of Wall Street‘s Mergers and Acquisitions Industry Shaped the Corporate World (New York 2008)  Robert F. Bruner, Applied Mergers and Acquisitions (New York 2004)  Robert F. Bruner, Deals from Hell. M&A Lessons that Rise Above the Ashes (New York 2015) 45

Excesses and scandals of investment banking („power‘s dark side“) 1 • Speculation („putting all one's eggs into one basket“)  Junk Bonds (1980er): Michael Milken and Drexel Burnham Lambert – junk is junk!  The end of an investment bank (1990): Nick Leeson

and Baring’s Bank - US$ 1.2 billion loss on currency derivatives  Yasuo Hamanaka, the king of copper

trading (1996): US$ 2 billion loss

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Excesses and scandals of investment banking („power‘s dark side“) 2  The end of a hedge fund (1998): LTCM

(Long-Term Capital Management, John Meriwether; directors included nobel price laureates Myron S. Scholes and Robert C. Merton)  Jérôme Kerviel, Société Générale (Januar 2008): € 4.9 billion loss -

the all time winner for trading losses  With a bank internal trading authorization for 200-300 DAX futures contracts up to 150,000 contracts

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Excesses and scandals of investment banking („power‘s dark side“) 3  Georg Funke/Gerhard Bruckermann (HypoRealEstate/DePfa)

(2008): the big refinancing gamble – costs to „tax payer“ of € 19.1 billion until 2010

 Kweku Mawuli Adoboli, UBS (2011):

trading speculations led to a loss of US$ 2.3 billion 48

Excesses and scandals of investment banking („power‘s dark side“) 4 • Deception  The stock market bubble and the role of technology analysts and IPO specialists (1990ies until 2000): Jack Benjamin Grubman (Salomon Smith Barney/ Citigroup) and Frank Quattrone (CSFB) – how to create value where there is none!  Jordan Belfort, Stratton Oakmont (1998)   

Investment fraud Film adaptation as „Wolf of Wall Street“ Now working as motivational trainer!

 Enron (2001): Andrew Fastow and his bankers

(Citigroup) and accountants (Arthur Andersen) – how to hide your debt! 49

Excesses and scandals of investment banking („power‘s dark side“) 5  WorldCom (2002): Bernard (“Bernie”) Ebbers – how to inflate your

sales and to create growth!

 Bernard (“Bernie”) L. Madoff, Madoff Investment Securities LLC –

the largest Ponzi-scheme of all times (2008)  US$ 50 billion estimated investor losses  Failure of supervisory bodies

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Excesses and scandals of investment banking („power‘s dark side“) 6 • Insider trading  Ivan Boesky, Ivan F. Boesky & Company  Insider trading  Model for „Gordon Gekko“ from the film „Wall Street“  Raj Rajaratnam, Galleon Group – insider trading of a hedge fund (2009)  Previously one of the largest hedge funds in the world (US$ 7 billion)  Sentencing of Raj Rajaratnam to a prison sentence in 2011

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Excesses and scandals of investment banking („power‘s dark side“) 7 • Risk cumulation and system failure  US-American mortgage loans (more precisely: loans secured by land mortgages) of low quality („sub-prime mortgages“) and the global transfer of risks via mortgage-backed securities, MBS  Global market deterioration since 2007 which amounted to a full-scale financial crisis

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Bibliography 1 • Geraint Anderson, Cityboy. Beer and Loathing in the Square Mile (London 2008) • Alexander Hagelüken and Harald Freiberger, Die großen Spekulanten. Märchenhafte Gewinne und gigantische Verluste (Munich 2009) • Michael Lewis, Liar’s Poker. Rising Through the Wreckage on Wall Street (London 1990) • Frank Partnoy, F.I.A.S.C.O. The Inside Story of a Wall Street Trader (London 1998) • Hans-Werner Sinn, Kasino-Kapitalismus. Wie es zur Finanzkrise kam, und was jetzt zu tun ist (Düsseldorf, Vienna, New York 2009)

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Bibliography 2 • Specifially on financial crises:  John Kenneth Galbraith, A Short History of Financial Euphoria (London 1990)  Charles P. Kindleberger and Robert Z. Aliber, Maniacs, Panics, and Crashes. A History of Financial Crises, 6th ed. (New York, Chichester, Brisbane, Toronto, Singapore 2011)  Carmen M. Reinhart and Kenneth S. Rogoff, This Time is Different. Eight Centuries of Financial Folly (New Yersey 2009) • Note for the psychological foundations of misjudgements:  Dietrich Dörner, Die Logik des Misslingens. Strategisches Denken in komplexen Situationen (Reinbek 1989)

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Introduction Part 1: Fundamentals of corporate finance 1. The notions of investment banking and corporate finance 2. The story of corporate finance 3. Economic fundamentals of corporate finance 4. General framework 5. Legal sources 6. Due diligence

Part 2: Fundamentals of German law Part 3: Specific types of transactions

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Foundations of modern investment banking • Three fundamental developments  Financial mathematics  Investors  Financial techniques

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Regulatory system 1: Levels of supervisory bodies and fora

International fora

European fora

National (e.g. German) fora and public authorities (UK) / agencies (US)

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Regulatory system 2: International financial markets supervision G8 (formerly G6 and G7) / G20 Not: United Nations / WTO International Monetary Fund (IMF), Washington D.C. Managing Director: Christine Lagarde Macroeconomic studies (e.g. Global Financial Stability Report)

Joint Forum, Basel (at BIS) Bank for International Settlements (BIS), Basel General Manager: Jaime Caruana

NGO

Financial Stability Board (FSB, 2009), Basel (at BIS) (formerly Financial Stability Forum [FSF, 1999]); members are supervisory agencies; prepares proposals

Institute of International Finance (IIF)

Securities Industry and Financial Markets Association (SIFMA), New York

Basel Committee on Banking Supervision, BCBS, Basel (at BIS) Proposals for banking supervision (capital adequacy, liquidity) Chairman: Stefan Ingves

International Organization of Securities Commissions, (IOSCO), Madrid

Committee on the Global Financial System (CGFS), Basel (at BIS)

International Swaps and Derivatives Association, Inc. (ISDA), New York

Eurofi (think tank), Paris/ Brussels

International Association of Insurance Supervisors (IAIS), Basel (at BIS)

Committee on Payment and Settlement Systems (CPSS), Basel (at BIS)

International Accounting Standards Board (IASB), London

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Regulatory system 3: European financial markets supervision (previous institutions) European Council Economic and Financial Committee (ECOFIN): Ministers (UK: Secretaries) of Economy and Finance of the Member States Financial Stability Table of ECOFIN: larger group

Commission (Jean-Claude Juncker, Luxembourg) Pierre Moscovici, Michel Barnier, France France Directorate General (DG) Internal Market and Services European Banking Committee (EBC) (formerly Banking Advisory Committee) at the European Commission in Brussels

Directorate General (DG) Economic and Financial Affairs

Committee of European Banking Supervisors (CEBS), London

Margrethe Vestager, Denmark Directorate General (DG) Competition

Committee of European Securities Regulators (CESR), Paris

Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS), Frankfurt

Note also Committee on Economic and Monetary Affairs (ECON) of the European Parliament

Europeans System of Central Banks (ESCB): Banking Supervision Committee (BSC)

European Central Bank (ECB), Frankfurt

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Regulatory system 4: European financial markets supervision (new institutions since ab 2010/2011) European System of Financial Supervisors (ESFS) at ECB in Frankfurt European Banking Committee (EBC) (formerly Banking Advisory Committee) at the European Commission in Brussels

Steering committee European Systemic Risk Board (ESRB), at ECB in Frankfurt

European Banking Authority (EBA), London (successor of CEBS)

European Securities Authority (ESA), Paris (successor of CESR) • also supervision of rating agencies

European Insurance and Occupational Pensions Authority (EIOPA), Frankfurt (successor or CEIOPS)

European System of Central Banks (ESCB): Banking Supervision Committee (BSC)

European Central Bank (ECB), Frankfurt

• Uniform application of EU financial markets regulation in EU • Mediation between national supervisory agencies • Implementation until end 2010 Note also Committee on Economic and Monetary Affairs (ECON) of the European Parliament

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Regulatory system 5: German financial markets supervision (Note: so far no European or global banking supervision)

Federal Ministry of Finance (BMF)

Competition control

Banking supervision

* Federal Financial Supervisory Authority (BAFin), Bonn/Frankfurt

Official measures of banking supervision

German Federal Bank (Deutsche Bundesbank), Frankfurt

Operational banking supervision

Allocation of competences pursuant to § 7 KWG and 2002 Agreement and EU-Supervisory Regulation and German Supervisory Regulation 2013 It was agreed in coalition negotiations 2009 that banking supervision shall be done exclusively by the German Federal Bank in future

ECB Advice Promotion of cooperation (with ESCB Banking Supervision Committee) Advice on financial market stability Promotion of payment systems, 127 (2) AEUV Artt. 127 (4), (5) AEUV, 25.1 ESCB Articles

Deposit guarantee fund (Einlagensicherungsfonds), Berlin Reviews financials of members

European agencies and courts: Commission (Directorate General Competition)

General Court (formerly Court of First Instance) Court of Justice of the European Union

German agencies and courts: BKartA LG OLG BGH

Credit institutions (banks) / Financial services institutes / Financial institutes * Legal and substantive supervision, § 2 FinDAG

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Bibliography 1 • General books  Peter L. Bernstein, Capital Ideas. The Improbable Origins of

Modern Wall Street (New York 1993)  Peter L. Bernstein, Against the Gods. The Remarkable Story of Risk (New York 1996)  Peter L. Bernstein, Capital Ideas Evolving: The Improbable Origins of Modern Wall Street, 2nd ed. (New York 2007)  Burton G. Malkiel, A Random Walk down Wall Street. The TimeTested Strategy for Successful Investing, 11th ed. (New York 2016)

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Bibliography 2 • Behavioural economics  George A. Akerlof and Robert J. Shiller, Animal Spirits (Princeton, Oxford 2009)  Pete Lunn, Basic Instincts. Human Behaviour and the New Economics (London 2010)  Critical with respect to inherent paternalism: Gilles Saint-Paul, The Tyranny of Utility (Princeton, Oxford 2011); supportive: Cass R. Sunstein, Why Nudge? The Politics of Libertarian Paternalism (New Haven 2014)

63

Introduction Part 1: Fundamentals of corporate finance 1. The notions of investment banking and corporate finance 2. The story of corporate finance 3. Economic fundamentals of corporate finance 4. General framework 5. Legal sources 6. Due diligence

Part 2: Fundamentals of German law Part 3: Specific types of transactions

64

Issues of investment banking covered in the lecture: shareholding, assets and corporate finance

Shareholder

Shares Assets

Liabilities

Current assets

Financial liabilities - Bank liabilities - Provisions

Fixed assets

„Share deal“

„Asset deal“

Equity

Loan 65

Introduction Part 1: Fundamentals of corporate finance 1. The notions of investment banking and corporate finance 2. The story of corporate finance 3. Economic fundamentals of corporate finance 4. General framework 5. Legal sources 6. Due diligence

Part 2: Fundamentals of German law Part 3: Specific types of transactions

66

Legal sources 1 • International conventions  United Nations Convention on Contracts for the International Sale of

Goods (CISG, 1980)  Always contracted out in practice  Cf. Sir Roy Goode, Herbert Kronke, Ewan McKendrick and Jeffrey Wool (eds.), Transnational Commercial Law. International Instruments and Commentary, 2nd ed. (Oxford 2012) • National (e.g. German) law, in particular  Contract law  Property law  Company law  Conflict of laws rules

67

Legal sources 2 • Model agreements  Model agreements of the Loan Market Association (LMA) for agreements under English law which have been drafted by the British Bankers‘ Association, the Association of Corporate Treasurers und several law firms  Leveraged Term Sheet  Senior Multicurrency Term and Revolving Facilities Agreement  Users Guide to Form of Facility Agreement for Leveraged Finance Transactions  There are now also model agreements for other European laws (e.g. German and French law)  Model agreements of the US-American Loan Syndications and Trading Association (LSTA) for contracts pursuant to the law of New York 68

