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Tables of Contents for Mergers and Acquisitions
Chapter/Section Title
Page #
Page Count
A Preliminary Question: Hostile or Friendly Acquisition? Proxy Contest?
German Law on Acquisitions
2
1
Relevant Law on Commercial Entities
2
1
Corporate Entities
3
1
The GmbH
3
2
The AG
5
3
The KGaA
8
1
Other Entities
8
1
Partnerships
8
1
Limited Partnership (Kommanditgesellschaft [``KG''])
9
1
Sole Proprietorship
10
1
Mixed Forms
10
1
Conversions and Restructurings
10
2
German Law Relating Specifically to Acquisitions
12
1
Prior Law
12
1
More Recent Developments
13
1
General Description
13
1
Actions at the EU Level
13
1
German Actions
13
1
Reporting Requirements
13
1
Insider Trading Rules
14
1
German Law on Proxy Contests
15
1
German Corporate, Civil Law and Other Barriers to Corporate Changes Against the Will of the Management
16
1
Small Numbers of Publicly Traded Companies
16
1
Securities Aspects
17
1
Shareholder Approval
17
1
Defensive Measures
17
1
Voting Restrictions (Hochststimmrechte)
17
1
Blocking Minority
18
1
Board Approval for the Transfer of Restricted Registered Shares
19
1
Elimination of Preemptive Rights
20
1
Purchase by the Target Company of its Own Shares
20
1
Sale to a Friendly Third Party
20
1
Counter Offers
21
1
Lock Ups
21
1
Golden Parachutes
22
1
Other Barriers
22
2
Transactions
24
1
Kirch-Springer
24
1
Flick-Feldmuhle
24
1
Pirelli-Continental
25
1
Krupp-Thyssen
25
2
Vodaphone-Mannesmann
27
1
The Future?
28
1
Conclusion
28
1
Opportunities
29
1
Family-Owned Enterprises
29
1
In General
29
1
Potential Generation Conflicts
30
1
Incentives to Sell
31
1
Divisions and Affiliates of Groups
31
1
Former East German Businesses
31
2
Anatomy of an Acquisition
Getting Started
33
30
Preparatory Steps and Considerations
33
1
Information about the German Market
33
1
Special Strategic Objectves for Germany
33
1
Source Material
33
1
Access to Specific Information
34
1
Commercial Register
34
1
Financial Information
34
1
Intermediaries
35
1
Chronology of an Acquisition in Germany
36
1
Negotiations
36
1
Question of Style
36
1
Setting Goals
37
1
The Acquisition Team
38
1
Communications
39
1
Preliminary Agreements
40
1
Minutes of the Negotiations?
40
2
Letter of Intent
42
1
Options and Rights of First Refusal
43
1
``Precontracts''
43
2
Due Diligence---Both Prior To and After the Acquisition
45
1
Closing
45
2
Effective Date; Interim and Final Financials
47
1
Who Manages the Target---and Who Bears the Commercial Risk between Signing and Closing?
48
1
Retroactivity and Postponement of Closing
49
1
Retroactivity
49
1
Civil Law Considerations
49
1
Tax Law Considerations
49
2
Delay of the Closing
51
1
Civil Law Considerations
51
1
Tax Considerations
51
2
Rescission
53
1
Warranties (Termination)
53
1
Rescission by Reason of the Application of Antitrust Law
53
1
Other Rescission Rights
54
1
Merger Control
55
1
German Antitrust Law
56
4
European Merger Control
60
2
Non-German Antitrust Law
62
1
Parties and Other Participants
Seller and Acquiror
63
4
The Right to Sell
63
2
Determining the Identity of the Parties
65
1
Multiple Parties
66
1
Binding Multiple Parties
66
1
Unified Arbitration
66
1
Separating Potentially Multiple Parties
67
1
Assumption of Liability, Warranties
67
3
Express Provisions on Liability
67
3
``Upstream Guaranties''
70
1
``Third Parties''
70
2
Beneficial and Legal Parties
70
1
Specific Examples of Third Party Involvement
71
1
Antitrust Law
71
1
Real Property Acquisition Tax
71
1
Disparate Interests
71
1
Use of Third Parties
72
1
Rights of Approval and Information
72
9
Necessity of Approval
73
1
Corporate Law
74
1
Labor Law
75
1
Works Council Issues
76
1
Property Law Considerations
76
1
Issues relating to the Law of Obligations
77
1
Family Law
77
1
