How to Do M&A Deals in Germany

0:28Hello, M &A friends. learn more. Again, that's dealroom.net.

0:39I'm Kisan Patel, and you're listening to M &A Science, where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies, and what actually happened during M &A deals.

1:04Welcome to the M &A Science Podcast, where we learn from the best in M &A to uncover proven techniques for enterprise value creation. If you're interested in learning more about how to optimize your M &A practice or want to get involved with our community of forward-thinking M &A practitioners, visit mascience.com and subscribe to our free weekly newsletter. If you want to keep up with us on the go, head to LinkedIn and follow M &A Science. I'm your host and chief scientist, Kisan Patel. Joining me today is Frank Tepper-Savitsky, partner, corporate M &A, private equity, and venture capital at Denton's.

1:40Denton's is a global law firm with over 12 ,000 practicing attorneys. Their global M &A group has more than 1 ,500 attorneys and covers the full spectrum of M &A transactions. Today, we're going to talk about doing deals in Germany. Hello, guten Tag. Hello, guten Tag. Herzlich willkommen here in Deutschland. Thank you for hosting. We are here live in Düsseldorf, Germany at Denton's office. What better place to host a conversation about doing M &A in Germany than in Germany? Frank, how are you doing today? Thanks for having me today and look forward to our discussion. The best is that today is a national holiday, so we have time to speak.

2:21No pressure. Not many clients are knocking on the doors. This is when I get you to take a break from doing deals to have a little conversation. Frank, can we kick things off a little bit about your background? As you said, I'm an M &A lawyer doing venture capital and private equity deals. That's nowadays pretty common that lawyers also do both. In the former days, it was more separated, at least in Germany. When you're doing venture, you're not quite into doing also private equity with the bigger deals as an M &A deal structure. Because financing rounds is more about having a capital increase here in Germany.

2:52and then it's a slightly different structure even in the documents. But as it's more tech-related and even the M &A deals and private equity investors are looking for tech investments in Germany also. So it's pretty common that Bose is integrated. And that's how I came to Bose because I started with venture and then I also have done some tech M &A deals and also really easy reach out to the other financial sponsors doing the bigger deals actually in private equity. How many years have you been practicing for? I'm practicing now for 15 years. Yeah, so around 15 years. All right, that's a lot of deals.

3:27VC and private equities that you've seen. Difficult to count them because there were times it was like two a month or something because the smaller venture capital deals could be done a bit faster and then you have deals in parallel, actually. The bigger M &A deals took longer, so difficult to count them all. Can we break it down? How is dealmaking different in Germany? Private equity is a strong business, was also a strong yield driven business for investors and financial sponsors. But it's not the culture of Germany. The German investors, the former days, were more corporates, maybe more private investors, private high net individuals.

4:09It comes more and more. It's also the first difference to the US because US is more private equity dominated. I think that's also the reason why the bigger deals are in the centers, actually, because there are many investors doing the deals. In Germany, it could be elsewhere also in the middle of nowhere, I would say, because there might be a family-owned business which will be de-vested, actually, to a financial sponsor. So it's not only doing secondaries here because you have many primaries first year and even smaller businesses. As Germany is smaller, the US, of course, the deals are a bit smaller because the economy is not such big.

4:49Yeah, it's quite interesting. Germany is also in a transformation, actually, in many branches. Even the renewables are slightly interesting. And other branches like the tech industry, of course, there's lots of things going on. Maybe it's, first of all, a small business venture. and then it's grow up and became a tech giant and then take over bigger other clients actually. And then it is more about doing tech deals later on. It's just a big listed company you're doing deals with. So crazy times actually last 10 to 12 years, I would say. So I got a couple of things. One, it sounds like just smaller countries, so smaller deals are happening.

5:29But then also private equity maturity is probably at a different stage because when you look at America, very mature, thousands and thousands of private equity firms. And then you hear UK, there's a significant number of private equity firms. It sounds like a lot of private equity as a model is like still emerging in Germany. Does that sound fair? Yes, there was always also certain private equity investors, but the culture of doing investments actually even for private people and to get access to such privately structured funds, That is a new and come more to a broader mass of people doing their investments.

6:06I think there was, after the Second World War, not that kind of a culture doing investment that way, because that was not maybe in the US, because in the US it was more used to bring your money to big funds. They are doing the investments for you, actually, and you increase your money for later days, actually, when you're retired. But in Germany, it's more governmental structure and some less people were interested. But it is changing because of certain venture. It's more a cultural change going on. And therefore, the people are also more often thinking about divesting to private equity because they now understand how private equity works.