Abbreviations / Glossary of terms 1 • BGB = Bürgerliches Gesetzbuch (Civil Code) • GmbHG = Gesetz betreffend die Gesellschaften mit beschränkter Haftung (Act on Private Limited Liability Companies) • GWB = Gesetz gegen Wettbewerbsbeschränkungen (Competition Act) • HGB = Handelsgesetzbuch (Commercial Code) • InsO = Insolvenzordnung (Insolveny Act) • KAG = Kapitalanlagegesetzbuch (Investment Act) • KWG = Kreditwesengesetz (Banking Act)

69

Abbreviations / Glossary of terms 2 • UmwG = Umwandlungsgesetz (Reorganisation Act) • VAG = Versicherungsaufsichtsgesetz (Insurance Supervision Act) • ZPO = Zivilprozessordnung (Act on Civil Procedure)

• For English translations e.g. of BGB see the website of the German Federal Ministry of Justice and Consumer Protection (www.gesetze-iminternet.de/englisch_bgb)

70

Introduction Part 1: Fundamentals of investment banking and corporate finance 1. The notions of investment banking and corporate finance 2. The story of corporate finance 3. Economic fundamentals of corporate finance 4. General framework 5. Legal sources 6. Due diligence 6.1 Business due diligence and company valuation 6.1.1 Functions of due diligence 6.1.2 Types of due diligence 6.1.3 Documents for financial due diligence 6.1.4 Documents for other types of due diligence 6.1.5 Company valuation 6.1.6 Financial ratio analysis 6.2 Legal due diligence and agreement drafting

71

Functions of due diligence • Collection of information prior to a transaction  Valuation of a company  Financing of a company

• Identification of risks and weaknesses of a transaction  May be mitigated by conditions precedent, warranties, indemnities, guarantees and other types of security • Transparency and documenting a transaction for the purposes of providing evidence  Contract party cannot claim it has not been advised of existing facts and risks in a sufficient manner  May be relevant for civil liability  E.g. disclosure letter containing a limitation of liability

72

Types of due diligence 1 • Due diligence with different interests, e.g.  Seller (vendor‘s due diligence): identification of factors which may lower valuation, increase of investor interest  Buyer (buyer‘s due diligence)  Strategic buyers – Due diligence focused on opportunities and risks  Financial buyers – Due diligence focused on opportunities and risks but also potential for later sale (exit)  Financing banks  Focus on risks • Practical rule: first due diligence then contract drafting  In practice often not taken into account

73

Types of due diligence 2 • Specific types of due diligence  Commercial / market due diligence = market situation (in particular market, competition, business model, differentiation [unique selling proposition = USP])  Financial due diligence = financial situation of the company (based on the company‘s bookkeeping)  Legal due diligence = legal situation of the company  E.g. licences  Integrity / compliance due diligence = uncovering criminal and corrupt structures  Tax due diligence = tax situation of the company

74

Types of due diligence 3  Environmental due diligence = environmental situation of the

company  Insurance due diligence = risk protection of the company  Management due diligence = qualification of top management  Particular cases  Technical due diligence = e.g. status of equipment  Geological due diligence = e.g. reserves of a natural resources company

75

Documents for financial due diligence 1 • Analysis of past  Financial statements (in particular balance sheets and profit and loss accounts) together with auditors‘ reports covering the last three business years  Single financial statement and, where applicable, group financial statement  Financial statements of subsidiaries (>50% of shares) and affiliates ( Competition process > Clearing Preparation closing accounts

Signing

Rarely: effective date prior to closing

Typically: closing = effective date -Purchase price payment -In rem transfer

183

Asset deal agreement – purchase price 1 • Purchase price is matter of negotiations  Is based on company valuation  Also a function of competition for company acquisition • Purchase price arrangements  Fixed purchase price, possibly in instalments or deferred payment (see below due date)  Rare for large transactions  However, negative purchase price which is paid by the seller in restructuring cases  Purchase price formula (normal case)  Cf. over (next slide)

184

Asset deal agreement – purchase price 2

Discounted cash flow (discounted at weighted cost of equity and debt)

enterprise value

1

interest bearing debt

2

net debt

cash & cash equivalents

3

4

equity value

5

Equity value provides orientation for purchase price of 100% of the assets/the shares (without purchase price adjustment)

1

Enterprise value; „cash and debt free“

2

./. Interest bearing debt * I.a. loans * I.a. pension liabilities

3

+ Liquid assets (cash, account balances and securities [cash and cash equivalents])

4

= Net debt

5

= Equity value Thereafter: positive or negative deviation of net working capital

185 185

Asset deal agreement – purchase price 3  Variable purchase price, i.e.

 Sometimes purchase price payment under condition precedent (§ 158 (1) BGB) or different due dates, § 271 (2) BGB  Basic models – Success-oriented improvement of purchase price (earn out) – Warranty retention in trust account (Treuhandkonto)  Purchase price improvement (earn out) – Part of the purchase price is paid depending on future company success (typically in ordinary course of business)

186

Asset deal agreement – purchase price 4  Vendor‘s loan, § 488 BGB

 Can economically also be provided by payment of purchase price in instalments (= initial deferral [anfängliche Stundung], § 311 (1) BGB of the purchase price payment)

187

Asset deal agreement – purchase price 5  Possibly payment of money combined with provision of shares in

buyer company  Purchase price can only be paid in money pursuant to §§ 453 (1) case 2, 433 (2) case 1 BGB  If assets other than money are performed the transaction is (partly) barter (Tausch), §§ 480, 433 BGB  Possibly (partly) performance of assets (asset swap)  Not sale but barter, §§ 480, 433 BGB

188

Asset deal and statutory warranty liability – overview 1 Breach of contract (e.g. information at contract formation)

Pre-contractual breach of contract: c.i.c., §§ 280 (1), 311 (2) No. 2, 241 (2)

Breach of contract post contract formation

Prior to transfer of risk: § 280 (1)

Post transfer of risk: §§ 453 (1) case 2, 437/435 189

Asset deal and statutory warranty liability – overview 2

Pre-contractual phase [Initiation of contract negotiations (Vertragsanbahnung), § 311 (2) No. 1 BGB]

Prevailing opinion – in principle:

Conclusion sale agreement, § 433 BGB

Transfer of risk, §§ 453, 446 = transfer date under sale agreement

Contract negotiations (Vertragsverhandlung), § 311 (2) No. 2 BGB

Claim in damages for breach of pre-contractual obligations (c.i.c.), §§ 280 (1), 311 (2) No. 2, 241 (2)

Exceptions: •No quality deficit (Beschaffenheitsmangel) •Intent (Arglist and Vorsatz) •Duties to provide advice

Claim in damages for breach of contract, § 280 (1)

Claim in damages for breach of warranty, §§ 453 (1) case 1 or 2, 437 No. 3 case 1, 434 (1), 280 (3), 281 (1), (2), 280 (1), 440 + Claim in damages for breach of pre-contractual obligations (c.i.c.), §§ 280 (1), 311 (2) No. 2, 241 (2)

190

Asset deal and statutory warranty liability – overview 3 Supplementary performance, §§ 453 (1) case 2, 437 No. 1, 439 case 1 BGB (removal of deficit or delivery of object of sale without defect) or Rescission, §§ 453 (1) case 2, 437 No. 2 case 1, 440, 323, 326 (5) BGB, if defect is material (§ 323 (5) sentence 2 BGB)

Reduction of purchase price, §§ 453 (1) case 2, 437 No. 2 case 2, 441 (4) BGB

and

Restitution (Rückabwicklung), §§ 346 et seqq. BGB

or

or

Claim in damages, §§ 325, 280 et seqq. BGB

Claim in damages, §§ 453 (1) case 2, 437 No. 3 case 1, 280 (1), 440/ 281 (1), (2), 283, 311a BGB

Reimbursement of expenses, §§ 453 (1) case 2, 437 No. 3 case 2, 284 BGB

or („Large“) claim in damages instead of performance for deficit damages, §§ 280 (3), 281, 280 (1), 440 BGB, if deficit is material (§ 281 (1) sentence 3 BGB)

(„Small“) claim In damages for deficit damages, §§ 280 III, 281, 280 I, 440 BGB, if defect is not material (§ 281 I 3 BGB)

Possibly claim in damages for related or consequential deficit damages (Mangelfolgeschäden), § 280 I BGB / § 823 I BGB

191

Asset deal and statutory warranty liability – overview 4 Asset deal Effect on the company

Company sale, § 453 (1) case 2 BGB

Single asset

Sale of things (Sachkauf), § 433 No (direct) liability for defects in the company

Defect in the quality (§ 434 BGB) of the company: § 437 BGB Source: Stephan Lorenz

Violation of information obligations (other circumstances than defect in the quality): §§ 280 (1), 241 (1), 311 (2) BGB 192

Asset deal and statutory warranty liability – assessment scheme 5 • Applicability  Issue: Applicability warranty liability to company sale (asset deal), § 453 (1) case 2 BGB  Minority opinion: (-) with company sale; rather culpa in contrahendo, §§ 280 (1), 311 (2) No. 1, 241 (2) BGB – In contradiction to wording of § 453 BGB; in contradiction government justification; requires teleological reduction of § 453 (1) case 2 BGB for which there is no lacuna in the act (Canaris, Handelsrecht, § 8 n. 23)  Prevailing opinion: company sale is sale of „other assets“ (sonstiger Gegenstände), § 453 (1) case 2 BGB – Company and parts of the company (more precisely: the contained assets) can be „other assets“ (sonstige Gegenstände) of the sale pursuant to § 453 (1) case 2 BGB – Sale law is in principle exclusively applicable from the time of transfer of risk, § 434 BGB 193

Asset deal and statutory warranty liability 6 • Uncertainties of statutory warranty liability  Application of provisions to company sale by courts is not yet certain  Regulatory differences between c.i.c., § 280 (1) BGB and statutory warranty liability not major any longer with respect to statute of limitation (mostly 2 or 3 years) – However: pursuant to c.i.c. no liability for unknown deficits (unerkannte Mängel) since seller does not act with fault (Vertretenmüssen) pursuant to § 280 (1) BGB  Uncertainty with respect to all relations of the company (Umweltbeziehungen) (indirect qualities of the company)  Criterion to define warranty liability „company as such (Unternehmen als solches) imprecise

194

Asset deal and statutory warranty liability 7  Fault for claim in damages if damage „beyond performance“

(Schadensersatz neben der Leistung (i.a. related and consequential damages [Begleit- und Folgeschäden])  Many company sales can lead to quality or legal deficit and thus to legal consequences from §§ 453 (1) case 2, 437 BGB  Instruments are, however, not suited to company sale (in particular restitution (Rückabwicklung) of the company sale or damages instead of performance)  Note: legislator opined positively on suitability of sales law following the reform; practice feels quite differently

195

Asset deal and seller‘s contractual warranty liability 1 • Statutory warranty liability is replaced by contractual warranty system because the former is not appropriate; therefore,  Exclusion of statutory claims and replacement by contractual liability system  Quality and legal deficits, §§ 453 (1) case 2, 437 BGB  Breaches of duty – Pre-contractual, §§ 280 (1), 311 (2), (3), 241 (2) BGB – Post formation of contract, before transfer of risk, § 280 (1) BGB (non or bad performance)

196

Asset deal and seller‘s contractual warranty liability 2  Disruption of the foundation of the contract (Geschäftsgrundlage, clausula rebus sic stantibus), § 313 BGB  Statutory provisions related to rescission or termination of contract in another way, §§ 323-326, 346 et seqq. BGB

197

Asset deal and seller‘s contractual warranty liability 3 • Limitations of liability exclusion:  Deception with intent (arglistige Täuschung), § 123 BGB/§§ 453 (1) case 2, 444 case 1 BGB  Damage with intent (vorsätzliche Schädigungen), §§ 826, 823 (2) sentence 1 BGB in connection with § 263 StGB • Exclusion of liability pursuant to §§ 453 (1) case 2, 444 case 2 BGB  Legal nature: counter-defence of buyer  Pursuant to § 444 case 2 BGB the seller cannot raise a contratual liability exclusion to the extent that […] a quality guarantee has been assumed by the seller