Inheritance Law Issues
78
1
Public Law
78
1
Obtaining Necessary Consents
78
1
The Legal Consequences of the Failure to Obtain Consents
79
1
Invalidity
79
2
Transfer of the Business
The Purchase of Parts of a Business or of Shares
81
1
Tax Considerations in Choosing between a Stock or Asset Transaction
82
21
Seller: Sale of Shares: Acquiror: Purchase of Parts of a Business
83
1
Taxation of the Seller
84
1
Individuals
84
1
Tax-Free Transactions
84
1
Taxation at 50% Rate (Limited to DM 30 Million Per Year Per Person)
84
1
Taxation at Full Amount (but Generally Without Trade Taxation)
84
1
Corporations
85
1
Tax Planning Measures to Retain the DM 30 Million Limit (but Care Is Advised: Objective and Temporal Relationships with the Transfer Can Be Cumulated)
85
1
Transfer as a Criterion for Realisation of Profit
85
1
Examples
85
1
Time of Transfer
86
1
Tax Free or Taxation at Half Rate
86
1
Full Taxation
87
1
Church Tax
87
1
Inheritance Tax
88
1
Transaction Costs
88
1
Acquiror: Purchase of Individual Assets
89
1
Stepping Up (or Stepping Down) Book Values
89
1
Length of Depreciation
90
1
Depreciation Period
91
1
Purchase Price and Obligations Assumed. Devaluation
91
1
``Purchase Price'' in other Agreements
92
2
Partnership Interests
94
1
Seller
94
1
Acquiror
94
1
Miscellaneous
95
1
Exception:
95
1
Identical Tax Treatment of the Purchase of a Business or of Shares
95
1
Transfer of Silent Reserves Pursuant to § 6b EStG or bei UBG
95
1
Losses
96
1
Purchase of a Shell Company (Shell Company Losses)
96
1
Negative Purchase Price
97
1
Value of the Business and Immaterial Assets
97
1
Value of a Business
97
2
Currently Depreciable Immaterial Assets
99
1
Immediately Deductible Expenses
99
1
Assets similar to Business Value
100
1
Combined Stock and Asset Transactions
101
1
Combinations, Split-ups
102
1
Other Taxes
102
1
Real Property Acquisition Tax (Grunderwerbsteuer)
102
1
Value Added Tax
103
1
Intermediate Forms
103
4
Overview of the Civil Law Side
103
2
Taxation
105
1
Divestiture
105
1
Real Property Acquisition Tax
105
1
Capital Increase
105
1
Transactions involving Concealed Contributions
106
1
Ancillary Rights (Rights to Receive Profit, Partial Depreciation, Etc.)
107
2
Necessity of Contractual Provisions
107
1
Taxation
108
1
Partnerships
108
1
Corporations: Separate Transfer of the Right to Receive Dividends
108
1
No Separate Capitalisation of the Right to Receive Dividends
109
1
Partial Depreciation and Dividends
109
1
Other Commercial Relationships
109
1
Managing Director and Advisory Agreements
110
3
Continuity of Management
110
1
Taxation
111
1
Current Compensation for Current Activity
111
1
Severance Pay
111
1
Prohibitions on Competition
112
1
U.S. Tax Considerations
Introduction
113
1
A U.S. Purchaser's Considerations
113
12
Financing Questions
113
1
Allocation and Apportionment of Acquisition Interest Expense
113
1
Section 864(e)
113
1
The § 864(e) Temporary Regulations
114
1
Basis
114
1
Planning
115
1
Foreign Borrowing
115
1
Foreign Currency Issues
116
1
Structuring Issues
116
1
Basis and Other Matters
117
1
Direct Acquisition of CFCs
117
1
Acquisition of a U.S. Holding Company
117
1
Subpart F
118
1
Section 338
118
1
Operations following the Acquisition
119
1
Section 311 (b) Issues
119
1
U.S. and Foreign Personal Holding Company Issues
120
1
Section 902 E & P
120
1
Section 904(d) Basket
121
1
2c2(i)
121
1
LTR 9409020
121
1
Sections 382, 383 and 384
122
1
Previously Taxed Income
123
1
Information and Representations
123
1
General
124
1
Elections
124
1
Section 1248 Information
124
1
Other Current Year Information
124
1
Representations
124
1
Section 6043(c)
124
1
Section 1060
125
1
Sale of a Foreign Affiliate
125
21
Character of Gain---§ 1248
125
1
Direct Sale
125
1
Section 1248
125
1
E & P
126
1
Lower-Tier CFCs.
