As of mid-2022, private equity (PE) and venture capital (VC) in Germany had clearly recovered from the pandemic-related decline in 2020 and 2021. However, the business climate continued to cool off towards the end of 2022, with funds, portfolio companies and management facing various challenges against the background of various macro-economic challenges. Negative economic forecasts and rising interest rates have led to increased pessimism among investors. However, in these challenging times, investment companies have demonstrated their important function as experienced mentors alongside their portfolio companies. In addition, the current situation may also create certain opportunities for PE funds, in that the numbers of forced and distressed sales are expected to increase in the mid-term.

There are sufficient funds available, both in and outside of Germany, to further boost the VC space and fuel the future PE market. Germany is still an attractive market for domestic and foreign investors, with a broad scope of interesting businesses, and valuations that are often still below those in other areas of the world.

The amount raised in the first half of 2022 dropped by around one-fourth in comparison to the amount raised in the first half of 2021, to a total of EUR3 billion. However, the number of funds remained stable. According to German Private Equity and Venture Capital Association (Bundesverband Deutscher Kapitalbeteiligungsgesellschaften) (BVK) data, VC funds raised EUR2.7 billion in 2022, while PE funds (growth, mezzanine and buy-out) raised only EUR0.3 billion in the same year.

After a drop in 2020, investment amounts rose significantly in 2021 and 2022, with the rate of increase slowing in 2022. Based on the BVK’s German Private Equity Barometer for Q2 2022, the recovery of PE business after the COVID-19 pandemic came to a halt. The first two quarters of 2022 showed a slight decrease again, reflecting a more reserved approach by market participants.

In comparison, VC business increased significantly at the end of 2021 and, according to the German Venture Capital Barometer for Q3 2022, the closing level reached a new all-time high, completely compensating for any decrease caused by the COVID-19 crisis. However, this strong performance ended in Q3 2022, with a slowdown in investments, largely attributed to the cautious sentiment of VC investors with regard to the currently observed interest rate levels.

According to BVK figures, in the first half of 2022 most transactions were VC transactions (373, equalling 71% of all PE/VC deals), with a strong focus on start-up financing (239), while buy-out transactions (64) covered 60% of the overall transaction volume.

According to BVK figures, out of 135 divestments in Germany in the first half of 2022:

Based on transaction volume, the majority were sale scenarios, with 25% to strategic investors as against 72% to other investors. In line with previous years, IPO exits did not play a significant role, neither with regard to the number of transactions (six), nor their volume (0.4%).

The terms VC and PE are commonly used together, with PE often used as the more general term. However, while both forms of investment are focused on equity and some basic principles are similar, they are not used interchangeably.

PE refers to the equity financing of experienced, established companies provided by private or institutional investors, such as in management buyout (MBO) situations.

VC represents investments made under increased risk of loss to young, innovative companies offering an above-average growth potential at an early stage (seed or start-up). However, there are no clear limits between these two areas and the boundaries are permeable.

According to BVK statistics, the following groups of investors were the biggest sources of funding for PE/VC funds in 2021:

The specific allocation may vary depending on the focus of the specific fund.

Except for some new regulations under the recently adopted Fund Location Act (Fondsstandortgesetz) (passed in 2021), there are no substantial tax incentives specifically relating to VC or PE investments.

The German participation exemption on capital gains is important from a structuring perspective. Capital gains may be 95% or 100% tax exempt where a corporate shareholder (directly or via a flow-through entity) sells shares in a German corporation. Since most of the investee companies are set up as limited liability companies (Gesellschaften mit beschränkter Haftung) (GmbH) this tax exemption typically applies.

However, the participation exemption does not apply to dividends in the same way, as it requires a minimum participation of up to 15%. Without a participation exemption on dividends, the German company must withhold and pay 26.375% (standard rate) to the tax office. A 15% reduced rate may apply, in particular, for foreign shareholders under double-tax treaty relief (Doppelbesteuerungsabkommen). However, this relief is subject to special rules relating to business purpose or substance tests. See Question 7.