198

Asset deal and seller‘s contractual warranty liability 4 Warranty declarations

Quality/warranty guarantees, §§ 453 (1) case 2, 443

„Independent“ guarantee (formerly § 311 I)

Seller‘s quality declarations (Beschaffenheitserklärungen), §§ 453 (1) case 2, 434 (1) sentences 1, 2 case 1; partly contractual legal consequences defined different from the act

„Non-independent“ „guarantee“ (extension of seller‘s liability) 199

Asset deal and ancillary obligations (covenants) 1 • Duties to act or omit (Handlungs- und Unterlassungspflichten), e.g. to terminate certain agreements or to enter into new agreements only with approval of the buyer • Cases  No notice to existing employees/employment of new employees  Adjustments following transfer date under sale agreement  Payments to the seller or buyer: payment to be made  Liability of the seller or buyer: indemnity (Freistellung) (= claim) – If the legal situation is unclear (e.g. potential tax liabilities which are not yet determined by a tax audit)  Payment of expenses for the benefit of the buyer

200

Asset deal and ancillary obligations (covenants) 2  Obligation of the seller not to change or to bring about the

company‘s quality until the transfer date under sale agreement  Consequence of a breach: liability system agreed in the sale and purchase agreement  Notices (continuation of company‘s name [Firma], notice to commercial register etc.)  Public announcements (e.g. press announcement) • Consequences of a breach:  In principle liability system agreed in the sale and purchase agreement  Penalty clause (Vertragsstrafe, § 339 BGB)

201

Overview: company sale and value changes 1 • Options to deal with legal and economic risks which may lead to value changes  Fundamental principle: „the general company risk arising from the business activity of the company is borne by the respective economic owner and holder of control, i.e. the seller for the past before and the buyer for the future after the transfer date under sale agreement“ (Walter Günther, Unternehmenskauf, in: Münchener Vertrags-Handbuch)

202

Overview: company sale and value changes 2  Due diligence

 Seller‘s most important tool!  Condition subsequent to/covenant in the sale and purchase agreement, § 158 (1) BGB: duty perform subsequent improvement (Nachbesserungsverpflichtung) for identified risks  Purchase price  Subsequent reduction of purchase price (separate subsequent calculation) – Occurence of deficit and amount can be determined with certainty  Variable purchase price, i.e. – Success-oriented improvement of purchase price (earn out) – Warranty retention in trust account (Treuhandkonto) 203

Overview: company sale and value changes 3  Warranty guarantees, §§ 453 (1) case 2, 443 (1) case 1 BGB or

seller‘s quality declarations (Verkäufer-Beschaffenheitserklärungen), §§ 453 (1) case 2, 434 (1) sentences 1, 2 case 1 BGB create responsibility of the seller for non-existance or non-realisation of a risk (negative declarations; Negativerklärungen); consequence of a breach is either a contractual guarantee liability (Garantiehaftung) or a statutory warranty liability (Gewährleistungshaftung)  Occurence of deficit possible, timing is not yet determined  Indemnities (Freistellungsregelungen), § 311 (1) BGB with respect to claims of third parties vis-à-vis the seller  Indemnity of the buyer: occurence of the deficit is not certain  Ultimately: assumption of risk by the buyer

204

Asset deal and other and general provisions 1 • Other provisions  Provisions on time limit (Verjährung)  Contractual time limit – Rescission (Rücktritt): short preclusion period (Ausschlussfrist) – All claims: unitary time limit and in partciular clear definition of final date of time limit (§§ 163, 158 (2) BGB) – Note: no shortening of statute of limitation in advance for intentional breach of duty (vorsätzliche Pflichtverletzung), § 202 (1) BGB

205

Asset deal and other and general provisions 2 • General provisions  Possibly clarification of relationship with general terms and conditions (allgemeine Geschäftsbedingungen = AGB)  Exclusion of pre-contractual arrangements  Possibly choice of law (Art. 3 Rom I-VO, previously Art. 27 EGBGB old version)  Note: national court applies always its own conflict of laws rules – Certain shield can be achieved by arbitration clause since arbitration courts usually apply the law chosen by the parties

206

Asset deal and other and general provisions 3  Jurisdiction clause (Gerichtsstandsklausel), § 38 ZPO or arbitration

clause (Schiedsklausel) (also possible directly in sale and purchase agreement, § 1029 (2) case 2 ZPO)  Ad-hoc arbitration: Establishment without assistance of an external body – Procedural law: ICC Rules, UNCITRAL Arbitration Rules  Institutional arbitration – Deutsche Institution für Schiedsgerichtsbarkeit (DIS), Cologne – International Chamber of Commerce (ICC), Paris – London Court of International Arbitration (LCIA) – American Arbitration Association (AAA), New York City

207

Asset deal and other and general provisions 4  Clause on written form (Schriftformklausel)  Safeguarding clause (salvatorische Klausel)

 Agreement remains valid even if it is partly not valid (Teilnichtigkeit), § 139 BGB  Replacement provisions (Ersetzungsregelung) for invalid contractual provisions • Signatures (sometimes initialling of other pages) • Annexes

208

In rem transfer of rights and asset deal • Principle of specificity (Spezialitätsprinzip)  Each asset is transferred by a separate agreement and thus transaction! • Each type of asset follows its respective rules on transfer  Movable thing, §§ 929 et seqq. BGB  Immovable thing, §§ 873 (1) first half the sentence case 1, 925 BGB  Receivable, § 398 sentence 1 BGB  Other rights, insb. §§ 413, 398 sentence 1 BGB  Receivables, rights and duties (see below)

209

Assessment scheme for proprietary transactions (dingliche Rechtsgeschäfte) Analysis method for transfers (Verfügungsaufbau) • • • •

•

Agreement (Einigung) Making public (Publizität): transfer of possession, substitute for transfer of possession, registration (not just filing) Still in agreement at time of completion of making public (Einigsein) (cf. § 929 sentence 1 BGB/§ 873 (2) BGB) Power (Berechtigung) • Ownership • Power of disposition (Verfügungsmacht) • Possibly good faith acquisition Invalidating defences against in rem right

Analysis method for defences (Einwendungsaufbau) – Extension of the analysis method for transfers • Analysis method for transfers (requirements for acquisition, without invalidating defences) + • No loss of in rem right + • Defences against in rem right • Invalidating defence • Terminating defence • Refusing defence

210

Assumption of liabilities 1: overview • Liberating assumption of debt (befreiende [privative] Schuldübernahme), §§ 414 et seq. BGB • Assumption of contract (Vertragsübernahme), customary law (further development of the law beyond the act [gesetzübersteigende Rechtsfortbildung]) • Assumption of performance (Erfüllungsübernahme) (so-called pseudocontract for the benefit of third persons [unechter Vertrag zugunsten Dritter]), §§ 329, 415 (3) BGB 

Rule of interpretation (Auslegungsregel) § 415 (3) BGB

• Indemnity [Freistellung] of buyer from debts as between the parties (Innenverhältnis), § 311 (1) BGB 

If legal situation is ambiguous (e.g. potential tax liabilities which have not yet been determined by a tax audit [Betriebsprüfung])

211

Assumption of liabilities 2: overview 

If indemnity is agreed contractually the term is „indemnity“ (Freistellung) and not „release“ (Befreiung); in the context of legal claims the term is often „release“ (Befreiungsansprüche) (vgl. § 257 BGB)  Also indemnity of seller, § 311 (1) BGB

• Contractual accession to agreement (rechtsgeschäftlicher Vertragsbeitritt), § 311 (1) BGB • Contractual accession to debt by buyer (rechtsgeschäftlicher [kumulativer] Schuldbeitritt [Schuldmitübernahme] des Käufers), § 311 (1) BGB

212

Assumption of liabilities 3: Liberating assumption of debt, §§ 414 et seq. BGB Case 1: Agreement between creditor and transferee (Übernehmer), § 414 BGB Buyer of Contract (Schuld- Seller of §§ 453, 433 company vertrag) Contractual company assets = partner = creditor assets = debtor transferee Assumption of debt, § 414

Case 2: Agreement between debtor and transferee (Übernehmer), § 415 BGB

Contract (SchuldVertrag)

Contractual partner = creditor

Seller of company assets = debtor

§§ 453, 433

Assumption of debt, § 415

Approval creditor to debt assumption, § 415 (1) sentence 1

Buyer of company assets = transferee

213

Assumption of contract and asset deal: transfer of receivables, rights and obligations 1 Case 1: Tri-party agreement on assumption of contract (Vertragsübernahmevertrag) Buyer of Seller of §§ 453, 433 company Contract company Contract assets = partner assets transferee Assumption of contract between contract partner, seller of company and buyer of company

Case 2: Bi-party agreement on assumption of contract (Vertragsübernahmevertrag)

Contract

Contract partner

Seller of company assets

§§ 453, 433 Assumption of contract

Buyer of company assets = transferee

Approval of contract partner to assumption of contract, § 415 (1) sentence 1 by way of analogy

214

Assumption of performance, §§ 329, 415 (3) BGB 1

Contract partner

Contract

Seller of company assets

§§ 453, 433

Assumption of performance, §§ 329, 415 (3)

Buyer of company assets = performance transferee

• Situation:  No liberating assumption of debt (befreiende Schuldübernahme), no contractual assumption of contract (rechtsgeschäftliche Vertragsübernahme)  Hence, no change in the contractual parties

215

Indemnity of buyer from debts 1

Contract partner = creditor

Contract

Seller of company assets = debtor = person indemnifying (Freistellender)

§§ 453, 433 Assumption of debt/contract, § 415

Buyer of company assets = indemnified person (Freigestellter)

Indemnity agreement (Freistellungsvereinbarung), § 311 (1)

• Constellation if buyer is indemnified: 

 

Buyer has assumed liabilities (Verbindlichkeiten) from seller (i.e. liberating assumption of debt [befreiende Schuldübernahme] or contractual assumption of contract [rechtsgeschäftliche Vertragsübernahme])  If legal situation is unclear (e.g. potential tax liabilities which are not yet determined by a tax audit [Betriebsprüfung]) Hence, change of contract parties Under English law an indemnity is a promise made by the seller to reimburse the buyer in respect of a specific liability, should it arise 216

Contractual accession to agreement, § 311 (1) BGB 1 Case 1: Agreement between initial and acceeding contract partner Contract partner

Contract

Seller of company assets = initial contract partner

§§ 453, 433 Accession to agreement (Vertragsbeitritt), § 311 (1)

Buyer of company assets = acceeding person = new contract partner

Case 2: Agreement between acceeding person and contract partner Contract partner

Contract

Seller of company assets = initial contract partner

§§ 453, 433

Buyer of company assets = acceeding person = new contract partner

Accession to agreement (Vertragsbeitritt), § 311 (1)

217

Contractual accession to debt by buyer, § 311 (1) BGB 1 Case 1: Agreement between initial debtor and acceeding debtor Contract partner = creditor

Contract

Seller of company assets = initial debtor

§§ 453, 433 Accession to debt (Schuldbeitritt), § 311 (1)

Buyer of company assets = acceeding person = new debtor

Case 2: Agreement between acceeding debtor and creditor Contract partner = creditor

Contract

Seller of company assets = initial debtor

§§ 453, 433

Buyer of company assets = acceeding person = new debtor

Accession to debt (Schuldbeitritt), § 311 (1)

218

Statutory transfer/assumption of an employment agreement (§ 613a BGB) 1

Employee (Arbeitnehmer)

Employment agreement (Arbeitsvertrag), Seller of § 611

company assets = company

§§ 453, 433

Buyer of company assets = assuming person

Statutory assumption of employment agreement (gesetzlicher VertragsÜbergang), § 613a

219

Statutory transfer/assumption of an employment agreement (§ 613a BGB) 2 [E.g. claim to salary (Arbeitslohn), §§ 611 BGB, 615, 613a (1) sentence 1 BGB] • Liability (Haftung)  Creation (e.g. existing employment agreement)  Termination  Enforceability

