In recent years the importance of takeovers by means of
public tender has increased significantly in Europe, and
particularly in Germany, where the Vodafone AirTouch takeover
bid for Mannesmann vividly illustrated the potential impact of
hostile takeovers on the German business environment. This has
called for binding regulation, in order to balance the
competing interests in a takeover procedure and to achieve an
equitable solution that binds all relevant parties. The new
German takeover regulation, in conjunction with the
introduction of the future steps of the German tax reform, will
generate the creation of a legislative environment which
encourages companies to pursue major disposals and acquisitions
THE GERMAN DRAFT SECURITIES PURCHASE AND TAKEOVER ACT
With the aim of replacing the existing voluntary German
Takeover Code, a Governmental draft of a Securities Purchase
and Takeover Act ("Governmental Draft") was
published on July 11 2001.
Initially, the German Securities Purchase and Takeover Act
("Takeover Act") was to be implemented only
after a decision on the 13th EU Directive on Company Law in
order to avoid contradictions between the two regulations.
Notwithstanding the compromise entered into by the European
Conciliation Committee on the duty of neutrality, the Directive
was rejected on July 5 2001 with 273 votes in favour, 273 votes
against and 22 abstentions. The efforts of the European Union -
developed over a 12-year period - to establish a uniform
framework for takeovers in Europe have thus failed for the time
being. As it stands, the German Takeover Act shall come into
force on January 1 2002 but may be subject to further changes
in the course of the legislative procedure.
The German Takeover Act will apply to:
- takeover offers, i.e. offers aiming at the acquisition of
control over the target.
- mandatory offers, i.e. offers launched after control has
been obtained .
- all public acquisition offers, i.e. offers which do not
aim at the acquisition of control or which aim at the
consolidation of the participation of an existing position of
Basically, the rules applying to acquisition, takeover and
mandatory offers are the same, although takeover and mandatory
offers are regulated in more detail.
The Takeover Act shall regulate the acquisition of
securities (i.e. not only shares) of joint-stock companies or
commercial partnerships limited by shares, whose registered
office is situated in Germany, and whose shares are traded on
an organized market within the European Economic Area.
The Governmental Draft contains special rules on mandatory
offers. In practical terms, this means that any corporate
bidder achieving 30% or more of all existing voting rights,
must within five weeks make an unconditional public offer to
Exemptions from the obligation to make a mandatory
- In certain cases, such as reorganization within a group
of companies, the Federal Supervisory Office for Securities
Trading may exempt the person or entity reaching the 30%
threshold from making such a mandatory offer.
- Both mandatory and takeover offers which aim to take
control of a company must comply with the same criteria.
Thus, the Governmental Draft stipulates explicitly that no
(further) mandatory offer needs to be made, if control has
been obtained as a result of a takeover offer.
Before publishing the offer documentation the offeror will
have to ensure that it will have the funds necessary to finance
the offer when such funds are due. If the consideration
consists of cash, a company providing securities trading
services (Wertpapierdienstleistungsunternehmen) with a
registered office within the territory of the European Economic
Area must confirm that the offeror has undertaken the necessary
measures in order to ensure that it will have the funds
necessary to finance the offer when such funds are due. Should
the offeror not have undertaken the necessary measures and the
funds be insufficient, the security holders who have accepted
the offer may hold the company providing securities trading
services liable for any damages incurred.
The question whether the management of the target company
should be allowed or not to carry out defense measures during
the takeover period was one of the most disputed aspects of the
Takeover Act. Whereas previous drafts of the Takeover Act still
imposed a severe duty of neutrality for the management and
supervisory board of the target company, the Governmental Draft
now intends to grant the target management more room for
manoeuvre, although a consent of the general meeting is still
needed. The consent of the general meeting can be granted
either after the takeover offer is launched or by way of an
anticipatory resolution, i.e. an abstract resolution issued
prior to a takeover situation authorizing the management to
frustrate unfriendly bids. It remains to be seen whether the
defense measures are effective tools.
Consent given after the takeover offer was
Measures which may frustrate the bid and which are taken by
the management of the target company during the offer period
require generally authorization of the general meeting.