126
1
Foreign Tax Credits
126
1
Section 905(c)
126
1
Amount of E & P
126
1
Post-Acquisition Earnings and Dividends
127
1
Section 1248 Rules
127
1
Sale of U.S. Holding Company
128
1
Section 1248(e)
128
1
Suspension of Section 1248(e)
128
1
Dividend Planning
129
1
Foreign Tax Credit Planning
129
1
Subpart F Deficit Planning
129
1
Subpart F
129
1
Foreign Tax Credit Limitation
130
1
Source of Gain
130
1
Source of Loss
130
2
Limitation Category
132
1
Section 1248 Dividend
132
1
Gain on the Sale of Stock
132
1
High-Tax Kickout
132
1
Sale of Second-Tier CFC
133
1
Losses
133
1
Application of Section 338
134
1
Section 338(h)(6)(B)
134
1
New Treas. Reg. § 1.338-5
134
1
The Previous 5T Temporary Regulations
135
1
Enhanced E & P
136
1
Temp. Treas. Reg. § 1.338-6T
136
1
Exclusion and Transitional Rules
137
1
Regular Exclusion Election
137
2
Transitional Elections
139
1
Section 338(h)(10)
140
1
Section 338 and Eoreign Tax Credits
141
1
Effect of § 338 Election on § 904 Limitation
142
1
General
142
1
LTR 8938036
143
1
Temporary Regulations
143
3
OBRA
146
7
OBRA 1993
146
1
Anti-Deferral Provisions
146
3
PFIC Rules
149
1
Section 956
149
1
Other Subpart F Changes
150
1
Section 482 Penalty
151
1
Section 936
151
1
Earnings Stripping
152
1
Other International Provisions
152
1
Other Changes
153
1
Tax-Free Acquisitions Pursuant to § 367
153
4
Acquisitive Reorganizations of a U.S.-Owned Foreign Corporation
153
1
Application
153
1
U.S. Shareholders
154
1
Foreign Corporation
154
1
The Target CFC's E & P
154
1
Basis
154
1
Special Rule
154
1
Stock-for-Stock Acquisitions of Foreign Corporations
154
1
Section 367(a)
154
1
Section 367(b)
155
1
Special Rule Where There Is a Type B Reorganisation/§ 351 Exchange Overlap
155
2
Lbos, Mbos and Tender Offers
Overview
157
1
LBOs in Germany and the USA
157
1
Goals and Interests of the Parties
157
1
Significant Characteristics
158
1
Tender Offers
158
1
Civil and Corporate Law
158
1
Banking and Stock Exchange Law
159
1
Tax Law
159
1
Financing the Purchase Price with Target Assets
159
9
Alternatives
160
1
Asset Transaction
160
1
Share Transaction
160
1
Target is a Stock Corporation
161
1
Return of Capital Contribution
161
1
Prohibition against a Corporations's Financing the Acquisition of its own Shares
162
1
Merger
162
1
Integration
163
1
Liquidation
163
2
Transfer of the Business to Majority Shareholders, Without Liquidation
165
1
Target in the Form of a GmbH
165
1
Maintenance of Stated Capital
165
1
Violation of Contractual Corporate Obligations
166
1
Criminal Provisions
167
1
Mergers/Liquidation
167
1
Transfer of the Business to a Majority Shareholder
167
1
Commercial Partnerships (oHG, KG)
168
1
Step Up of Basis
168
8
Tax Goals
168
1
Step Up of Basis
169
1
Corporate Target
169
1
Cash flow
170
1
Step of the Basis of Individual Assets
170
1
Overview
171
1
Holding Company
171
1
Asset Acquisition
171
1
Asset Sale
172
1
Profit Payout or Pay Up
173
1
Partial Depreciation
174
1
Trade Tax
174
1
Partial Realisation
175
1
Sales by Foreigners
175
1
Assets Tax
176
1
``Internal'' Asset Transactions
176
1
Payment from Cash Flow
176
1
Miscellaneous Tax Questions
177
5
Taxable Reserves
177
1
Payment to the Acquiror
177
1
Outside Financing of the Acquisition
177
1
Purchase of Reserves
177
2
Payment to the Seller
179
1
Risk of Loss
179
1
Deduction for Loss
179
1
Deduction of Interest after the End of the Participation
180
1
Interest Deduction
180
1
Basic Situation
180
1
Intermediaries
181
1
Concealed Dividends
182
1
Mangement Buy-Outs (MBO)
182
4
Labor Law Issues
182
1
Flexible Sellers
183
1
Advantageous Purchase Price/Forgiveness of Purchase Price Payment/Leasing Plant and Equipment
183
1
Negative Purchase Price, Purchase Price below Net Basis
184
1
Seller's Representations and Warranties in an MBO
184
1
Tax Free Cash Flow from Reserves
185
1
The Temporary GmbH
185
1
Management Participation in the Acquiring Corporation
185
1
Other Providers of Funds
186
4
Structure of the Financing
186
1
Equity
186
1
Debt
186
1
Tax Provision
186
1
Investor Pools
187
1
Interim Holding Companies
187
1
Debt
187
1
Fixed Interest
187
1
Silent Partnership
187
1
Loans with Profit Participation
187
3
Labor Law
The Elements of § 613a BGB.
