I. Acquisition and Purchase of Shares ("Share Deal")
Starting Point
Shares in companies - for example in a Limited Company (Ltd) or Public Limited Company (Plc) - can be acquired by means of a purchase agreement. Particular attention should be paid to certain formalities that may need to be complied with according to German law, e.g. a notary certification.
Since the purchase of shares constitutes the purchase of a company or an interest in a company, exact information on the company affairs and the actual value of the company need to be obtained. Determination of the value is done by means of a "Due Diligence", which is an inquiry into all circumstances relevant to the acquisition of the company; this is done in order to disclose the risks and opportunities for the investor. The financial standing of the company is especially relevant (share capital, order situation, liabilities, business prospects) as well the legal situation (contracts with employees, customers, suppliers, litigation, tax liabilities and risks).
A Due Diligence is always advisable. The time and research needed to carry out a Due Diligence depends on the purchase. It goes without saying that the purchase of a share of a GmbH worth Euro 10.000,00 differs from the acquisition of all shares of an AG worth several million Euros.
An effective Due Diligence requires the close collaboration of lawyers, financial advisors, auditors and accountants together with experienced economic experts, who are capable of estimating a realistic value of the company. Determining the true value of a company is a very difficult practical problem and there are many different methods available. But, in the end it is the principles of the market - namely supply and demand - which will finally decide and influence the purchase price.
Time scheme
The purchase of a company should never be hurried. There is always the risk that while carrying out the Due Diligence there will be unexpected findings which need to be examined in depth (especially as far as fiscal or legal risks are concerned). Four weeks should be sufficient for a normal Due Diligence, plus about 2 to 4 weeks for the following negotiations.
To evaluate a company it is necessary to gain access to private company documents this usually requires a declaration of strict confidentiality which again may take time.
The amount of time required depends on the case in hand. Very often single problems may turn out be very time-consuming (for example hidden risks caused by employment contracts or concrete legal risks because of product liability, the evaluation of intellectual property rights like patents, trademarks etc.). If no unforeseen problems arise, a legal Due Diligence will take around 50 to 80 hours. If notary certification is required the fees of the notary public need to be added. These fees range from ca. 500, - € for transaction values of 100.000 EURO to 3.550, - € for transaction values of 1 million EURO.
II. Purchase of a Business or Business Assets ("Asset Deal")
Starting Point
If you are not interest in acquiring shares in a business it is also possible to purchase an entire business or just some of the business assets (Asset Deal). Assets range from the actual physical machinery and office equipment or buildings to product patents, copyrights and trademarks.
Depending on the circumstances of the business it may also be recommendable to do a Due Diligence (see Acquisition and Purchase of Shares), especially if you intend to purchase the entire company. A Due Diligence is not necessary if the value of the assets is clear e.g. the value of machines is stated in the balance sheet and therefore can be used as the basis for negotiations. Things may be more difficult if intangible things such as goodwill, i.e. the reputation of the business and its relationship with its customers, are acquired. Contacts with customers whether they are on a contractual basis or not may cause problems, since customers as such cannot be sold. If there are contractual agreements between the business and its customers, the latter have to consent to a transfer of the contracts to the buyer. This also has to be considered when drafting the agreement.
Caution needs to be exercised if there are grounds for suspicion that the selling company is facing financial problems. In connection to this there are two risks the buyer must be aware of. The first major risk is if the newly purchased company becomes insolvent shortly after the acquisition has taken place. The liquidator then has the power to challenge the purchase and nullify the deal. As a consequence the buyer is obliged to give back all purchased assets to the liquidator; the purchase price is lost and must be proven to the liquidator. Due to the fact that the company's assets are distributed pari passu amongst the creditors, only a small amount of the purchase price might be recovered later.
The second major risk may be incurred if the buyer chooses to keep the previous business name. This often occurs if the purchaser is taking over the old customer base. In accordance with German law the further use of the business name has the effect that the buyer is liable for the debts of the seller. This liability can be excluded within the purchase agreement, but it is only valid if the exclusion has been expressly announced to the creditors prior to the transfer. The announcement may be effected by a record in the register of companies, stating that the buyer is not liable for the debts of the seller. Alternatively, the buyer can inform each creditor separately of the exclusion of liability. But this has to be accomplished prior to the actual transfer of the business.
Time scheme
In the case of the acquisition of a business the time scheme depends on what precisely needs to be examined. To avoid a hectic purchase which may have disadvantageous consequences, a minimum of 4 weeks should be taken into account.
If single clearly defined objects are to be taken over, a less complicated purchase agreement needs to be drafted. This, according to our experience, can be accomplished within 10 to 20 hours. If the business as a whole or a unit of an enterprise is to be acquired, you should calculate roughly 50 to 80 hours.
III. Which kind of purchase is the right one?
Sometimes it is not easy to find out which kind of purchase (asset or share deal) can fulfil the interests of the potential buyer in the best way. Only if the potential buyer is solely interested in certain parts of the business is the solution is obvious: The purchase agreement will just refer to those specific objects.
If the business is to be purchased as a whole, the buyer should focus on the problems arising from the assumption of debts. As long as the business is healthy and insolvency is unlikely, the purchase of assets or of the business as a whole is preferable in most cases. More caution should be shown if there is any likelihood of impending insolvency.
It is quite understandable that owners of insolvent companies try to sell the valuable parts of their business, such as the name, claims against third parties, machines or goods.
The problem with such purchases is if the business goes into insolvency. Sooner or later a liquidator will become involved and he, as already mentioned before, has a wide range of powers. He can cancel the purchase afterwards, even though at the time of the purchase insolvency had not yet taken place, and ask the buyer to return the business or the assets already purchased. The purchase price will not be refunded, but be regarded as a normal claim which will be served pari passu beside the other creditors from the money that the liquidator realizes in the course of the liquidation. If winding-up proceedings do not take place there is the possibility that creditors of the seller get in touch with the buyer looking for the payment of their claims. In any case extreme caution needs to be exercised.