Under the Fund Location Act, the management fee of a VC fund will no longer be charged with VAT (otherwise due at 19%). Therefore, managing a fund on the ground within Germany no longer triggers VAT, which would otherwise typically be non-refundable and would reduce the management fee.

The Fund Location Act also sets out new rules for employee incentive programmes. Transferring shares to employees no longer qualifies as "dry income" (triggering taxes without liquidity) if certain other requirements are met. The increase in value will be taxed as capital gain when selling the shares or when realising the built-in gains through another taxable event. The tax rate for capital gains is about 20% lower than for salary income. See Question 28.

The most common German fund structure is the limited partnership (Kommanditgesellschaft) (KG) with carry vehicles and (in PE scenarios) management participation vehicles that pool the shares in turn.

A KG aims to have full tax transparency to avoid any trade tax. Trade tax is a separate profit tax charged at company level (even if the company is a partnership). The trade tax rate depends on the local setting but rates of 15% to 16% are not uncommon. To avoid trade tax on a specific investment, the fund must not:

While the first requirement is met by using the legal form of a KG, the latter requirement limits the activities of the fund.

A KG is always a flow-through structure for capital gains tax purposes. Trade tax is only an issue with respect to dividend or other income.

Foreign fund vehicles in the legal form of a limited partnership are the most common structure. Although they are flow-through entities from a German tax perspective, providing the indirect shareholder with tax treaty protection, both the fund and the investor may find themselves struggling with compliance issues. The German tax auditor will evaluate who sold the relevant shares and whether capital gains tax applies. Even if an indirect shareholder benefits from treaty protection, the shareholder and fund must still be able to demonstrate this.

Foreign corporations are not commonly used by PE funds. A corporation does not allow for a tax-friendly structure for the carried interest. Any such structure requires a partnership rather than a corporation.

Mezzanine financing can trigger withholding tax problems, depending on the specific structure.

There is a danger that a business presence in Germany may be considered to be "substantial" and lead to a taxable presence in Germany for the foreign fund different from the intended place and jurisdiction. This will then trigger concerns as to profit taxes and VAT, in addition to serious compliance issues. This issue must be carefully assessed whenever a foreign fund (or any other entity) intends to have a business presence in Germany.

The average term of funds is around ten years, and the investment period typically ranges around four or five years. Limited partnership agreements often include options for certain prolongations of the term and/or the investment period, typically for one year, with the consent of the limited partners or a relevant committee. The timeframe within which a fund typically sought to exit an investment commonly used to be four to six years from the initial investment. However, in the last few years there has been a trend towards longer terms and investment/divestment periods, and tendencies towards evergreen funds and funds with more versatile investment structures.

Funds generally aim for the highest possible rate of return with regard to each individual investment, as well as the performance of the fund in total. The average net internal rate of return (net IRR) of other comparable funds often provides a benchmark for the performance of a fund. In 2017, the average net IRR of German PE funds was 18.6% (Private Equity Monitor 2018 by Institut für Mitbestimmung und Unternehmensführung der Hans-Böckler-Stiftung).

In recent years there has been a noticeable trend towards environmental, social and corporate governance (ESG) criteria as additional investment objectives.

German funds fall within the scope of the German Capital Investment Act (Kapitalanlagegesetzbuch) (KAGB), which is the German equivalent of Directive 2011/61/EU on alternative investment fund managers (AIFM Directive). Fund managers must typically register with or seek approval from the German federal financial supervisory agency (BaFin). These rules may also apply to foreign funds entering the German market.

As a rule, PE funds fall within the scope of the regulatory provisions applicable to investment companies. However, a "light version" of the regulations applies to small alternative investment fund managers. A manager may be a small alternative investment fund manager if it manages special alternative investment funds with assets under management that do not exceed either:

As a result, a small fund must only comply with some of the alternative investment fund managers’ rules, most of which are reporting requirements. However, full registration is still required to begin marketing.