- Measures requiring consent
Such measures may be e.g. the issuance of a large
number of new shares by the target company, the purchase of
own shares, the sale of crown jewels, the creation of
anti-trust problems (e.g. through the acquisition of a
competitor of the target company).
- Measures not requiring consent
Measures which would also be carried out by a proper and
conscientious manager of a company not being a target of a
takeover offer and the search for a competing offer (white
knight) do, however, not require the authorization of the
The Governmental Draft allows now the management of the
target company to make use of an anticipatory resolution of the
general meeting, in order to defend the company after a hostile
bid was launched.
This anticipatory resolution
- has to be issued by a majority of at least ¾ of
the represented capital.
- is effective only for 18 months.
- must include a detailed description of the measures which
may be carried out by the management. The description of the
measures may take the form of a catalogue; blank
authorizations are inadmissible.
Measures taken by the management as a consequence of an
anticipatory resolution are subject to the prior approval of
the supervisory board.
Benefits for target's management
The offeror is not allowed to grant or promise unjustified
cash benefits or equivalent patrimonial advantages to the
management or to the supervisory board of the target company.
The perspective of a continued employment of the board may be
Whilst the draft Takeover Act provides no price fixing rules
for acquisition offers, the offeror has to observe severe rules
while determining the consideration for takeover and mandatory
Types of consideration
Takeover or mandatory offers need in principle not to be in
cash; a share-for-share offer is also permissible, as long as
these shares are liquid and admitted to trading on an organized
market within the European Economic Area. A cash offer is
nevertheless obligatory in two cases:
- where the offeror has acquired for cash more than 5% of
the shares or voting rights of the target company within the
three months before the publication of the offer.
- where the offeror acquired shares while the takeover
offer was being made, and paid cash for these shares.
- The value of the offeror's consideration must generally
amount to at least the target company's average weighted
stock exchange price during the last three months.
- In the event that the offeror has acquired shares in the
target company within the last three months, the value of the
consideration must be based on the highest amount between the
average weighted price for the last three months and the
highest price paid by the offeror. As opposed to previous
drafts, the Governmental Draft admits no longer any share
The draft Takeover Act will also introduce changes to the
German Stock Corporation Act, which, for the first time, will
provide a possibility for squeeze out. Accordingly, once a
threshold of at least 95% has been reached, the general meeting
may decide, at the main shareholder's request, that the shares
held by the minority shareholders (even where they had refused
to sell) are transferred to the main shareholder in return for
compensatory payments. The shareholder will thus be enabled to
acquire all of a company's stock.
The consideration to be paid to the minority shareholders in
exchange for their shares will be paid by the main shareholder,
not by the company. The amount of the consideration is, in the
first instance, established by the main shareholder and,
according to the commentaries accompanying the Governmental
Draft, may not be fixed below the current market value of the
target company's shares. The main shareholder is nevertheless
bound by the cash consideration he has paid during an offer
made in accordance with the Takeover Act, if the offer:
- was within the six months prior to the passing of the
squeeze out resolution.
- was accepted by no less than 90% of the shareholders to
whom it was addressed.
- and the main shareholder acquired his main participation
by way of this offer.
Prior to convening the general meeting, the main shareholder
must provide the management board with a declaration issued by
a financial institute attesting that this institute guarantees
the consideration due to the minority shareholder.
The consideration will be paid in cash. Moreover, the
minority shareholders may challenge the amount of the
consideration in court (with certain exceptions). In such a
case, the level of consideration will be fixed by a special
court procedure (Spruchverfahren).
EFFECTS OF THE TAX REFORM ON COMPANY ACQUISITIONS AND
Besides the new takeover regulation, Germany will take as of
next year, full benefit of the recently adopted tax reform. The
German Parliament passed an Act on the Reform of Taxation of
Companies and Reduction of Tax Rates ("Tax Reduction
Act") which makes some radical changes to the German
tax system. In future the half-income system will apply,
replacing the previous tax credit system. Under the new system,
the profits of corporations are taxed (i) at the corporate
level, and (ii) on distribution, half of the amount distributed
is taxed again at the shareholder level.