220

Statutory transfer/assumption of an employment agreement (§ 613a BGB) 3 • Transfer of liability (Haftungsüberleitung)  Purpose: protection of employment agreement (Bestandsschutz) combined with protection against dismissal (Kündigung) pursuant to § 613a (4) BGB  Requirements  Applicability: is it possible to exclude § 613a BGB contractually? (-), since § 613a (1), (2), (4) sentence 1 mandatory (zwingendes) law (teleological interpretation of law)  Employment agreement, § 611 BGB  Business (Betrieb)  Transfer (Übergang) of the business  By way of contract (durch Rechtsgeschäft)

221

Statutory transfer/assumption of an employment agreement (§ 613a BGB) 4  Legal consequences

 Legal transfer of the rights and obligations under the employment agreement (statutory transfer/assumption of an employment agreement; wording in company sale contract: „assumes“ [tritt ein]), § 613a (1) sentence 1 BGB  Collective bargaining agreements (Tarifverträge) are not transferred pursuant to § 613a BGB  Counter-defence (Gegeneinwendung) of the employee against dismissal (Kündigung) by the employer, § 613a (4) sentence 1 BGB (Kündigungsverbot)  Information (Unterrichtung) of all employees affected by the transfer, § 613a (5) BGB  Right to object (Widerspruchsrecht) if the information has been deficient, § 613a (6) BGB 222

Statutory transfer/assumption of an employment agreement (§ 613a BGB) 5 • Political assessment  § 613a BGB is seen as problematic in the context of a company‘s insolvency since the transfer of employees may render the acquisition of a company unattractive  Note: unitary provision in European Union (regulation!)  Note further: employment and qualification companies (Beschäftigungs- und Qualifizierungsgesellschaften, BQG) for restructuring prior to insolvency, rescue company (Auffanggesellschaften) following insolvency

223

Participation of workers‘ council • Transfer of business (Betriebsübergang) pursuant § 613a BGB does not have to be approved by workers‘ council (Betriebsrat) • Information and approval of the workers‘ council are, however, necessary if there is a change of business (Betriebsänderung) pursuant to § 111 sentence 1 BetrVG, if  Extensive dismissals on operational grounds (betriebsbedingte Kündigungen) by the buyer  Separations (Spaltungen) pursuant to UmwG  Split-up (Aufspaltung), § 123 (1) UmwG  Split-off (Abspaltung), § 123 (2) UmwG  Hive down (Ausgliederung), § 123 (3) UmwG

224

Purchaser‘s liability under § 25 HGB

§ 25 (1) sentence 1 HGB

§ 25 (1) sentence 2 HGB

Situation: creditor has receivable against company (old) and claims against company (new)

Situation: debtor has debt against company (old), performs, however, to company (new)

Solution: Extension of liability (Haftungserweiterung) by statutory accession to debt (gesetzlicher Schuldbeitritt) by company (new), § 25 (1) sentence 1 HGB

Solution: performance (§ 362 (1) sentence 1 BGB) due to legal fiction/ irrebuttable presumption (Fiktion) of power to receive performance (Forderungszuständigkeit) of company (new), § 25 (1) sentence 2 HGB

In practice excluded by notice in commercial register

In practice excluded by notice in commercial register 225

Merger control and asset deal 1 • Three pillars of competition law (UK)/antitrust law (US):  Prohibition of horizontal and vertical agreements (Kartellverbot) (Art. 81 EG; § 1 GWB)  Horizontal: prohibition of practices which restrict competition between competitors at same level of value chain  Vertical: prohibition of practices which restrict competition between non-competitors (e.g. manufacturer/trader)  Prohibition of abuse of a dominant position (Art. 82 EG; §§ 19-21 GWB)  Requirement is i.a. the dominant market position  Purpose: Protection of purchasers (Abnehmer) and competitors from abuse of a dominant market position  Merger control (Zusammenschlusskontrolle) (Art. 2 Merger Regulation [Fusionskontrollverordnung = FKVO]; 36 GWB) 226

Merger control and asset deal 2 • German merger control (§§ 35-43 GWB)  Purpose: protection from the creation or reinforcement of a dominant market position or from the material decrease of competition through mergers  Applicability  Merger not subject to EU merger control  Merger requirements (Zusammenschlusstatbestand), § 37 GWB  [Acquisition of at least 25% of the shares (equity or voting rights) or]  Acquisition of all the assets or a substantial part of the assets of a company, § 37 (1) sentence 1 No. 1 GWB or  The direct or indirect control or  An influence on another company which is material from a competition point of view 227

Merger control and asset deal 3  Hence: not only for „mergers“ (Zusammenschlüssen/Fusionen) in a narrow sense  Notice requirement (Anmeldepflicht) if revenue limits are exceeded, § 35 GWB  Company‘s total global revenues are >€ 500 million and  At least one of the companies has revenues in Germany of > € 25 million, §§ 35 (1), 39 GWB  No notice requirement if  An independent company with global revenues of less than € 10 million merges with another company (de minimis clause, § 35 (2) No. 1 GWB) or  The market concerned had a volume of less than € 15 million for the past 5 years (market de minimis clause, § 35 (2) No. 2 GWB) 228

Merger control and asset deal 4  The merger is noticeable (spürbar) in the German market  Legal consequences

 Invalidating defence against proprietary transaction: invalidity because of prohibition on implementation pursuant to competition law, § 41 (1) sentence 2 GWB  Fine (Bußgeld), § 81 (1) No. 7 GWB

229

Merger control and asset deal 5 • European merger control (Fusionskontrolle) (Merger Regulation [Fusionskontrollverordnung, FusKontrVO])  Merger (Zusammenschluss): acquisition of [indirect or] direct control by acquisition of assets, Art. 3 (1) lit. b case 2 Merger Regulation  Hence: not only for „mergers“ (Zusammenschlüssen/Fusionen) in a narrow sense  Obligation to notify (Anmeldepflicht) if  Companies‘ global revenues >€ 5 billion and  EU wide revenues of at least two companies each >€ 250 million, Art. 1 (2) Merger Regulation

230

Merger control and asset deal 6  Also obligation to notify if

 Companies global revenues >€ 2.5 billion and  Total revenues in at least three EU Member States each >€ 100 million and  Revenues of at least two companies in the three EU Member States each more than € 25 million and  EU wide revenues of at least two companies each >€ 100 million, Art. 1 (3) Merger Regulation

231

Merger control and asset deal 7  Legal consequences

 Invalidating defence proprietary transaction: invalidity because of prohibition on implementation pursuant to competition law, Art. 7 (1) Merger Regulation  Fines (Bußgelder), Art. 14 Merger Regulation, EU Commission Guidelines on Fines (Bußgeldleitlinien der EU-Kommission)

232

Part 3: Specific types of transactions 12. Mergers & Acquisitions 12.1 Business considerations 12.2 Pre-deal negotiations 12.2.1 Pre-deal arrangements 12.2.2 Legal consequences of pre-contractual obligation breaches 12.2.3 Contract drafting 12.3 Legal issues of asset and share deal 12.3.1 Introduction 12.3.2 Asset deal 12.3.3 Share deal 12.3.4 Final issues Appendix: Bibliography

233

Type of sale: share deal 1 (repetition) • Acquisition of shares (so-called „share deal“) with legal entity • Legal nature  In principle (pure) sale of rights, § 453 (1) case 1 BGB  Issue: acquisition of all or nearly all shares („company acquisition by way of share deal“)  Courts: „almost all“ shares = in any event from acquisition of 75% of the shares  Canaris: Sale of „other assets“ (sonstiger Gegenstände), § 453 (1) case 2 BGB  MüKo HGB/Lieb: sale of rights, § 453 (1) case 1 BGB

234

Type of sale: share deal 2 (repetition)

§§ 453 (1) case 1/2, 433 BGB, 15 (4) sentence 1 GmbHG A (shareholder)

§§ 413, 398 BGB, 15 (3) GmbHG

B (buyer)

Shareholding

A GmbH Note however: termination rights (Kündigungsrechte) in case of change of shareholder (change of control)

235

Analysis method sale agreement for share deal 1 Claim to transfer of ownership/title, §§ 453 (1) case 1/2, 433 (1) sentence 1 case 2 BGB (or sale agreement) / Claims to purchase price payment and acceptance, §§ 453 (1) case 1/2, 433 (2) case 1, 2 BGB (or sale agreement) • Applicability  Sale of rights, § 453 (1) case 1 BGB or sale of „other assets“ (sonstiger Gegenstände), § 453 (1) case 2 BGB • Creation • Termination • Enforceability

236

Share sale agreement – overview 1

Key topics

Main obligations seller/buyer

Ancillary obligations

Seller‘s warranties & indemnities

Other issues

237

Share deal agreement – object of sale • Provisions on obligations on two levels:  Shareholding in the legal subject (GmbH) combined with the rights and duties connected with the shareholder position  Object of sale in the sense of § 433 BGB  Assets of the company (cf. explanations on asset deal agreement above)  Economic object of sale

238

Share deal agreement – transfer date under sale agreement • Company is subject to dynamic changes • Note sequence of events: 

Entering in sale and purchase agreement („signing“)  Transfer date under sale agreement (kaufvertraglicher Übergangsstichtag) („effective date“)  

Often time of purchase price payment, in rem transfer („closing“) = effective date Rarely closing ≠ effective date

Signing of sale and purchase agreement

Transfer

t

Application > Competition process > Clearing Preparation closing accounts

Signing

Rarely: effective date prior to closing

Typically: closing = effective date -Purchase price payment -In rem transfer

239

Share deal agreement – purchase price 1 • Purchase price is matter of negotiations  Is based on company valuation  Also a function of competition for company acquisition • Purchase price arrangements  Fixed purchase price, possibly in instalments or deferred payment (see below due date)  Rare for large transactions  However, negative purchase price which is paid by the seller in restructuring cases

240

Share deal agreement – purchase price 2  Purchase price formula (normal case)

 Calculation („equity bridge“): – Enterprise value – + Liquid assets – ./. Interest bearing liabilities (in particular financial liabilities, tax liabilities) = Result: equity value; do not mix up with balance sheet equity + / ./. NWC (net working capital) adjustment (difference between working capital at time closing from average working capital during past [12] months) working capital = current assets – short-term debt = Purchase price 241

Share deal and statutory warranty liability – overview 1 Breach of contract (e.g. information at contract formation)

Pre-contractual breach of contract: c.i.c., §§ 280 (1), 311 (2) No. 2, 241 (2)

Breach of contract post contract formation

Prior to transfer of risk: § 280 (1)

Post transfer of risk: §§ 453 (1) case 2, 437/435 242

Share deal and statutory warranty liability – overview 2

Pre-contractual phase [Initiation of contract negotiations (Vertragsanbahnung), § 311 (2) No. 1 BGB]

Prevailing opinion – in principle:

Conclusion sale agreement, § 433 BGB

Transfer of risk, §§ 453, 446 = transfer date under sale agreement

Contract negotiations (Vertragsverhandlung), § 311 (2) No. 2 BGB

Claim in damages for breach of pre-contractual obligations (c.i.c.), §§ 280 (1), 311 (2) No. 2, 241 (2)

Exceptions: •No quality deficit (Beschaffenheitsmangel) •Intent (Arglist and Vorsatz) •Duties to provide advice

Claim in damages for breach of contract, § 280 (1)

Claim in damages for breach of warranty, §§ 453 (1) case 1 or 2, 437 No. 3 case 1, 434 (1), 280 (3), 281 (1), (2), 280 (1), 440 + Claim in damages for breach of pre-contractual obligations (c.i.c.), §§ 280 (1), 311 (2) No. 2, 241 (2)

243

Share deal and statutory warranty liability – overview 3 Supplementary performance, §§ 453 (1) case 2, 437 No. 1, 439 case 1 BGB (removal of deficit or delivery of object of sale without defect) or Rescission, §§ 453 (1) case 2, 437 No. 2 case 1, 440, 323, 326 (5) BGB, if defect is material (§ 323 (5) sentence 2 BGB)

Reduction of purchase price, §§ 453 (1) case 2, 437 No. 2 case 2, 441 (4) BGB

and

Claim in damages, §§ 325, 280 et seqq. BGB

or

or

Restitution (Rückabwicklung), §§ 346 et seqq. BGB

Claim in damages, §§ 453 (1) case 2, 437 No. 3 case 1, 280 (1), 440/ 281 (1), (2), 283, 311a BGB