In general, there are no restrictions on investors in PE funds. However, most funds only target investments from (semi-)professional investors (high net-worth individuals and institutional investors) due to the stricter regulatory regime when marketing to other investors.

In addition, funds are subject to anti-money laundering and know-your-customer regulations, which limit investments into the fund to individuals and entities who fulfil the relevant requirements.

There are no statutory restrictions on investment periods or amounts. Investment periods are set out in the relevant constitutional documents and, while theoretically open to negotiation, are typically defined by the fund’s management before the search for investors. Often, the constitutional documents provide for minimum investment amounts for investors and only (semi-)professional investors are allowed to invest.

The transferability of the interests in a fund depends on the legal structure of the fund. With limited exemptions, such as the transfer to affiliated companies, transfers of interests in a fund organised as a KG are normally subject to the consent of the fund’s management under the limited partnership agreement.

The relationship between an investor and a fund structured as KG is governed by the limited partnership agreement, and possibly side letters, which are likely to include a "most-favoured nation" clause.

Investors normally expect the limited partnership agreement to include the following provisions and protections:

In addition, the relationship between the investors and the fund may be affected by the specific regulatory regime applicable to the chosen fund structure.

PE funds usually invest in the share capital of portfolio companies through a newly founded investment vehicle structure (one tier/two tier) by acquiring shares in the top-level entity and making payments into its capital reserves (Kapitalrücklage).

There are generally certain liquidation preferences linked to the shares, relating to the payments made into the capital reserves. Subordinated shareholders’ loans form a typical part of PE fund investments in portfolio companies. PE investments commonly also comprise a debt component (see Question 22). The ratio of debt and equity financing will vary depending on the exact structure of any individual transaction, and there will be a specific focus on the tax consequences.

VC funds typically invest directly into portfolio companies and primarily acquire shares in the portfolio company with liquidation preferences attached to them. VC funds also provide convertible loans, in particular to bridge until the next financing round.

Existing shareholders of the most common forms of portfolio companies, the GmbH and the German stock corporation (Aktiengesellschaft) (AG) benefit from statutory pre-emption rights with regard to the issuance of new shares.

The ability to transfer shares is usually restricted in the portfolio company’s articles of association or other contracts between the shareholders, such as a shareholders’ agreement. A transfer usually requires the consent of the other shareholders and/or the compliance with rights of first refusal or other restrictive provisions. In a GmbH and an AG, the transfer restrictions under the articles of association have in rem effect. In addition, the transfer of shares in a GmbH requires notarisation by a German civil law notary.

A share transfer may fall under merger control or other special regulatory regimes, in particular, the German foreign investment regime. An upfront regulatory analysis with regard to the parties and the sectors of the economy involved is therefore necessary when planning this kind of transaction.

The most straightforward investment structure for PE funds is the acquisition of 100% of the shares and payment of the full purchase price. This is typically through an acquisition company, which in turn is financed by debt and equity. A debt push-down can then be effected by a downstream merger or the creation of a tax group. A crucial point is the deductibility of interest and the usability of carried forward tax losses.

A variation of this structure is the roll-over, where the existing shareholders do not sell all of their shares in return for cash but swap a certain portion of their shares in return for shares in acquiring entity. Such a share-swap can be structured to be tax neutral, while selling shares for cash will leave the seller only with the net amount for the purposes of reinvestment.

Interest payments are typically not subject to withholding taxes. However, certain exceptions apply. As a rule, a fixed interest rate speaks against the application of withholding tax, while profit-participating instruments are likely to be subject to withholding tax. Preference rights are a typical instrument for these purposes. According to the latest developments, such rights are generally reflected in the valuation of shares for tax purposes.

Auction sales of private companies are a common practice in Germany. In a seller-friendly environment (as is currently still the case), the seller is often in a position to maximise its return through such a process.