190
6
Business or Part of a Business
190
2
Change of Owner
192
1
Requirement of a Transaction
193
1
Acquisition of an Operation from a Trustee in Bankruptcy
194
2
Legal Consequences of the Transfer of a Business Pursuant to § 613a BGB
196
3
Transfer of Employment Relationships
196
1
Objection by the Employee
197
1
Liability Pursuant to § 613a BGB
198
1
Union Aspects
198
1
Pension Rights
199
1
Assumption of pension Obligations
199
1
Acquisitions in Bankruptcy
200
1
Termination
200
3
Performance and Payment
The Performance of the Respective Parties
203
2
Performance by the Seller
203
1
Performance by the Acquiror
203
1
Time of Determination of the Purchase Price
204
1
Allocation of Risk and the Purchase Price
205
1
Valuation, Fixing the Purchase Price
205
1
Fixed or Variable Purchase Price and the Representations a Warranties
206
1
Fixed Purchase Price
206
1
Variable Purchase Price
206
1
Purchase Price and balance Sheet Adjustments
207
2
Balance Sheet Adjustments
207
1
Financial Representations and Warranties
208
1
Production and Examination of Financials
208
1
Adjustment of the Financials
208
1
Tax Planning
209
2
Avoidance of Tax Disadvantages
209
1
Tax Advantages for the Seller
210
1
Severance Pay
210
1
Options
210
1
Partial Deferral of the Purchase Price
210
1
Transfer following a Capital Increase
210
1
Deferral of Profit Realisation
211
1
Dividend Payments in the Event of Losses by the Seller
211
1
Divestiture, Etc.
211
1
Limitation of Expenses by Effective Tax Planning for the Acquiror
211
1
The Tax-Related Interests of the Acquiror
211
1
Seller Tax Flexibility
212
1
Financing
212
2
Increased Risk
212
1
Taxation
213
1
Financing the Transaction via the Target
213
1
Exchange of Shares
214
1
Security Measures
214
1
Hold-Backs
214
1
Securing the Purchase Price
215
1
Transaction Taxes
215
4
Value-Added Taxes
215
1
Contractual Provisions
215
1
Tax
216
1
Assignment of the Claim for VAT Paid
216
1
Real Property Acquisition Tax
217
1
Valuation of the Real Property
217
1
Unification of all Shares of a Partnership or Corporation
217
2
``Closing'' Issues
Preparations for the Transfer of the Business
219
1
Divestitures and similar Transactions
219
1
Separation from Private Assets
220
1
Delivery of Assets
220
2
``Delivery'' of Corporate Shares
222
1
Non-Compete Agreements
222
7
Effectiveness in General
222
1
Violation of Public Policy
223
1
German Cartel Law
224
2
Cartel Law Invalidity. Administrative Offense. Requirement of a Writing
226
1
European Cartel Law
226
1
Substantive Law
226
1
Procedure
227
1
Tax Law
227
1
Non-compete Agreements Outside the Context of the Acquisition
228
1
Other Ongoing Obligations
229
1
Information and Participation Rights of the Seller
230
1
Prozesse/Litigation
230
1
Litigation: Seller's Interests
230
1
Tax and Similar Audits
230
1
Notarisation of the Purchase Agreement
Necessity of Notarisation
231
3
Real Property Transactions (§ 313 BGB)
231
1
Agreement with Respect to Current Assets or Fractions Thereof (§ 311 BGB)
232
1
Transfers of GmbH Shares (§ 15 GmbHG)
233
1
GmbH Shares
233
1
GmbH & Co. KG
233
1
Notarisation Outside of Germany
234
3
GmbH Shares
235
1
Real Property
235
2
APPENDICES
Appendix 1. I.R.C. § 864(e)
237
4
Appendix 2. Acquisition Code of the Commission of Exchange Experts at the Federal Ministry of Finance in the Version dated July 14, 1995, as amended, effective January 1, 1998, by Notice dated November 28, 1997 Promulgated by the Acquisition Commission (January 1998)
241
7
Introduction
241
1
Definitions
241
1
Public Offers
241
1
Offeror
242
1
Target Company
242
1
Securities
242
1
Acquisition Commission
242
1
Clerk's Office
243
1
Basic Principles
243
1
Contents of the Offer
244
1
Obligations of the Offeror
245
3
Target Obligations
248
1
Acquisition Commission
248