Reimbursement of expenses, §§ 453 (1) case 2, 437 No. 3 case 2, 284 BGB

or („Large“) claim („Small“) claim in damages instead of In damages for performance for deficit deficit damages, damages, §§ 280 (3), §§ 280 III, 281, 281, 280 (1), 440 BGB, 280 I, 440 BGB, if if deficit is material (§ 281 (1) sentence 3 defect is not material BGB) (§ 281 I 3 BGB)

Possibly claim in damages for related or consequential deficit damages (Mangelfolgeschäden), § 280 I BGB / § 823 I BGB

244

Share deal and statutory warranty liability – overview 4 Share deal Simple share sale

Sale of rights, § 453 (1) case 1

Sale of all or nearly all shares

Company sale, § 453 (1) case 1 / 2 BGB

No (direct) liability for defects in the company Defect in the quality (§ 434 BGB) of the company: § 437 BGB Source: Stephan Lorenz

Violation of information obligations (other circumstances than defect in the quality): §§ 280 (1), 241 (1), 311 (2) BGB 245

Share deal and statutory warranty liability – assessment scheme • Applicability  Issue: Applicability warranty liability to share sale (share deal)  In principle (pure) sale of rights, § 453 (1) case 1 BGB  Acquisition of all or nearly all shares („company acquisition by way of share deal“; Unternehmenskauf mit Beteiligungskauf) – Sale of rights, § 453 (1) case 1 BGB or sale of other assets, § 453 I Fall 2 BGB? – Courts: „almost all“ shares = in any event from acquisition of 75% of the shares – Canaris: sale of „other assets“ (sonstiger Gegenstände), § 453 (1) case 2 BGB

246

Share deal and seller‘s contractual warranty liability 1 • Statutory warranty liability is replaced by contractual warranty system because the former is not appropriate; therefore,  Exclusion of statutory claims and replacement by contractual liability system  Quality and legal deficits (Sach- und Rechtsmängel), §§ 453 (1) case 2, 437 BGB  Breaches of duty (Pflichtverletzungen) – Pre-contractual, §§ 280 (1), 311 (2), (3), 241 (2) BGB – Post formation of contract, before transfer of risk, § 280 (1) BGB (non or bad performance)

247

Share deal and seller‘s contractual warranty liability 2  Disruption of the foundation of the contract (Geschäftsgrundlage, clausula rebus sic stantibus), § 313 BGB  Statutory provisions related to rescission or termination of contract in another way, §§ 323-326, 346 et seqq. BGB

248

Share deal and seller‘s contractual warranty liability 3 • Limitations of liability exclusion:  Deception with intent (arglistige Täuschung), § 123 BGB/§§ 453 (1) case 1/2, 444 case 1 BGB  Damage with intent (vorsätzliche Schädigungen), §§ 826, 823 (2) sentence 1 BGB in connection with § 263 StGB • Exclusion of liability pursuant to §§ 453 (1) case 1/2, 444 case 2 BGB  Legal nature: counter-defence (Gegeneinwendung) of buyer  Pursuant to § 444 case 2 BGB the seller cannot raise a contratual liability exclusion to the extent that […] a quality guarantee has been assumed by the seller

249

Share deal and seller‘s contractual warranty liability 4 Warranty declarations

Quality/warranty guarantees, §§ 453 (1) case 1/2, 443

„Independent“ guarantee (formerly § 311 I)

Seller‘s quality declarations (Beschaffenheitserklärungen), §§ 453 (1) case 1/2, 434 (1) sentences 1, 2 case 1; partly contractual legal consequences defined different from the act „Non-independent“ „guarantee“ (extension of seller‘s liability) 250

Share deal and ancillary obligations (covenants) • Duties to act or omit (Handlungs- und Unterlassungspflichten), e.g. to terminate certain agreements or to enter into new agreements only with approval of the buyer • Cases  Non-compete clause

251

Special features for listed companies

3%

5%

10%

15%

20%

25% 30%

50%

95%

75%

100%

Voting rights

German Securities Trading Act (WpHG)

Disclosure thresholds[1]; any passing or falling below has to be publicly announced

German Securities Acquisitions and Takeover Act (WpÜG)

Acquisition of at least 30% of voting rights triggers a mandatory public tender offer

German Foreign Trade Regulations (Außenwirtschaftsverordnung)

Acquisition of at least 25% of voting rights requires approval by German Federal Ministry of Economics and Technology

Merger Control

Acquisition of at least 25% of the capital or of the voting rights triggers German Merger Control 5%

25%

50%

75%

95%

Voting rights

[Listed companies]

6

Financial investment

5

Minority with board representation

4

Blocking minority 25%+1 share

3

Simple majority >50%

2 75% Holding

1

Delisting & full integration

252 [1] Percentage of voting rights Sources: Außenwirtschaftsverordnung, WpHG, WpÜG

252

Excursus: Public take-over offer (öffentliches Erwerbsangebot) 1 • Applicability Takeover Act (Wertpapiererwerbs- und Übernahmegesetz, WpÜG), §§ 1 et seq. WpÜG  Offer for the acquisition of shares or other securities  Target company is a public limited liability company (AG), an SE or a public limited partnership (KGaA)  Corporate seat (Sitz) in Germany  Shares (Aktien) or other securities are admitted for trade in an organised market (official market [amtlicher Markt] or regulated market [geregelter Markt], § 2 (7) WpÜG) within the European Economic Area (Europäischen Wirtschaftsraum)

253

Excursus: Public take-over offer (öffentliches Erwerbsangebot) 2 Regulated market (EU regulated market)

Open Market (Freiverkehr) (exchange regulated market)

official market, §§ 30-47 BörsG

regulated market, §§ 49-56 BörsG

Prime Standard

Entry Standard

General Standard

(General) Open Market, § 57 BörsG

Example: market segments of the Frankfurt Stock Exchange Cf. www.deutsche-boerse.com 254

Excursus: Public take-over offer (öffentliches Erwerbsangebot) 3 • Public offer (öffentliches Angebot)  Voluntary (freiwilliges) (Squeeze-Out: §§ 327a-327f AktG, 39a-c WpÜG) or mandatory (gesetzlich) (Pflichtangebot, §§ 35 et seqq. WpÜG) offer  Special case: take-over offer (Übernahmeangebot), §§ 29-34 WpÜG – Voluntary public offer – Aimed at control » Control is ≥30% voting rights  Public sale or barter offer  For the purpose of acquiring shares in a target company, § 2 WpÜG

255

Excursus: Public take-over offer (öffentliches Erwerbsangebot) 4 • Publication of decision to make an offer, § 10 WpÜG • Transfer of an offer document (Angebotsunterlage) to the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht = BaFin), §§ 11, 14 et seq. WpÜG • Publication of an offer document, § 14 (2), (3) WpÜG • Acceptance (Annahme) of the offer by shareholders • Legal consequences if publication duties for mandatory offer (Pflichtangebot) pursuant to § 35 WpÜG are breached

256

Assessment scheme transfer of shares in private limited liability company and share deal 1 §§ 413, 398 sentence 1 BGB, 15 (3) GmbHG • [Subject of transfer: shares in private limited liability company (GmbHGeschäftsanteile)] • Agreement (Einigung) between owner and purchaser (proprietary contract) • Valid representation (Vertretung) of the seller e.g. by director of private limited liability company (GmbH-Geschäftsführer), §§ 35, 36 sentence 1 GmbHG • Invalidating defence: invalidity based on defect in form (Formnichtigkeit), § 125 sentence 1 BGB  Invalidity cannot be cured (keine Heilungsmöglichkeit)

257

Assessment scheme transfer of shares in private limited liability company and share deal 2 • Invalidating defence: condition subsequent (aufschiebende Bedingung), § 158 (1) BGB / time limit (Befristung), §§ 163, 158 BGB (permissible; BGHZ 127, 133) • Transferability (Übertragbarkeit)  Exclusion or limitation (= approval [Zustimmung]) in articles of association (Satzung), § 15 (5) GmbHG • Power (Berechtigung)  Owner (Inhaber)  Power of disposition (Verfügungsmacht) • Other defences against transfer of shares  Invalidating defence: prohibition on implementation pursuant to competition law, § 41 (1) sentence 2 GWB or Art. 7 (1) Merger Regulation (FusKontrVO) 258

Participation of economic council or workers‘ council • Economic council (Wirtschaftsausschuss) (= committee of workers‘ council)  Acquisition of a company if this is related to taking control, § 106 (3) No. 9a BetrVG  Other actions or plans which may materially influence the interest of the company‘s employees, § 106 (3) No. 10 BetrVG  I.a. sale of all shares of a private limited liability company • Workers‘ council for companies without economic council, § 109a BetrVG • In addition, information obligations towards workers‘ council or employees pursuant to Securities Acquisitions and Takeover Act (Wertpapiererwerbs- und Übernahmegesetz = WpÜG)

259

Merger control and share deal 1 • German merger control (§§ 35-43 GWB)  Merger (Zusammenschluss)  Acquisition of at least 25% of the shares (equity or voting rights), § 37 (1) sentence 1 No. 3 GWB  Notice requirement (Anmeldepflicht) if revenue limits are exceeded, § 35 GWB  Company‘s total global revenues are >€ 500 million and  At least one of the companies has revenues in Germany of >€ 25 million, §§ 35 (1), 39 GWB

260

Merger control and share deal 2  Legal consequences

 Invalidating defence against proprietary transaction: invalidity because of prohibition on implementation pursuant to competition law, § 41 (1) sentence 2 GWB  Fine (Bußgeld), § 81 (1) No. 7 GWB – Up to € 25.000.-, § 81 (2) sentence 1 case 2 GWB – Up to 10% of annual revenues, Announcement of Cartel Office (Bekanntmachung über die Festsetzung von Geldbußen nach § 81 (4) sentence 2 GWB gegen Unternehmen und Unternehmensvereinigungen (Bußgeldleitlinien) vom 26.09.2006)

261

Merger control and share deal 3 • European merger control (Fusionskontrolle) (Merger Regulation [Fusionskontrollverordnung, FusKontrVO])  Merger (Zusammenschluss): acquisition of indirect or direct control by acquisition of shares, Art. 3 (1) lit. b case 1 Merger Regulation  Obligation to notify (Anmeldepflicht) if  Companies‘ global revenues >€ 5 billion and  EU wide revenues of at least two companies each >€ 250 million, Art. 1 (2) Merger Regulation

262

Merger control and share deal 4  Also obligation to notify if

 Companies‘ global revenues >€ 2.5 billion and  Total revenues in at least three EU Member States each >€ 100 million and  Revenues of at least two companies in the three EU Member States each more than € 25 million and  EU wide revenues of at least two companies each >€ 100 million, Art. 1 (3) Merger Regulation

263

Merger control and share deal 5  Legal consequences

 Invalidating defence proprietary transaction: invalidity because of prohibition on implementation pursuant to competition law, Art. 7 (1) Merger Regulation  Fines (Bußgelder), Art. 14 Merger Regulation, EU Commission Guidelines on Fines (Bußgeldleitlinien der EU-Kommission)

264

Part 3: Specific types of transactions 12. Mergers & Acquisitions 12.1 Business considerations 12.2 Pre-deal negotiations 12.2.1 Pre-deal arrangements 12.2.2 Legal consequences of pre-contractual obligation breaches 12.2.3 Contract drafting 12.3 Legal issues of asset and share deal 12.3.1 Introduction 12.3.2 Asset deal 12.3.3 Share deal 12.3.4 Final issues Appendix: Bibliography

265

Relationship between aquiring and acquired company 1 • Acquisition of companies who remain independent and keep their identity („acquisitions“) without transfer of assets (only with share deal)  Group and holding structures (Konzern- und Holdingstrukturen): direct / indirect subsidiary (Tochtergesellschaft)

Contractual group (Vertragskonzern)

De facto group (faktischer Konzern)

Purchaser

Purchaser

Shareholding

Domination and profit transfer agreement (Beherrschungs- und Gewinnabführungsvertrag), for AG: § 291 AktG*

Target company

* Note also cash pooling agreement, § 311 (1) BGB

Shareholding >50% (equity/ voting rights)