6:48In the past, they were more frightened of doing real deals with financial sponsors because also of the employees and all the others. When you have a family-owned business, you're not thinking about only your benefits. You also think about what's about the firm and what's about the employees. Are these employees secured actually under the financial sponsor or not? The private equity firms doing deals in Germany have done a quite good job actually last decade, I would say. The people are more open to it even to sell their companies to private equity. The culture is evolving and changing to be more accepting of private equity products.

7:24The products actually and also when you have a family-owned business, which is not uncommon in Germany because we have a strong league of family-owned businesses. The next generation, they're investing their business. I'm more thinking about also to give this in the hands of private equity funds. Very interesting. How about structuring deals? Is there a difference in how deals are structured in Germany? The major difference is that we have codified law and it's not like common law. You do not have to rule everything in the contract. So the documents are just not so many pages, do not have so many definitions, etc.

8:03Because it is more codified law, you can just make a reference to it or just name these phrases and it is binding. So sometimes if you are not ruling something which is different or which is the opposite of what was ruled, then it is just binding by codified law and then you do not have to take it into the contract. That makes a big difference because then you have just less pages and deal documentation. For a germ lawyer, at least more easier because you do not have to look in every detail because the details are in the codified law you probably know because they are pretty much standard. to the deal.

8:41But for foreigners, maybe it's more complicated because you probably do not know what is codified. So it's more difficult to get transparency to the deal, actually, with documentation. For us, it's more easy because we are knowing what's standard. This is interesting. It sounds like it kind of saves some work if it's already standardized in a way, wouldn't it? Yeah, it is. We have lots of court decisions around these standards. So they are also court decisions, but they are more recising the language of the codified law. It's a bit different because in common law, you have more cases about the same situations and then you have to look for such a case which is similar to this one you are dealing with.

9:23For us, it's more about getting a sense of this codified law and thinking about is that the right understanding? And once you have a matured understanding of codified law, then you have a pretty secureness actually how to act with those rulings. This codified law is more effective in a general way. You have a wording and this wording will not change except there is a court decision or there are court decisions of a higher court which goes in the wrong direction to the parliament's ideas and they made the law actually. And sometimes if they're seeing that's the wrong direction then they change the codified law.

10:02This is actually pretty interesting. Not how we do things in America. Can you give me an example? What areas of a deal would this cover in terms of referencing codify law versus we just negotiate directly? One of the biggest differences actually is that we also have some other formalities. And these formalities bring you to another deal structure actually. Because when you're looking at the term sheet is divided into sections. One is binding, one is not binding. And why is there a non-binding term sheet, for example, before you're doing an investment? you would like to get both parties to agree on the crucial terms in a way, in a wording, which is high level, but gives you an idea how the structure of the deal at the end could be.

10:46But in this term sheet, for example, you cannot do, you cannot take in or you cannot include language to transfer shares, for example, writing down an obligation that someone has to give you the shares if some requirements are fulfilled. Because if you're doing it that way, then you need an authorization to get a binding. So therefore, it's more about having such intention to do so. You have soft writings actually, but what you're including in this term sheet, but you have also binding parts for breakup fees, etc., etc., because you also would like to get some secureness on the deal. So I think that is first the difference because when it starts with a term sheet, there is a difference because you have such formalities to the binding rules when you're talking about for transferring shares, which is the core of each transaction, actually.

11:37When you would like to change the ownership, you have to transfer shares. Then you go into the due diligence. It is pretty much the same, I would say. Maybe here you have to also look into the qualified law in each section because sometimes you have more authorities having done some decisions, etc. But I'm not a U.S. qualified lawyer, so I'm not in the details when it comes to diligence in the U.S. when we're going down to such details. But I would assume that because of the codified law and the structure and the authorities we have here, that it is more to check what the authorities give you or what instruction, for example, and have you followed it the way you should do so you do not get any liabilities.

12:19I'm not sure. In the US, it might be a different way because you have also the punished damages and other structures and tools that might avoid that people or the market is doing it wrong, but you maybe do not have so many authorities looking after that. When you have someone who's damaged, then of course you get maybe high damages fees to pay and you would never do it again or your business runs for insolvency. That might be not the same in Germany because in Germany when you violate any laws, for example, then you have just to bring in the same position that was never the case. It's not about the punished damages as a add-on.

12:58We do not have this structure. So I think that's also a difference. Having done the due diligence, then you have to do the legal documentation before you do the signing at the notary. And you have to also work with the notary. That way he is satisfied with all documents you have provided to him. And that way that he can say, okay, that is valid when you are doing the deed because he is the master of the deed more or less. He also is checking if everything is valid and effective. For good practice in Germany, you would really work tightly with the notary at the end at least. But don't forget that he is always neutral.

