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Company acquisitions – choice of the legal form for German companies

In recent years foreign direct investment in Germany has risen considerably. In particular growth from the United States and China is notable. The focus of the investors is on the medium-sized companies of which many are global leaders. This enables the acquisition of special expertise and an opportunity to immediately penetrate the domestic European market. In this process the investors are frequently faced with cultural, company, trading and tax law challenges.
Foreign investors in Germany have to choose between a wide range of legal forms of company and organisational possibilities. The special points of German company law and the associated legal issues require that the investor has to analyse a legal area in detail with which he is not fully familiar.
The investment in a company can primarily be made through the acquisition of shares in a company (share deal), the acquisition of the majority of the assets of a company (an asset deal) or through equity participation in a company.
If the investor has opted for a share deal he is faced with the question of whether his investment in Germany is to be structured by a direct investment made from abroad or via the involvement of German or foreign purchasing company. The end decision frequently primarily depends on considerations with regard to tax law.

The right legal form is decisive

Furthermore, the legal form of the company which the investor wishes to acquire or invest in should be taken into consideration. Stock corporations are the best known form for foreign investors. Partnerships and in particular GmbH & Co. KGs or similar legal forms on the other hand are frequently unknown. It is necessary to observe that stock corporations and partnerships are treated very differently from a tax point of view and also that there are important differences with regard to distributed profits, majority requirements with shareholder resolutions, right of disposal of shares and also the legal regulations governing wills and these differences have to be taken into account. In addition, it should be noted that mainly due to tax reasons especially in medium-sized companies assets which particularly required for business operations such as real estate and patents are not owned by the actual target company but often by shareholders who allow the company to use these assets.
Foreign investors may also experience surprises with regard to the foreign legal system concerning partly unknown legal principles which must be observed in Germany in relation to capital maintenance regulations with stock corporations, special representation regulations and co-determination in companies. In particular, at the start the regulations regarding co determination are for foreign investors often difficult to understand. In stock corporations which (generally) employ more than 2,000 people, the employees have a right of co-determination in accordance with the German Co-Determination Act. The supervisory board of the company has to be equally made up of shareholders and employees (with a works council from the unions).
If the investor considers acquiring the company through an asset deal, it is necessary to observe that under German law all of the employment relationships of the company to be disposed of or part of the company are transferred to the person acquiring the company. This regulation is often unknown to foreign investors and lead to significant surprises. One the one hand he by law acquires the complete workforce of the company or part of the company, but on the other hand the employees have the right within a certain period of time to object to the transfer of the employment relationship to the acquiring party with the result that the acquiring party may possibly have to do without key workers who wish to remain working for the seller of the company.
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