Target company

266

Relationship between aquiring and acquired company 2 • Acquisition of companies which loose their independence and identity  Merger (Verschmelzung) of two legal subjects, §§ 2-122 UmwG  Merger by inclusion (Aufnahme) (in existing company), §§ 4-35 UmwG Prior to merger

Shareholder A

Company X

Shareholder B

Company Y

Post merger

Shareholder A

Shareholder B

Company X (which continues the business of former company Y) 267

Relationship between aquiring and acquired company 3 – Special forms of merger by inclusion » Up-stream merger Prior to merger

Post merger

Company A

Company A

Company B

NewCo (upstream company) receives assets of target company (subsidiary)

268

Relationship between aquiring and acquired company 4 » Down-stream merger (rare in practice)

Prior to merger

Post merger

Company A

Company B

Company B Target company (subsidiary) receives assets of NewCo (upstream company) 269

Relationship between aquiring and acquired company 5  Merger by way of new formation (Verschmelzung durch Neugründung) (transfer to new company), §§ 36-38 UmwG Prior to merger

Shareholder A

Company X

Shareholder B

Company Y

Post merger

Shareholder A

Shareholder B

Company Z (which continues the business of former company Y and former company X)

270

Relationship between aquiring and acquired company 6 • Note terminology for „mergers“ in English  European „merger“: combination (Verschmelzung) of two legal subjects  „Merger“ in Anglo-American legal systems: aquisition of a majority shareholding in another company (hence share deal [Beteiligungskauf] in German terminology)  „Mergers and acquisitions“: company sale in a wider sense

271

Relationship between aquiring and acquired company 7 • Transfer of assets (Übertragung von Vermögensgegenständen)  Separation of a company pursuant to company law; creation of a new company („spin-off“, carve out), §§ 123-173 UmwG  Split-up (Aufspaltung), § 123 (1) UmwG  Split-off (Abspaltung), § 123 (2) UmwG  Hive down (Ausgliederung), § 123 (3) UmwG  Transfer of assets pursuant to UmwG, §§ 174-189 UmwG  Rare in practice • Change of legal form (Formwechsel), §§ 190-304 UmwG

272

Bibliography 1 • Asset Capital Partners and Nörr, Stiefenhofer, Lutz (eds.), MD&A guide for the Russian oil & gas industry. Legal and tax issues of mergers, divestitures and acquisitions in the Russian oil & gas industry, Moskau 2006 (written by Jan-Hendrik Röver) • Wilhelm Beisel and Hans-Hermann Klumpp, Der Unternehmenskauf. Gesamtdarstellung der zivil- und steuerrechtlichen Vorgänge, 6th ed. (Munich 2009) • Claus-Wilhelm Canaris, Leistungsstörungen beim Unternehmenskauf, in: ZGR 1982, pp. 395-434 • Claus-Wilhelm Canaris, Handelsrecht, 24th ed. (Munich 2006), § 8  Outstanding discussion; highly recommended

273

Bibliography 2 • Horst Eidenmüller, Rechtskauf und Unternehmenskauf, in: ZGS 08/2002, pp. 290-296 • Jochen Ettinger and Henning Jaques (eds.), Beck‘sches Handbuch Unternehmenskauf im Mittelstand, 2nd ed. (Munich 2017) • Bernd Fahrholz, Neue Formen der Unternehmensfinanzierung. Unternehmensübernahmen, Big ticket-Leasing, Asset Backed- und Projektfinanzierungen (Munich 1998), pp. 17-52, 103-138  Unfortunately outdated!  Announced for 2017: Fahrholz, Röver and Meissner, Formen des Unternehmenskaufs und der Unternehmensfinanzierung, 2nd ed., Munich • Stefan Göthel (ed.), Grenzüberschreitende M&A-Transaktionen. Unternehmenskäufe, Umstrukturierungen, Joint Venture, SE, 4th ed. (Cologne 2015) 274

Bibliography 3 • Walter Günther, Unternehmenskauf, in: Münchener VertragsHandbuch (hrsg. von Rolf A. Schütze und Lutz Weipert), vol. 2: Wirtschaftsrecht I, 5th ed. (Munich 2004), pp. 165-548  Model agreement with commentary  Note: purchase price calculation not in confirmity with practice (where so-called equity bridge is used) • Dieter Hoffmann, Der Unternehmenskauf und seine möglichen bürgerlich-rechtlichen Ansprüche (Hamburg 2009) • Wolfgang Hölters (ed.), Handbuch Unternehmenskauf, 8th ed. (Köln 2015) • Hans-Joachim Holzapfel and Reinhard Pöllath, Unternehmenskauf in Recht und Praxis. Rechtliche und steuerliche Aspekte, 15th ed. (Cologne 2016) 275

Bibliography 4 • Florian Kästle and Dirk Oberbracht, Unternehmenskauf - Share Purchase Agreement (Beck‘sche Musterverträge Bd. 49) (Munich 2005)  Share deal agreement in English language but under German law • Hermann J. Knott (ed.), Unternehmenskauf, 5th ed. (Cologne 2016) • Wolfgang A. Münchow, Andreas Striegel and Thomas A. Jesch, Management Buy-Out (MBO) (Beck‘sche Musterverträge Bd. 59) (Munich 2008) • Jennifer Payne (ed.), Takeovers in English and German Law (Oxford 2002) • Gerhard Picot (ed.), Unternehmenskauf und Restrukturierung. Handbuch zum Wirtschaftsrecht, 4th ed. (Munich 2013)  Standard treatise on M&A • Gerhard Picot (ed.), Handbuch Mergers & Acquisitions. Planung – Durchführung – Integration, 5th ed. (Stuttgart 2012) 276

Bibliography 5 • Georg Rotthege and Bernd Wassermann, Unternehmenskauf bei der GmbH (Heidelberg 2011) • Christoph H. Seibt (ed.), Beck‘sches Formularbuch Mergers & Acquisitions, 2nd ed. (Munich 2011) • Wolfgang Meyer-Sparenberg/Christof Jäckle, Beck‘sches Handbuch Mergers & Acquisitions (Munich 2016)  Not yet published • Ralf Thaeter and Tim Oliver Brandi (eds.), Öffentliche Übernahmen. Recht und Praxis der Übernahme börsennotierter Unternehmen (Munich 2003) • Volker Triebel (ed.), Mergers & Acquisitions. Strategie – Steuern – Recht (Heidelberg 2004) • Wolfgang Weitnauer, Management Buy-Out. Handbuch für Recht und Praxis, 2nd ed. (Munich 2013) 277

Bibliography 6: Business aspects • Donald M. DePamphilis, Mergers, Acquisitions and Other Restructuring Activities. An Integrated Approach to Process, Tools, Cases, and Solutions, 6th ed. (Amsterdam, Boston, Heidelberg etc. 2012) • Maximilian Dreher and Dietmar Ernst, Mergers & Acquisitions. Grundlagen und Verkaufsprozess mittlerer und großer Unternehmen (Konstanz, Munich 2014) • Kai Lucks (ed.), M&A-Projekte erfolgreich führen: Instrumente und Best Practices (Stuttgart 2013)  See article Jan-Hendrik Röver, Transaktionsmanagement im großen Mittelstand • Marianne Schramm and Ekkehart Hansmeyer (eds.), Transaktionen erfolgreich managen. Ein M&A-Handbuch für die Praxis (Munich 2010) • Bernd W. Wirtz, Mergers & Acquisitions Management: Strategie und Organisation von Unternehmenszusammenschlüssen, 2nd ed. (2012) 278

Introduction Part 1: Fundamentals of corporate finance Part 2: Fundamentals of German law Part 3: Specific types of transactions 12. Mergers & Acquisitions 12.1 Private transactions 12.2 Capital markets transactions [13. Private Equity] 14. Acquisition financing 14.1 Bank financing 14.2 Capital markets financing 15. Project financing 10.1 Bank financing 10.2 Capital markets financing 16. Securitisation 279

14. Acquisition financing 14.1 Business considerations 14.1.1 Financing of companies 14.1.2 Definition of acquisition financing 14.1.3 Parties of an acquisition financing 14.1.4 Financial layers of an acquisition financing 14.2 Bank financing 14.2.1 Pre-deal arrangements 14.2.2 Loan agreement acquisition financing 14.2.3 Mezzanine financing 14.2.4 Security interests 14.2.5 Other agreement 14.2.6 Legal opinion 14.3 Capital markets financing

280

Financing of companies Financing Internal financing

External financing Equity financing

Capital Strategic markets investors/ management/ employees/ financial investors

Mezzanine financing

Traditional company financing -Investments -Working capital

Debt financing

Project financing in a narrow Acquisition sense financing in a narrow sense (LBO) 281

Definition of acquisition financing 6 • In contract to traditional corporate loans acquisition financings are

characterised in principle by five criteria:

1

Financing purposes Financing of a company sale

2

Borrower Legally and economically independent single purpose company (NewCo)

3

Service of acquisition loan (interest and repayment) from future cash flow of the acquired company and – therefore – the NewCo Liability basis 4 No or only limited liability of the purchaser • Security by the single purpose company • Security by the target company • (Limited) security by the purchaser

5

Risk structuring

282

Parties of an acquisition financing

(Economic) Purchaser

§ 488 BGB §§ 453 (1) case 1/2, 433 BGB §§ 413, 398 BGB, 15 GmbHG

Shareholders

Single purpose company (NewCo)

Target company

§ 488 BGB

§ 488 BGB

Bank 1

Bank 2

Bank

283

Financial layers of an acquisition financing 1

NewCo Equity 15-25%

Shareholders (i.a. investors, private equity fund)

10-20%

Mezzanine financings (i.a. investors, bank, mezzanine financiers, funds)

Debt

Acquisition loan (bank)

Mezzanine

60-70%

- arranging - underwriting - participation

possibly unitranche debt

284

14. Acquisition financing 14.1 Business considerations 14.1.1 Financing of companies 14.1.2 Definition of acquisition financing 14.1.3 Parties of an acquisition financing 14.1.4 Financial layers of an acquisition financing 14.2 Bank financing 14.2.1 Pre-deal arrangements 14.2.2 Loan agreement acquisition financing 14.2.3 Mezzanine financing 14.2.4 Security interests 14.2.5 Other agreement 14.2.6 Legal opinion 14.3 Capital markets financing

285

Contractual relationships for a loan 1 • Prevailing opinion: loan opening agreement (Krediteröffnungsvertrag, Kreditzusage), § 311 (1) BGB; § 488 BGB by way of analogy; banks general terms and conditions (AGB Banken)  Base and framework agreement  Duty of the lender to provide and to disburse loan  Duty of the borrower to pay commitment fee • Prevailing opinion: drawdown (Abruf) by borrower  Exercise of a right to influence a legal relationship by unilateral declaration (Gestaltungsrecht)

286

Contractual relationships for a loan 2 • Individual loan agreement, § 488 BGB  Separation theory: must legally be separated from the loan opening agreement  In practice both agreements contained in one deed  Created by drawdown (Abruf)  On the other hand unitary theory: loan agreement only substantiated (= konkretisiert) by way of drawdown • Security rights/interests (Kreditsicherheiten)  Distinguish for in rem/proprietary security rights  Respective contractual security agreement (Sicherungsabrede), § 311 I BGB  Creation of proprietary security rights • Consortium agreement 287

Loan agreement acquisition financing - basics 3

Key topics

Main obligations

Covenants

Representations and warranties (Zusicherungen)

Conditions precedent (Auszahlungsvoraussetzungen)

Security agreements

Rescission (Kündigung)

Requirements of drawdown (Inanspruchnahmemodalitäten)

Other issues

288

Loan agreement acquisition financing - basics 4

General legal consequences for breach of loan provisions

With duty to act (Verhaltenspflicht) (covenant, security agreement): independent right to bring law suit

Absence of condition precedent / requirement of drawdown

Rescission right for extraordinary rescission

Contractual legal consequences

Claim in damages, § 280 (1) / §§ 280 (1), 311 (2) No. 1, 241 (2) (c.i.c.)