13:39So he's with both parties. He will always take a neutral role in this signing process. And then you have signing and closing. And between those, you have the signing in front of the notary, but the closing could be done between the parties with the closing memorandum pretty easy. So the crucial part, more or less, of course, you have closing conditions you have to fulfill and maybe you have also closing accounts. So maybe there's also some major points in the closing, but the things, the rulings and the obligation has to be done before signing and documented in this signed documentation in front of the notary.

14:13So notarized documents, actually. This is interesting. It's different what I've seen from the US lawyers, actually, when they're doing the closing. then it's more between the lawyers. Yes. They can change the documents and say that is final and then you have it closed, the deal closed actually. And that is not the same here in Germany. We have a commercial registry which is officially by the local court of each local district where the company has its business address and seat. They're official documents you can download where you can see, for example, the newest or the recent AOAs, for example.

14:52You can download excerpts where you can just see what has done, what changes in the history has done before and what is the current status. And that is helpful. It gives you a lot of information as an investor. And even you can just check it on the homepage. This is for like a particular business or just an area of work? For all registered companies in Germany, GMBH, KUKAGEs, or for like ING's, the Aktiengesellschaft and so on. Well, if they had like a company had a previous transaction, I would be able to see all that information or? That is only possible if you have a cause actually to ask for such documents.

15:30They are not have to be uploaded. But you have other things like the company, for example, has done a merger before, but merger maybe as a restructuring in the firm or a spin off or something. then you can see it there or you can see for example the change of managing directors you can see when it was established you have lots of information in this register which is really official and gives you trust and what is done in the past and you can really it's not the same in the us as i know because there's more with the secretary to structure the documents and there's no official place where you can download it and see that i think it's more transparent in Germany.

16:13Yeah, it sounds like there's some good pros. Can we go back to the letter of intent? I thought it was interesting. It sounds like a lot of this stuff is already templated in a way. You mentioned sort of a blend between non-binding and binding. Can you go through that a little bit more? Is it sort of like every agreement's standardized when it comes to letter of intent, that there's this non-binding component and a binding component? There are different ways of LOIs because a term sheet is one thing, how you can structure it for both parties, making agreements on soft terms and binding terms actually.

16:44But you can also have a letter of intent, what was done at the beginning of my career more often than today actually, to be honest, that has changed actually. What is also good because when you see it the letter of intent, you maybe just have an offer under certain requirements and that you would like to take over the shares. But when you have a term machine, then it's more about shifting terms in a high level way from the signing process at the beginning to the agreement process. Because first of all, you would like to understand, are we on the same page? Is it worth to go into the making, the efforts actually to go into the due diligence and do the whole process?

17:25Also the reason why, especially in venture deals, you're doing it that way because you cannot go always for signing when you have so many deals at the desk, you might do or not and that could be screwed up by so many things because you do not have on maybe only one investor former investor or old investor you have maybe three or four or five or ten and then it's more easy if you make an agreement up front and even if you are more than one investor five or ten or something then it's more easy than you see this how the conditions are for each. That's also good that we have structure that way. What is a funny aspect is that there are many terms in Germany and this, at least in the venture deals, which came from the US deals and they were just localized to German law.

18:17But I think even the wording is more or less the same. And as long as it is possible, just because they're the same investors, the market has tried to make it more convenient for foreign investors. to invest by taking the same wording or trying to do it the same structure, actually. We have slightly different by law, of course, of our codified law, but I think the market has tried to take over as much as possible. Sounds like there's not a huge difference between how some of these term sheets are put together in the U.S. as opposed to... I think the most crucial difference in a venture deal is that you're doing the term sheet with a company in the U.S.

18:54and you're doing it more with the investors being invested. you're more negotiating with them also with the company of course they're also on the desk but at the end you have also to find first term negotiation to the terms also with the old investors and in the US how I understand it and it's just signing MOU or something or a term sheet with the company and the company runs the financial round actually. It's more about communicating about the company and we are also negotiating between the investors. That's interesting. And also when it comes to private equity deals, a bigger one. So for example, there's also like a rollover structure they offer.

19:35And then how could that be structured to taking over, for example, 80%, but 20 % is with the founders actually and stay with the founders, but the founders were rolled over in a SPV, for example. And how could that be structured? that is maybe more complicated here than the US because I do not have the full insight to the US, my excuse, but I would say we're also facing lots of tax issues here on the ground. It's always a good recommendation to take an experienced tax advisor with you and go through the deal because you have many obstacles here where something goes in the wrong direction and private equity and venture is always under time pressure.