However, the Tax Reduction Act is already subject to review
and the German Ministry of Finance (Bundesministerium der
Finanzen) has published a report
("Report") proposing further changes.
AN OVERVIEW OF TAXATION OF CORPORATIONS AND THEIR
- corporate income tax is reduced from 40 % to 25 % for
distributed and retained profits.
- a tax exemption is introduced for profits distributed by
corporations to corporations at the level of the
- individual shareholders are taxed only on 50 % of
- for partnerships and sole proprietorships the highest
income tax rate is reduced to 48.5 % in 2001 (dropping to 47
% in 2003 and to 42 % in 2005). An income tax reduction is
introduced by reference to a lump-sum trade tax amount.
- declining-balance depreciation on movables acquired after
December 31 2000 is reduced to 20 % and depreciation on
buildings is reduced to 3 %.
TAXATION OF ACQUISITIONS AND DISPOSALS
Taxation of the seller
The German Tax Reform provides for significant tax benefits
in the case of the sale of an enterprise.
- Sale of shares in a corporation
Profits resulting from the sale of shares will be
exempt from both corporate income and trade tax, even if, as
it is often the case with private equity investments, they
are held through a partnership. It remains unclear whether
(and to what extent) this exemption applies to trade tax on
sale of shares by a commercial partnership (discussions are
ongoing about exempting capital gains from trade tax, whether
or not the partners are individuals or corporations).
- Sale of participations in a partnership
The sale of shares in commercial partnerships is
currently not subject to trade tax, but is subject to full
rate corporate income tax; however, such capital gains are
tax-exempt to the extent that they are attributable to shares
in corporations held by the partnership. The Report proposes
to eliminate the trade tax exemption if only part of a
partnership interest is sold or a partnership interest is
sold after a tax neutral contribution of assets into the
- Sale of a business
Capital gains from the sale of a business or part of a
business (asset deal) is subject to full trade and corporate
Private / partnership Seller
- Sale of shares held as business assets
The sale of shares held as business assets is half
- Sale of shares held as private (non-business)
The sale of shares held as private assets is subject to
individual income tax according to the half-income system
(i.e. only half of the capital gain will be taxed), if,
within the last five years prior to the sale, the seller held
a participation of at least 1 % in the target corporation
(reduction of substantial participation threshold from 10 %
to 1 %). The half-exemption will also be applied to
speculative gains (Spekulationsgewinne), i.e. gains
arising on a sale by a shareholder holding less than 1 % in
the target company within one year of acquisition.
- Sale of a partnership interest or a sole
The capital gain from a sale of a partnership interest
or a sole proprietorship triggers individual income tax at
the full rate (but no trade tax (the Report suggests
abolishing this exemption under certain circumstances)). Only
sellers who are over 55 may benefit from the reduced (half)
tax rate (and then only once and only on the first DM 10
Minimum holding requirements
In principle there are no minimum holding requirements to
achieve a tax-free capital gain on sale of shares. However,
capital gains from the sale of shares received in exchange for
tax-free contribution in kind (einbringungsgeborene
Anteile) are only tax-exempt if the shares have been held
by the seller for at least 7 years prior to the disposal (thus
preventing the "dropdown" of a business/partnership interest
into a corporation and a tax-free disposal of such
It may be possible for individual shareholders holding a
substantial participation to avoid capital gains taxation if
the shares are contributed to a HoldCo in a tax-free exchange
for its shares and are then subsequently sold by HoldCo.
However, the Report proposes eliminating this possibility.
The new rules (exemption (or partial) exemption) and
reduction of the substantial participation threshold) apply
- from 1 January 2001 for the sale of shares in a foreign
- from 1 January 2002 for the sale of shares in a German
corporation (if the fiscal year of the target corporation is
the calendar year).
