Company acquisition – choice of legal form for German companies

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last updated on 22 February 2022 | reading time approx. 2 minutes

 

In recent years, foreign direct investment (inbound investment) in Germany has risen sharply. In particular, an increase in investments made by the United States and China has been recorded. Investors focus mainly on medium-sized companies, many of which are world market leaders. Such investments enable acquiring special know-how and the chance of positioning the company directly in the European single market. In this context, the buyers often face not only cultural but also corporate, commercial and tax law challenges.

 

 
In Germany, there is a broad range of corporate forms and structuring options available for foreign direct investments. However, the peculiarities of German corporate law and the related legal issues require the investor to carefully investigate the subject matter, which is partly new to him.
 
Investors can generally invest in companies by acquiring company shares (share deal), acquiring all company assets (asset deal) or by investing equity in the company.
 
If the investor has opted for the share deal, he is faced with the question of whether to structure his investment in Germany in form of direct shareholding from abroad or by involving an intermediary being a German or foreign acquiring entity. Here, tax considerations often come to the fore.
 

The right legal form is crucial

Another important aspect to consider is the legal form of the company that the investor wants to acquire or in whose shares he wants to invest. Foreign investors are largely familiar with corporations as the legal form. By contrast, partnerships and in particular GmbH & Co. KGs or similar legal forms are often something new. Not only are corporations and partnerships treated differently under tax law, but they also differ greatly in terms of profit distributions, majority requirements for shareholder resolutions, the right to dispose of shares, and inheritance regulations, for example, all of which must be taken into account. In addition, mainly for tax reasons, especially in the case of medium-sized companies, assets that are essential to the business (operating assets), such as land plots and patents, are often owned by shareholders outside the actual target company, who transfer them to the company for use.
 
Foreign investors can also face surprises with regard to the principles of capital maintenance regulations for corporations, special representation regulations and co-determination in companies, some of which are unknown in foreign legal systems but which must be observed in Germany. In particular, the regulations on co-determination are often difficult for foreign investors to grasp at first. In corporations that (as a rule) employ more than 2,000 employees, for example, the employees have a right of co-determination arising from the Co-Determination Act. Their supervisory board must be composed of an equal number of shareholder and employee members (including works council members from trade unions).
 
If the investor is considering acquiring a company by way of an asset deal, it should be noted that under German law all employment relationships attributable to the business or part of the business to be sold are transferred to the buyer by virtue of law. This regulation is often unknown to foreign investors and can result in major surprises. On the one hand, the buyer takes over the entire staff of the business or part of the business by law, but on the other hand, the employees have the right to object to the transfer of their employment relationships to the buyer within a certain period of time, which means that the buyer may have to do without key employees who want to continue working for the seller.

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