In an auction process, potential purchasers are commonly contacted through intermediaries such as investment banks or M&A advisers. After signing a non-disclosure agreement, the interested parties receive an information memorandum and are asked to submit a non-binding offer. The seller selects the remaining bidders from these offers and grants them further confidential information, such as:

The remaining bidders are then asked to submit a binding offer. Depending on the process, binding offers may be submitted before legal due diligence of the target company has been conducted and, if so, are submitted subject to subsequent legal review.

Competition law requirements must be taken into account before exchanging information with buyers who are competitors.

From a seller’s perspective, it is necessary to communicate the existence of a competitive situation up until the end of the auction process when negotiating the share purchase agreement simultaneously with the last remaining bidders. Otherwise, the seller risks a breach of pre-contractual obligations (culpa in contrahendo) under German law.

Buyouts of listed companies effected or backed by PE funds do not play a prominent role in Germany. However, these are increasing, a trend that is expected to continue after the temporary falls in activity of 2020 and 2021.

The current unfavourable developments on the stock markets could be used as an opportunity to carry out a delisting when share prices are low. A delisting is governed by the German Stock Exchange Act (Börsengesetz, BörsG) and certain formal requirements of the individual stock exchange(s).

The main documents typically produced in a buyout include:

Of these, only the articles of association and the new shareholder list must be made public through the commercial register. Information on ultimate beneficial ownership may need to be filed with the transparency register.

On the buyer’s side, a PE fund usually requests the following contractual protections:

In case of a publicly listed company, before the announcement of a friendly takeover/delisting offer, the bidder and target can enter into an investment agreement, securing for the bidder the approval of the target company’s management board and supervisory board, and therefore the status of its takeover as friendly. The conclusion of an investment agreement and its contents constitute inside information and must therefore be disclosed by the target company and, if applicable, also by the bidder or its parent company, as soon as possible. In practice, the investment agreement is therefore signed immediately before the publication of the bidder’s decision to submit its bid.

Managing directors of portfolio companies organised as a GmbH are bound by the duties set out in the German Act on Limited Liability Companies (Gesetz betreffend die Gesellschaften mit beschränkter Haftung) (GmbHG), while the German Stock Corporation Act (Aktiengesetz, AktG) applies to the management of an AG. These duties include:

In general, the statutory duties within an AG structure are stricter and less flexible than within a GmbH structure.

Further duties, such as consent requirements and specific information obligations, are commonly provided for in the articles of association and management rules of procedure.

A general legal non-competition obligation prevents managers from acting against their own company. However, the management service contract usually provides a more detailed non-competition clause, often also covering a certain period after leaving the company. Equally, a manager is bound by confidentiality obligations, often as further specified in the management service contract.

In the case of a violation, each member of the management is jointly liable to the company for the damage incurred alongside the other management members, if any. Only in exceptional cases does liability towards third parties also apply.

In the context of an MBO, the investor typically focuses on:

Even if investors generally want to be closely involved in the development of their portfolio companies, they do not want to control the company’s day-to-day business, and are often prevented from doing so for compliance reasons.

However, measures outside the ordinary course of business, as well as certain strategic decisions, are typically subject to the consent of the investor. Such extraordinary business measures are typically listed in management rules of procedures, rather than in a shareholders’ agreement or the articles of association of the company as, under German law, amendments of the latter documents require a stricter form, and the articles of association must be filed publicly.

If there is an advisory board (usually at the level of the holding entity), the competence to approve extraordinary management measures commonly lies with the advisory board. In this case, the board members appointed by the investor form a majority or benefit from weighted voting to ensure a voting majority. The same mechanism applies for affiliates of the portfolio company, ensuring that material business decisions are always taken on the top level of the group.

Further control measures for the investor in relation to managing directors include appointment and dismissal rights, and regular information obligations of the management towards the investor.

Given the different and stricter legal requirements in an AG, the control mechanisms investors regularly require may vary and are not always able to be fully implemented.

The financing of PE transactions is generally provided by equity alongside certain debt instruments, which may include:

In the current market environment, vendor loans and earn-outs have increasingly become more relevant when financing buyouts.