20:18Someone will deploy his money pretty fast. That could be the reason, but it could be also the reason that the startup, for example, is running out of money and then you have to hurry up. What's the timeline? How long do deals typically take in Germany? Like a private equity deal, M &A? It depends on the size, actually. And there are also on the due diligence, of course. But I would say four to six months for a private equity deal. If you are fast, then maybe four months, I would say. Now, is that from initial conversation to close or how about like LOI to close? LOI to signing, actually. four months three to four months yes because you have to go to the due diligence it takes time and you have to make the first draft you have to negotiate them you have to find appointment as a notary you have to go to the notary you have to poas poas is also pretty important here because you need to keep the formalities even in the poas you have to talk to the notary first how he would like to have it because he would also like to have proof of existence and a statement of good standing This is the right way described that the person underwriting are having the power to represent the company.

21:26Because when you have foreign direct jurisdictions, you as a notary do not know how it works. So you need writings where another colleague also maybe is the same structure with a notary notarized at POA and maybe op or style the POA to get knowledge how could this person represent the company actually. because otherwise you do not have a valid legal documentation here. You cannot execute the deed. So let's role play this a little bit because I want to understand some of the challenges cross-border-wise. So I run a tech company based in America and I got a similar business I'm looking to acquire that's based in Germany.

22:03You're my legal counsel. You're going to help advise me to do this acquisition. What are my big things like right off the bat that I want to start thinking of? Pretty much at the beginning, I would just say, look, let's get the POAs done actually. For example, if you are not in the US, you are in Canada, for example, then it could be weeks. It was a deal. We wait 10 weeks to get the POS and that way we need it because there is not even... This is like the proof of authorization? Yeah, because you have to notarize it and you do not only have to apostate it, you have to have a legislation, which makes it more difficult because you need authority to make a stamp on it.

22:42And that takes time that would screw up your timeline, actually. So it is good to think about such things in the beginning. Or you have time to do it before you get to the signing. Because when you're at the signing, you do not would like to wait for weeks to get things done, which you can easily avoid when you have done it at the beginning. As I said, the term sheet structure. When I have a foreign investor, I always give my pretty much standard term sheet to them and say, look at the terms, getting familiar with it, just real tries. And if you have a question, talk to me. And when it comes to the deal, when we're doing the negotiations, it's less work and much more understanding when they have read it twice, actually.

23:24So it's also something I try to do at the very first beginning, just to get more sense of what could be asked, what is crucial for you and to get more understanding about the deal because the term sheet more often are structured like the investment and shareholders agreement at the end. You get an idea of how it could be structured in a way. So it's like a high level introduction. I've also published another venture capital association or business angel association the templates for the venture capital gem market. So I just use those which are pretty much standard and even have some explanations.

24:04so you're getting more idea how a German deal runs. For me, it's always good to have someone, a client, who understands the deal, who can easily accelerate the negotiations if someone understands what's going on. So I don't have to explain it all while negotiating. It's better if you have done it at the beginning. I'm not sure whether it's the same in the US, but when we have this term sheet, there's often an attachment to it which shows the cap table, the capitalization table actually, and shows you how it is pre-deal and post-deal. And it is also good for me as a lawyer to get through the numbers because you have to include it in the language and the documents, of course.

24:48But it is also about which party do I have to have what kind of influence to the deal. You'll see that M &A deals. We'll actually have a cap table. That is more with ventures. Because when you're taking over 100%, You see who was the old investor and then you easily say, okay, I take them all. So from the registry, you can download to shareholders listen. Then you can see how the quotas are between the shareholders. That is also interesting on one hand, but you do not see the dilution maybe, which is convertible loans, et cetera, et cetera, and other instruments. But if I'm looking to buy this company in Germany, I can actually look at that registry and see how their shareholder breakdown is?

25:27Yes. Wow. That's pretty cool for any private business. Yes. Depends if it's a KG and others. You can see how the liability apps are there, but you cannot see at all. But for a typical GmbH, which is the used form in Germany, actually, which is a common form to do private businesses, there you can see it. And you can download the shareholders list and can see how the structure is from the shareholders. That's pretty powerful. Yeah. And it's pretty transparent, actually, to everyone. So I got to ask, okay, I'm going to buy this company in Germany. It's a competitor. Do I have to worry about like a regulatory body?

26:06Like in the US, we have FTC, DOJ. There are certain thresholds where they'll really watch it. But what's that like in Germany? Because if it's buying a direct competitor. Yeah, absolutely. Under certain thresholds, I always ask my colleagues to get the right numbers. Actually, it was a current status. sometimes they are changing but if you are crossing certain numbers actually like the size of the business and even it's a direct competitor you have to look at the market shares etc if there is quite a risk that it could be seen from authority that could be denied then you have to file for release from the competition authority that is on one hand the thing which is also nowadays really important is FDI actually for indirect investments because this regulation is changing all the time and even gets tighter and tighter and I think it's the same in the US it's a worldwide development actually right now because I think of the world's situation of the wars etc etc but that is something we really have to look at to get the deal really secured because otherwise you have the problem that might be screwed up afterwards because the authority just jump into the deal and say that's not valid.