Author: | Published: 4 Jan 2001
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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 in Germany.


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 control.

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 all shareholders.

Exemptions from the obligation to make a mandatory offer

  • 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 launched

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 general meeting.

Anticipatory resolutions (Vorratsbeschlüsse)

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 justified.


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 offers.

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 amount

  • 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 block discounts.

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

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).


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.



  • 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 recipient.


  • individual shareholders are taxed only on 50 % of dividends received.

Partnerships/sole proprietorships

  • 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 the seller

The German Tax Reform provides for significant tax benefits in the case of the sale of an enterprise.

Corporate seller

  • 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 partnership.
  • 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 income tax.

Private / partnership Seller

  • Sale of shares held as business assets
    The sale of shares held as business assets is half tax-exempt.
  • Sale of shares held as private (non-business) assets
    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 proprietorship
    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 million).

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 corporation).

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.

Timing issues

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 corporation.
  • 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 potential
    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 respect.

    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 depreciable assets.

    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 be applicable.
  • 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 tax.
  • 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.

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