In general, the debt instrument best suited to a transaction depends on the:

However, the mix of different forms and layers of capital creates a high degree of flexibility and complexity that makes it possible to tailor the financing optimally to the needs of the borrower. Depending on the strength of the borrower’s credit, the market conditions and the sector, lenders typically expect more than 40% of the deal to be financed by equity.

Given the impact of the pandemic, the supply-chain disruptions, the war in Ukraine, inflation and the corresponding interest rate hikes, as well as the global conditions on debt markets and the availability of funds, lenders now request a bigger equity cushion from borrowers with business models that are more exposed to COVID-19 and other macro-economic issues. Businesses with a higher resilience to the global economic conditions and effects are still financed on more favourable terms for borrowers.

A typical senior debt structure usually comprises term loans (amortising and/or bullet) combined with capex and acquisition facilities, as well as revolving credit facilities for working capital purposes. Senior financings are typically arranged by banks and other financial institutions as a club-deal or in the form of an underwritten deal where the loans are designated to be partially syndicated post-closing to additional banks and other debt investors.

In the mid-cap segment, unitranche financing is more popular than ever in the German market. A unitranche combines different layers of financing (from senior to mezzanine) in one blended facility with a single blended interest rate. Unitranche loans are typically provided by debt funds and other non-bank lenders and are generally priced with higher interest rates compared to senior loans, even though interest rates for unitranche financings have also decreased in recent years due to the high levels of liquidity and competition in the markets. At the same time, unitranche lenders tend to agree to higher leverage ratios and more flexible terms compared to bank lenders.

To further reduce margins, unitranche financings can be combined with a first-out term loan piece provided by a bank lender. For working capital purposes, unitranche facilities are combined with a super-senior revolving facility provided by a bank.

In upper mid- and large-cap acquisitions, given the high liquidity in the capital markets, high-yield bonds may provide a suitable option to finance the transaction. Due the transaction costs and non-call agreements, high-yield bonds are typically not repaid quickly and are combined with senior or super-senior revolving facilities granted by a bank lender.

Term loans structured as bridge facilities may be used for the acquisition, which are then refinanced by high-yield bonds or promissory notes (Schuldscheindarlehen) in a corporate context.

Second lien and mezzanine financings have seen their popularity decline in recent years given the relatively high costs in such financing approaches and the high level of liquidity in the senior loan market.

In addition to classical share capital as well as payments in the capital reserves, PE investors usually also use other forms of quasi-equity funding. This includes subordinated shareholder debt, which often comes as a payment-in-kind loan or note. In light of the multiples required to be paid on the M&A side, vendor loans and earn-out components are becoming more and more common.

Acquisition financings are generally structured as non-recourse financings and therefore do not require the granting of security or guarantees from the equity investors.

As a consequence, lenders typically request security and guarantees as cross-collateral from the acquiring company (NewCo/AcquiCo), the target company and the material subsidiaries of the target. While the security of the NewCo/AcquiCo (which constitutes a condition precedent for the utilisation of the facilities) is often limited to a share pledge over (future) shares in the target, an assignment of receivables and an account pledge, the full security package of the target and its material subsidiaries usually comprises the following:

The security granted by the target and its material subsidiaries mostly depends on the target’s operating activity and its business model, as well as the assets that are available as security. In a borrower-friendly environment, investors usually push for limited security packages by arguing cost/benefit considerations. However, the lender’s interest is usually to have as broad a security position as possible in an enforcement scenario.

Whether or not a subsidiary is considered to constitute a material subsidiary that is required to provide security largely depends on the percentage of earnings before interest, taxes, depreciation and amortisation (EBITDA) it contributes to the group’s consolidated EBITDA. Lenders may also take the subsidiary’s assets and/or revenue into consideration.