Taxation of the buyer
- Conversion of acquisition costs into depreciation
The buyer of a company is interested in obtaining a
step-up, i.e. an increase of the depreciation basis of the
target by the difference between the purchase price paid and
the net book value of the assets of the target. The Tax
Reduction Act creates considerable difficulties in this
If a business is acquired in an asset deal, the part of the
purchase price that exceeds the net book value is allocated
to the individual assets acquired, according to the fair
market value attributable to them. Particular arrangements
for the conversion of acquisition costs to depreciation
potential are, therefore, not needed. The same applies to the
acquisition of an interest in a partnership. From a tax point
of view, the acquisition of a partnership interest is treated
as a direct acquisition of a share in each asset owned by the
partnership. To the extent that the purchase price exceeds
the net book value of the share in the acquired assets, the
difference is allocated to the individual assets of the
partnership, capitalized in a supplementary tax balance sheet
(Ergänzungsbilanz) of the buyer, and added to
the basis for depreciation deductions.
In contrast to this, if shares in a corporation are
acquired, the target corporation's tax balance sheet is not
affected by the acquisition. The target corporation can use
only the previous book values of its assets as the basis for
its depreciation deductions. In order to avoid this share
deal disadvantage, special models for the acquisition of
corporations were developed in the past which combine the
respective advantages of the share deal and the asset deal
by, in effect, converting non-depreciable shares into
As a consequence of the fact that the seller's capital gains
will be largely tax-exempt, these models (in particular the
conversion of the target into a partnership) will no longer
- Fiscal unity
Company acquisitions will benefit from new reliefs
applying to fiscal unity for corporate income tax purposes.
In future a fiscal unity can be established if the purchaser
(after the acquisition) is the majority shareholder of, and
has concluded a profit transfer agreement with the target;
the economic and organizational integration of the target is
no longer required. It will therefore be easier for SPVs to
establish a fiscal unity (without having to actively manage
at least 2 subsidiaries). Whilst the requirement of economic
and organizational integration remains for trade tax
purposes, the Report proposes to recognize fiscal unity for
trade tax when it is recognized for corporate income
- Deduction of financing costs
Under the Tax Reform Act financing costs related to
tax-exempt dividends from shares in a German corporation are
not tax deductible. The Report proposes to cancel this
restriction on the deductibility of financing costs.
- Thin capitalization rules
The German thin capitalisation rules have been
tightened by reduction of the safe haven limitations.
Interest paid on loans made by a shareholder holding more
than 25% in a German corporation beyond a maximum shareholder
loan/shareholder equity ratio ("safe haven") is treated as a
constructive dividend, unless such interest payment is
taxable at the shareholder level in Germany (e.g. foreign
shareholders). Interest payments on the part of the loans
exceeding the safe haven are not tax deductible and the
German corporation pays withholding tax on such interest
payments. The previous safe haven ratio of 0.5 : 1 for
shareholder profit-related loans is abolished. The safe haven
ratio for fixed interest rate shareholder loans will be
reduced from 3 : 1 to 1.5 : 1. The extended safe haven ratio
for qualifying holding companies will be reduced from 9 : 1
to 3 : 1. This will have a substantial effect on the equity
structuring of private equity deals.
TAX EXEMPT DISPOSAL OF SHARES IN 2001?
Whilst the tax exempt sale of shares in German corporations
introduced by the Tax Reduction Act applies only to sales on or
after 1 January 2002, certain structures benefit from the tax
exemption even for a sale of shares in 2001 (e.g. put and call
options; controlled joint ventures) by deferring some of the
gains to 2002 or if certain conditions are met as to the
financial year end of target.
The new German Takeover Act, if enacted as anticipated in
this paper, will provide a clear framework for capital markets
and will lead to more takeover situations, despite the fact
that these may be more difficult, more time-consuming and more
expensive. As regards the Tax Reduction Act, this will trigger
some structuring problems for transactions (no step-up,
restrictions on deduction of financing costs, thin
capitalization). However, this is likely to be outweighed by
the increased willingness of vendors to sell (tax-free). The
effect on prices remains an open issue.
Clifford Chance Pünder
Mainzer Landstrasse 46
Frankfurt Am Main
Tel: 49 69 71 99 01
Fax: 49 69 71 99 4000