Statutory legal consequences 289

Loan agreement acquisition financing – security agreement 1 • Contents of security agreement (Sicherungsabrede)  Provisions in loan agreement deal with obligation to create personal and proprietary security  Security purpose (Sicherungszweck) of secured transaction (i.e. secured debt [gesicherte Forderung])  So-called purpose agreement (Zweckabrede) (sufficient as legal foundation [Rechtsgrund] for § 812 BGB)  Possibly claim of security provider to re-transfer security (Rückübertragungsanspruch des Sicherungsgebers), e.g. for security transfer of ownership in movables (Sicherungsübereignung)

290

Loan agreement acquisition financing – security agreement 2  Possibly provisions on enforcement of security right outside court

(Verwertungsbestimmungen) • Legal nature of security agreement  Independent agreement, § 311 (1) BGB  In textbooks often treated as part of the covenants  This is incorrect since the loan agreement is not legal foundation (Rechtsgrund) for proprietary security rights; this is security agreement which is therefore no covenant  Also contractual legal foundation (schuldrechtliches Grundgeschäft, causa) of the respective proprietary security rights

291

Loan agreement acquisition financing – security agreement 3 • Contractual implementation  Sometimes agreement of a general security agreement (generelle Sicherungsabrede), § 311 (1) BGB in loan opening agreement/loan agreement  This is typically further substantiated in a separate security agreement suited for the specific type of security  Hence, legal foundation sometimes distributed over several deeds • Creation of security is mentioned not only with security agreement but also in context of condition precedents (Auszahlungsvoraussetzung)

292

Loan agreement acquisition financing – security agreement 4 • Function of security  Exclusive function of proprietary security  Security (in structured financings) is „a shield, not a sword“ (Philip Wood)  In rem security prevents that third party creditors have access to assets of the borrower and get priority satisfaction; this shall enable restructuring of financing in case of financial difficulties  Subsidiarily (subsidiär) enforcement function (Durchsetzungsfunktion)  Ability to enforce security by way of out of court (außergerichtliche Verwertung) or in court enforcement (Zwangsvollstreckung)

293

Loan agreement acquisition financing – security agreement 5 • Specific security rights/interests (Sicherheiten) („three layer model“)  At the level of (economic) purchaser  Pledge of shares of the purchaser in NewCo (Pfandrecht Geschäftsanteile), §§ 1274 (1) sentence 1, 413, 398 sentence 1 BGB, 15 (3) GmbHG

294

Loan agreement acquisition financing – security agreement 6  At the level of NewCo

 Pledge of shares NewCo in target company, §§ 1274 (1) sentence 1, 413, 398 sentence 1 BGB, 15 (3) GmbHG  Security assignment of NewCo claims against target company (e.g. under loans provided by target company to NewCo), § 398 sentence 1 BGB  Pledge of payment claims with respect to account balances of NewCo (account pledge, Kontopfändung), §§ 1274 (1) sentence 1, 398 sentence 1, 1279 et seqq. (1280) BGB

295

Loan agreement acquisition financing – security agreement 7  Security assignment of NewCo claims against seller under sale and purchase agreement, § 398 sentence 1 BGB  Security under § 14 AGB Banken (pledge in securities and things in bank‘s possession and account balances)  At the level of target company  Note: so-called „vertical split“; security in assets of target company only possible if this is permitted by its financing banks; therefore, in practice release of target company‘s financing banks by NewCo‘s banks to avoid structural subordination (strukturelle Nachrangigkeit)

296

Loan agreement acquisition financing – security agreement 8  Pledge of payment claims with respect to account balances of target company (account pledge, Kontopfändung), §§ 1274 (1) sentence 1, 398 sentence 1, 1279 et seqq. (1280) BGB  Non-accessory real estate mortgages for security purposes (Sicherungsgrundschuld) – First ranking, immediately enforceable non-accessory real estate mortgage, §§ 873 (1), 1192 (1), 1113 et seqq. BGB, 794 (1) No. 5, 800 ZPO – Second ranking, not immediately enforceable nonaccessory real estate mortgage, §§ 873 (1), 1192 (1), 1113 et seqq. BGB, 879 (3) BGB

297

Loan agreement acquisition financing – security agreement 9  Security transfers of ownership (Sicherungsübereignung) in equipment and machines, §§ 929 sentence 1, 930 BGB (Raumsicherungsübereignung)  Security assignments of receivables (Sicherungszession), § 398 sentence 1 BGB of – Supplies of goods and services – Claims under insurance agreements – Claim of disbursement of shareholder loan (§ 488 (1) sentence 1 BGB)  No (proprietary or quasi-proprietary) security in pool of assets (Gesamtsicherheiten) such as floating charge under English law or nantissement de fonds de commerce under French law

298

Loan agreement acquisition financing – security agreement 10  Accessory guarantees (Bürgschaften), § 765 BGB, non-accessory

guarantees (Garantien), § 311 (1) BGB or firm comfort letter (harte Patronatserklärungen), § 311 (1) BGB  Security purpose (= part of security agreement), § 311 (1) BGB as legal foundation (Kausalverhältnis) of proprietary security rights  Only part of security agreement; however, other typical elements of security agreement are absent  Negative pledge clause (Negativklausel), § 137 BGB  Merely negative covenant  No type of security; nevertheless sometimes called „atypical security“  Note § 1136 / §§ 1192 (1), 1136 BGB: not in connection with real estate mortgage (Grundpfandrecht) 299

Several lenders Syndicated loan

Bank 1

Sub-participation (Unterbeteiligung)

Bank 2

§ 488 BGB

Bank 2

Sub-particpation agreement (Partnership under Civil Code [BGBGesellschaft], § 705 BGB)

§ 488 BGB

Bank 1

Borrower Loan, § 488 BGB

Borrower

300

Bibliography 1 • Ulrich Ammelung and Jan-Hendrik Röver, Mezzaninefinanzierungen in der Praxis, in: Finanzbetrieb News 7-8/2006, pp. 2-6, 12/2006, pp. 2-7 • Andreas Diem, Akquisitionsfinanzierungen. Kredite für Unternehmenskäufe. Mit internationalem Standardvertragsmuster, 3rd. ed. (Munich 2013)  Currently most up-to-date and comprehensive discussion • Stephan Eilers, Nils M. Koffka and Marcus Mackensen (eds.), Private Equity. Unternehmenskauf – Finanzierung – Restrukturierung – Exitstrategien, 2nd ed. (Munich 2012) • Bernd Fahrholz, Neue Formen der Unternehmensfinanzierung. Unternehmensübernahmen, Big ticket-Leasing, Asset Backed- und Projektfinanzierungen (Munich 1998), pp. 53-99

301

Bibliography 2 • Andreas Früh and Constanze Müller-Arends, Kreditvertragsrecht, in: Thorwald Hellner and Stephan Steuer (eds.) (formerly Bankgeschäftliches Formularbuch edited by Erich Trost), Bankrecht und Bankpraxis (BuB), 5 vols. (Cologne loseleaf)  Excellent dicussion of loan aspects; however, no focus on acquisition financing • Wolfgang Hölters (ed.), Handbuch Unternehmenskauf, 8th ed. (Cologne 2015)

302

Bibliography 3 • Jan-Hendrik Röver, Kreditfinanzierung, in: Ulf R. Siebel, Jan-Hendrik Röver and Christian Knütel (eds.), Rechtshandbuch Projektfinanzierung und PPP, 2nd ed. (Cologne, Munich 2008), pp. 581-710 • Jan-Hendrik Röver, Realsicherheiten und Direktvereinbarungen, in: ibid., pp. 762-812 • Sven Tischendorf (ed.), Strategies for Successful Acquisitions in Germany (London 2000) • Ralf Thaeter and Tim Oliver Brandi (eds.), Öffentliche Übernahmen. Recht und Praxis der Übernahme börsennotierter Unternehmen (Munich 2003) • Wolfgang Weitnauer, Management Buy-Out. Handbuch für Recht und Praxis, 2nd ed. (Munich 2013)

303

Introduction Part 1: Fundamentals of corporate finance Part 2: Fundamentals of German law Part 3: Specific types of transactions 12. Mergers & Acquisitions 12.1 Private transactions 12.2 Capital markets transactions [13. Private Equity] 14. Acquisition financing 14.1 Bank financing 14.2 Capital markets financing 15. Project financing 15.1 Bank financing 15.2 Capital markets financing 16. Securitisation 304

15. Project financing 15.1 Business considerations 15.1.1 Financing of companies 15.1.2 Definition of project financing 15.1.3 Parties of a project financing 15.1.4 Reasons for project financing 15.1.5 Economic importance of project financing 15.1.6 Financial layers of an acquisition financing 15.1.7 Types of projects 15.1.8 Geographical distribution of projects 15.1.9 Risk analysis

305

Financing of companies Financing Internal financing

External financing Equity financing

Capital Strategic markets investors/ management/ employees/ financial investors

Mezzanine financing

Traditional company financing -Investments -Working capital

Debt financing

Project financing in a narrow Acquisition sense financing in a narrow sense (LBO) 306

Definition of project financing 1 • In contract to traditional corporate loans project financings are characterised

in principle by five criteria:

1

Financing purposes Financing of a single, defined project

2

Borrower Legally and economically independent project company

3

Service of project loan (interest and repayment) from future cash flow of the project company

4

Liability basis No or only limited liability of the sponsors • Security by the project company • (Limited) security by the sponsors

5

Risk structuring

307

Parties of a project financing

Sponsor 1 (Carla S.A.)

Sponsor 2 (Maria S.A.)

§ 488 BGB

Project company

§ 488 BGB

Bank 1

Bank 2

308

Financial layers of a project financing 1

Project company Eigenkapital 10-40%

Gesellschafter (u.a. Sponsoren, Private-EquityFonds)

0-10%

Mezzanine-Finanzierungen (u.a. Sponsoren, Bank, Mezzanine-Finanzierer, Fonds)

Fremdkapital

Projektdarlehen (Bank)

Mezzanine

60-90%

- arranging - underwriting - participation

309

Types of projects Energy

Natural resources (mining)

Water & renewable energy

Oil & gas

Telecommunications (?)

Industrials

Transportation & Public Private Partnerships

310

Risk analysis 1: overview • Credit risk • Technical risks • Economic risks • Political risks/country risk

• Force majeure risks • Legal risks • Syndication risk (= distribution of risks from new loans)  In contrast to placement risk (= distribution of risks from loans which the bank has already on its „books“) • Refinancing risk

311

Risk analysis 2 • Credit risk  General credit risk of the borrower, i.e. payment default or loss on default  Credit standing of a contract partner (who is not the borrower)

• Technical risks  Completion risk, i.e. completion in a timely manner according to the agreed specification  Technical risk in a narrow sense (example: financing of satellites)

312

Risk analysis 3  Resource risk, i.e. existance of sufficient resources  Mining risk for mining and oil and gas projects  Risk of ground quality (Bodenbeschaffenheit) (e.g. construction of

large plants or streets) (example: Sibiria)  Transportation risk (with respect to supplies and sales) (example: Akshabulak)  Other infrastructure risk (e.g. electricity, water, qualified work force)

313

Risk analysis 4 • Economic risks  Expenditure and cost risk, i.e.