Subordination. A creditor of the NewCo/AcquiCo shareholder of the target company is generally structurally subordinated to the direct creditors of the target company, since the target company as operating company usually co-finances the NewCo/AcquiCo as a special purpose vehicle with no independent business. However, distributions to the NewCo/AcquiCo as shareholder are limited by German law. The financing creditors therefore usually have an interest in bringing other creditors into a structural subordination as well, in order to increase their own prospects of meeting their claims. This can be done through a multi-stage acquisition structure, a different distribution of debt or even a "debt push-up". The granting of a guarantee, surety or joint and several liability by the target company for the loan amount borrowed by NewCo/AcquiCo in combination with in rem security may even result in a priority position over the unsecured creditors of the target company.

Both the senior loan agreement and mezzanine loan agreement usually provide for the contractual subordination of shareholder loans to all other debt instruments. The intercreditor agreement usually grants the senior debt lenders priority over mezzanine debt and other debt providers.

Covenants. Loan agreements typically contain:

Financial covenants may be agreed that provide the lenders with early information and the possibility to react and intervene in the event of developments on the part of the borrower that do not meet the business plan. In loan agreements, these are most likely to relate to:

In the German market, covenant-lite or covenant-loose provisions are still frequently included in loan agreements, which may grant the borrower headroom on the financial covenants, extend testing intervals or even completely mask out certain financial covenants.

German corporate law includes rules and principles that, among other things:

In addition to payments to shareholders, these rules also apply to the granting of security by a company to secure the liabilities of its shareholder or other subsidiaries of its shareholder. The restrictions vary depending on the legal form of the company, so that different rules apply to AGs, GmbHs and German limited partnerships with a German limited liability company as their general partner (GmbH & Co KGs).

For a GmbH, German corporate law prohibits the disbursement of assets necessary to maintain the share capital of the GmbH to its shareholders. In case of violation, the GmbH must be reimbursed, and the managing director(s) can be held liable for damages.

An AG is prohibited from providing financial assistance by way of loan or granting of security to a potential buyer of its shares. Any such financial assistance will be void. The return of contributions to shareholders is also prohibited.

For a GmbH, financial assistance that does not violate the rules on capital contributions or capital maintenance is generally permitted.

There are exceptions to the capital maintenance rules where, for instance, the:

For a GmbH & Co KG, the same applies to the general partner.

For an AG, German law in particular recognises three exceptions from the general prohibition of financial assistance:

A seller can also offer financial assistance to a buyer in the form of, for example, vendor loans or deferred payments.

In addition, debt push-downs/push-ups may be available, and there are also various tax-driven implementation mechanisms and structural alternatives.

Under the German Insolvency Code (Insolvenzordnung) (InsO), creditors are satisfied according to the following order of priority:

Creditors entitled to segregation and separation have proprietary rights over certain assets of the debtor. These creditors can demand surrender of their property, so that these assets are withdrawn from the insolvency estate first.

Debt providers are generally ordinary insolvency creditors. As such creditors only participate in the insolvency estate, they may only receive a fraction of their repayment claim under their financing agreement. However, the creditor’s position may be improved if the creditor has been granted a right of segregation/separation.

German insolvency law generally provides for the subordination of shareholder loans and "claims arising from legal acts economically equivalent to such a loan" in the insolvency of the company. Lenders therefore have a statutory priority over holders of an equity interest in the insolvent company. However, there is a privilege for:

Legal acts that are contrary to the priority on insolvency are usually challengeable, and the insolvency administrator (Insolvenzverwalter) can deny repayment of an outstanding shareholder loan and reclaim any amount that has been repaid under a shareholder loan during a one-year period after the start of insolvency proceedings.

Care should be taken when drafting the financing agreements and security documents as, if the arrangements grant the lender a position similar to a position of a shareholder, the financing granted may also be considered to be subordinated.

In the context of a restructuring, creditors often generally subordinate their repayment claims behind claims of third parties by way of a qualified subordination (qualifizierter Rangrücktritt). This is often intended to avoid the insolvency event of over-indebtedness (Überschuldung) and thus to avoid the management’s obligation to file for insolvency. The German Insolvency Act provides for various pre-insolvency instruments for the contractual or statutory restructuring of a company’s debt, including through a debt-for-equity swap.

Equity appreciation is usually achieved through conversion features.