 Expenditure or cost overrun during the construction phase  Operating cost risk during the operating phase  Expenditure or cost risk during the closing phase  Risk of a business interruption (example: 11 September)  Operator risk

314

Risk analysis 5  Supply risk  Market/offtake risk with respect to amount and price of offtake    

 Special case: traffic frequency Risk of price changes (example: gold) Inflation/deflation risk Risk of interest changes with respect to variable interest rate Currency exchange risk

315

Risk analysis 6  Damages of goods  Damages of persons  Environmental damage

• Political risks/country risk  Risk of currency transfer/payment prohibition  Currency conversion risk

316

Risk analysis 7  Confiscation, expropriation, nationalisation  Import and export limitations/embargo/boycot  Non-issuance of approvals and concessions  Breach of concession  General risk of a change in law  Tax change risk

317

Risk analysis 8  Customs change risk  Risk of local impairments

• Force majeure risks (e.g. war, civil war, unrest, strike, terrorist action [Beispiel: Ocensa], natural catastrophes) • Legal risks  Non-issuance of licences  Validity and enforceability of agreements

318

Risk analysis 9  Unclear legal situation  Disfunctional court system (including enforcement, insolvency)

• Syndication risk (= distribution of risks from new loans)  In contrast to placement risk (= distribution of risks from loans

which the bank has already on its „books“) • Refinancing risk

319

15.2 Bank financing 15.2.1 Legal levels and considerations with project financings 15.2.2 Pre-deal arrangements 15.2.3 Legal structuring of a project financing – the contractual net 15.2.4 Technical tools 15.2.5 Project company 15.2.6 Loan agreement project financing 15.2.7 Security interests 15.2.8 Other agreement 15.2.9 Legal opinion 15.3 Capital markets financing

320

Pre-deal arrangements 1 • Mandate agreement (Mandatsvereinbarung) with arranger bank  Agency agreement focused on services (auf Dienstleistung gerichteter Geschäftsbesorgungsvertrag), §§ 675, 611 et seqq. BGB  Rarely agency agreement focused on specific result (auf Werkleistung gerichteter Geschäftsbesorgungsvertrag), §§ 675, 631 et seqq. BGB or agency agreement (Auftrag), §§ 662 et seqq. BGB • Confidentiality (Vertraulichkeits-)agreement, § 311 (1) BGB

321

Pre-deal arrangements 2 • Other mandate agreements with financial, legal and tax advisers  Agency agreement focused on services (auf Dienstleistung gerichteter Geschäftsbesorgungsvertrag), §§ 675, 611 et seqq. BGB  Rarely agency agreement focused on specific result (auf Werkleistung gerichteter Geschäftsbesorgungsvertrag), §§ 675, 631 et seqq. BGB or agency agreement (Auftrag), §§ 662 et seqq. BGB • Financing proposal or Term Sheet, § 154 (1) sentence 2 BGB  No intention to be bound (Rechtsbindungswille)  Sometimes annexed to mandate agreement with arranger bank

322

Contractual relationships for a loan 1 • General banking agreement (allgemeiner Bankvertrag), § 311 (1) BGB (until recently prevailing opinion, previously also Federal Court of Justice [BGH])  Or statutory ancillary contractual relationship (gesetzliches Begleitschutzverhältnis), § 311 (2) BGB (Canaris, now also BGH) • Prevailing opinion: loan opening agreement (Krediteröffnungsvertrag, Kreditzusage), § 311 (1) BGB; § 488 BGB by way of analogy; banks general terms and conditions (AGB Banken)  Base and framework agreement  Duty of the lender to provide and to disburse loan  Duty of the borrower to pay commitment fee • Prevailing opinion: drawdown (Abruf) by borrower  Exercise of a right to influence a legal relationship by unilateral declaration (Gestaltungsrecht) 323

Contractual relationships for a loan 2 • Individual loan agreement, § 488 BGB  Seperation theory: must legally be separated from the loan opening agreement  In practice both agreements contained in one deed  Created by drawdown (Abruf)  On the other hand unitary theory: loan agreement only substantiated (= konkretisiert) by way of drawdown

324

Contractual relationships for a loan 3 • Security rights/interests (Kreditsicherheiten)  Distinguish for in rem/proprietary security rights  Respective contractual security agreement (Sicherungsabrede), § 311 I BGB  Creation of proprietary security rights • Consortium agreement • Project agreements, in particular EPC (engineering, procurement, construction) agreement

325

Legal structuring of a project financing – the contractual net 1

Pre-Feasibility - Pre-feasibility study

Feasibility - Feasibility study - Evaluation by independent engineer - Financing/businessplan

Arranging / Underwriting

Advisory - Confidentiality agreement - Mandate agreement - Equity agreements - Formation project company - Project agreements

- Confidentiality agreement - Arranger mandate - Due Diligence - Term Sheet - Financing agreements - Legal opinions

Completion

Signing / Closing

Syndication

Construction - Drawdown notice - Drawdowns - Project reports

Operation

- Project reports - Repayment - Waiver(s) - Amendment

326

Legal structuring of a project financing – the contractual net 6 6 Bank 2 Completion guarantee

- Consortium agreement - Security pool agreement

4 Bank 1

1 Sponsoren Pledge on shares (and security agreement)

2

Project company GesV / Satzung 5 Advisers Project agreements - EPC contract - Operating agreement - Supply agreements - Offtake agreements etc.

7 Government of host country

- Legal adviser - Tax adviser - Auditor - Independent engineer - Insurance adviser

3 Third persons 327

Loan agreement project financing – basics 3

Key topics

Main obligations

Covenants

Representations and warranties (Zusicherungen)

Conditions precedent (Auszahlungsvoraussetzungen)

Security agreements

Rescission (Kündigung)

Requirements of drawdown (Inanspruchnahmemodalitäten)

Other issues

328

Loan agreement project financing - basics 10

General legal consequences for breach of loan provisions

With duty to act (Verhaltenspflicht) (covenant, security agreement): independent right to bring law suit

Absence of condition precedent / requirement of drawdown

Rescission right for extraordinary rescission

Contractual legal consequences

Claim in damages, § 280 (1) / §§ 280 (1), 311 (2) No. 1, 241 (2) (c.i.c.)

Statutory legal consequences 329

Loan agreement project financing – security agreement 1 • Contents of security agreement (Sicherungsabrede)  Provisions in loan agreement deal with obligation to create personal and proprietary security  Security purpose (Sicherungszweck) of secured transaction (i.e. secured debt [gesicherte Forderung])  So-called purpose agreement (Zweckabrede) (sufficient as legal foundation [Rechtsgrund] for § 812 BGB)  Possibly claim of security provider to re-transfer security (Rückübertragungsanspruch des Sicherungsgebers), e.g. for security transfer of ownership in movables (Sicherungsübereignung)

330

Loan agreement project financing – security agreement 2  Possibly provisions on enforcement of security right outside court

(Verwertungsbestimmungen) • Legal nature of security agreement  Independent agreement, § 311 (1) BGB  In textbooks often treated as part of the covenants  This is incorrect since the loan agreement is not legal foundation (Rechtsgrund) for proprietary security rights; this is security agreement which is therefore no covenant  Also contractual legal foundation (schuldrechtliches Grundgeschäft, causa) of the respective proprietary security rights

331

Loan agreement project financing – security agreement 3 • Contractual implementation  Sometimes agreement of a general security agreement (generelle Sicherungsabrede), § 311 (1) BGB in loan opening agreement/loan agreement  This is typically further substantiated in a separate security agreement suited for the specific type of security  Hence, legal foundation sometimes distributed over several deeds • Creation of security is mentioned not only with security agreement but also in context of condition precedents (Auszahlungsvoraussetzung)

332

Loan agreement project financing – security agreement 4 • Function of security  Exclusive function of proprietary security  In rem security prevents that third party creditors have access to assets of the borrower and get priority satisfaction; this shall enable restructuring of financing in case of financial difficulties  Subsidiarily (subsidiär) enforcement function (Durchsetzungsfunktion)  Ability to enforce security by way of out of court (außergerichtliche Verwertung) or in court enforcement (Zwangsvollstreckung)

333

Loan agreement project financing – security agreement 5 • Specific security rights/interests („two layer model“)  At the level of sponsors  Pledge of shares NewCo sponsors in project company, §§ 1274 (1) sentence 1, 413, 398 sentence 1 BGB, 15 (3) GmbHG – Protection of cash flow to project company  Accessory (completion) guarantee (Bürgschaft), § 765 BGB [or non-accessory guarantee (Garantie), § 311 (1) BGB] or firm comfort letter (harte Patronatserklärungen), § 311 (1) BGB

334

Loan agreement project financing – security agreement 6  At the level of project company

 Security in individual assets – Pledge of payment claims with respect to account balances of NewCo (account pledge, Kontopfändung), §§ 1274 (1) sentence 1, 398 sentence 1, 1279 et seqq. (1280) BGB » Protection of project company‘s cash flow » Notice (Anzeige), § 1280 BGB is not required (methodology of law: teleological reduction of § 1280 BGB

335

Loan agreement project financing – security agreement 7 – Non-accessory real estate mortgages for security purposes (Sicherungsgrundschuld) » First ranking, immediately enforceable non-accessory real estate mortgage, §§ 873 (1), 1192 (1), 1113 et seqq. BGB, 794 (1) No. 5, 800 ZPO

» Second ranking, not immediately enforceable nonaccessory real estate mortgage, §§ 873 (1), 1192 (1), 1113 et seqq. BGB, 879 (3) BGB – Possibly security transfers of ownership (Sicherungsübereignung) in equipment and machines, §§ 929 sentence 1, 930 BGB (Raumsicherungsübereignung)

336

Loan agreement project financing – security agreement 8 – Security assignments of receivables (Sicherungszession), § 398 sentence 1 BGB of » Claims under insurance agreements

» Claims under agreements with EPC contractors » Claims under supply agreements » Claims under off-take agreements (of particular importance!) » Possibly claim of disbursement of shareholder loan (§ 488 (1) sentence 1 BGB) Shareholder loans instead of equity injection can be efficient way of financing since interest payment are tax deductible

337

Loan agreement project financing – security agreement 9  Security under § 14 AGB Banken (pledge in securities and things in bank‘s possession and account balances)  No (proprietary or quasi-proprietary) security in pool of assets (Gesamtsicherheiten) such as floating charge under English law or nantissement de commerce under French law  Security purpose (= part of security agreement), § 311 (1) BGB as legal foundation (Kausalverhältnis) of proprietary security rights  Only part of security agreement; however, other typical elements of security agreement are absent

338

Loan agreement project financing – security agreement 10  Negative pledge clause (Negativklausel), § 137 BGB

 Merely negative covenant  No type of security; nevertheless sometimes called „atypical security“  Note § 1136 / §§ 1192 (1), 1136 BGB: not in connection with real estate mortgage (Grundpfandrecht)

339

Bibliography 1 • Bernd Fahrholz, Neue Formen der Unternehmensfinanzierung. Unternehmensübernahmen, Big ticket-Leasing, Asset Backed- und Projektfinanzierungen (Munich 1998), pp. 253-299 • Andreas Früh and Constanze Müller-Arends, Kreditvertragsrecht, in: Thorwald Hellner and Stephan Steuer (eds.) (formerly Bankgeschäftliches Formularbuch edited by Erich Trost), Bankrecht und Bankpraxis (BuB), 5 vols. (Cologne loseleaf)

340

Bibliography 2 • Jan-Hendrik Röver, Kreditfinanzierung, in: Ulf R. Siebel, Jan-Hendrik Röver and Christian Knütel (eds.), Rechtshandbuch Projektfinanzierung und PPP (Cologne, Munich 2008), pp. 581-710 • Jan-Hendrik Röver, Realsicherheiten und Direktvereinbarungen, in: ibid., pp. 762-812 • Jan-Hendrik Röver, Bergbau (mining)/Öl und Gas (oil and gas)/Hybride Finanzierungsformen für Rohstoffprojekte, in: ibid., pp. 37-59 • Jan-Hendrik Röver, „Security is a shield, not a sword“. Security in Project Finance and PPP and the implications for secured transactions law, in: Frederique Dahan (Hrsg.), Secured Lending in Commercial Transactions (Cheltenham, Camberley, Northhampton/MA 2015), pp. 235-254

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Introduction Part 1: Fundamentals of corporate finance Part 2: Fundamentals of German law Part 3: Specific types of transactions 12. Mergers & Acquisitions 12.1 Private transactions 12.2 Capital markets transactions [13. Private Equity] 14. Acquisition financing 14.1 Bank financing 14.2 Capital markets financing 15. Project financing 15.1 Bank financing 15.2 Capital markets financing 16. Securitisation 342

Trading of loans and other receivables: true sale securitisation

Company/bank = creditor of claims = seller of claims = originator

2

3

Sale of monetary claims, §§ 453, 433 BGB Assignment of monetary claims, § 398 BGB (general assignment)

Special purpose vehicle, SPV = purchase of claims

6 Payment purchase price 1 Monetary claims, e.g. § 433 II / § 488 I 2 BGB

Several debtors of claims (co-called „third party debtors“)

4 Bonds, § 793 BGB (asset backed securities)

5 Payment of bond proceeds

Investors

343