For a GmbH, convertible loans (Wandeldarlehen) are frequently used in corporate financing, especially in the case of growth companies/start-ups. The challenge in these cases is to actually provide for enforceable conversion mechanisms to secure the acquisition of shares at conversion.

For an AG, the law provides for convertibles bonds (Wandelschuldverschreibungen) with specific mechanisms in place for such security at conversion.

For both an AG and GmbH, the shareholders’ meeting can create authorised capital (genehmigtes Kapital), which can be issued to a debt holder in exchange for the debt holder waiving the repayment claim under the debt instrument.

The following management incentives are most commonly used in German PE transactions:

Company managers sometimes seek preferred tax treatment through the tax structuring of carried interest. The standard scenario is to have an individual as carry holder of the carried interest, either directly or through a KG set up for the purpose. German income tax law then provides for a tax relief that effectively treats the carry holder as if they had realised capital gains. This leads to a tax rate slightly below 30%.

If the investing manager is tax resident in Germany and invests (themselves or through a holding entity) pari passu with third-party investors, the capital gains tax rate is reduced to approximately 1.5% (from approximately 28.5%). Any subsequent dividend payment out of the holding to the individual is then charged at 26.4%. To the extent that no such dividends are paid out, 98.5% of the proceeds can be reinvested.

"Growth shares" or other instruments that provide for beneficial rights only to employees may be characterised as salary rather than capital gains on exit. However, under the Fund Location Act, equity participation of the management/employees can now be granted without triggering immediate taxation. That is, it is no longer characterised as "dry income" (triggering taxes without liquidity). The tax charge is postponed, ideally until exit, and the future increase in value is taxed only as a capital gain (meaning the tax rate will be approximately 20% lower). However, there are several potential complications to this and there should be a careful analysis as to whether making use of this new law is the right choice in the specific scenario.

Restrictions on payments by a portfolio company to its investors may apply for various reasons, such as:

Compliance violations by the target company can lead to liability for both the target company and the buyer. Penalties can result in:

In addition to liability under German law, liability under foreign law is also possible, in particular under the UK Bribery Act and the US Foreign Corrupt Practices Act.

To minimise these liability risks, it is advisable to:

The most common form of successful exit for VC and PE investments in Germany is a trade sale in which all shares are sold to a strategic investor.

Secondary sales are also fairly typical. In VC structures they are mostly used (as partial sales) in difficult times where shares are sold in connection with a primary financing round to enhance the average price for the investment of a new investor. Secondary sales can also be found at certain trigger points in the development of an investee company, when the type of investor changes.

Although initial public offerings typically achieve high returns for investors, these still only make up a very small number of exits in Germany. This is mainly due to a lack of a culture of this happening, and some negative examples in the past. In addition, many investors and portfolio companies shun the costs involved.

There is a new trend towards the use of a special purpose acquisition company (SPAC). However, it remains to be seen for which companies and to which extent this form of exit will be chosen.

When an investment is unsuccessful, a secondary sale (in a VC structure, in particular, to the founders) is a common form of exit.

For VC investments, it has become common to promote clauses in the investment documentation granting an investor a put option for the investor’s shares, often at nominal value, to allow the investor to back out of the investment. This allows the investor to avoid liquidation or insolvency proceedings for the company and to quickly write off the investment.

In the case of unsuccessful/distressed investments in a PE structure, a reorganisation, also comprising an asset sale, is a typical option.

In 2020, against the background of the COVID-19 pandemic various measures were implemented to minimise the economic effects of the pandemic for businesses in Germany. Various programmes with a focus on financial assistance were set up, including the:

Unrelated to the pandemic, one main reform with regard to PE and VC is the Fund Location Act, in relation to tax and structuring issues for funds and transactions in Germany (see Question 4).

The turnover thresholds for merger control were raised significantly in January 2021. About one-third of transactions that previously had to be notified were expected to no longer be subject to this obligation.

The restrictions on foreign direct investments have also been tightened, in particular, by extending these to further sectors.