M&A in Germany

M&A in Germany A Practical Guideline for Chinese Companies Squire, Sanders & Dempsey L.L.P. Frankfurt Office 13 and 14 November 2007 Table of Contents 1 Profile of Squire, Sanders & Dempsey L.L.P. 2 China Services of Squire, Sanders & Dempsey L.L.P. 3 M&A in Germany and Europe 4 Due Diligence Issues Key Statistics One of the largest international law firms • 850 lawyers • 30 locations and 7 associated offices worldwide – North America (since 1890) 15 offices – Asia (since 1955) 4 offices – Europe (since 1974) 12 offices – South / Latin America (since 2002) 5 offices – Middle East 1 office • 4th most global US law firm Squire, Sanders & Dempsey Offices Worldwide Asia Latin America Beijing Buenos Aires* Hong Kong Caracas Shanghai Rio de Janeiro Tokyo Santiago* Santo Domingo North America Europe Middle East and Africa Cincinnati Phoenix Bratislava Milan* Riyadh* Cleveland San Francisco Brussels Moscow Columbus Tallahassee Bucharest* Prague Houston Tampa Budapest Warsaw Los Angeles Tysons Corner Dublin* Miami Washington Frankfurt New York DC Kyiv* * = Associated Office Palo Alto West Palm London Beach One-Firm Philosophy • Our firm is a single partnership providing seamless services across all offices and practices • No franchises, no profit centers – Same level of services - in all offices - for all offices • Roots and expertise with industrial clients serving – Standard Oil (BP) – Cleveland & Pittsburgh Railroad (Conrail) – American Steel & Wire (US Steel Corp.) – Cleveland Electric Illuminating Co. (FirstEnergy) – Graselli Chemical Company (DuPont) ... for 117 years - from 1890 until today Frankfurt office • Full service corporate law firm – M&A, Transactions – Corporate, Commercial – Corporate Finance, Capital markets – Tax – Labor Law – Real Estate – China / Asia inbound / outbound business • 6 Partners from the Haarmann Hemmelrath firm (2006) – 2 Frankfurt professionals have extensive working experience in Asia, one is also fluent in Mandarin • In Germany, we have worked with – Dalian Machine Tool Group Co., Ltd – Feiyue Group Co., Ltd – Hangzhou Machine Tool Group Co., Ltd – Qingdao Jinzuan Needles Co., Ltd – Shenyang Machine Tool Co., Ltd Table of Contents 1 Profile of Squire, Sanders & Dempsey L.L.P. 2 China Services of Squire, Sanders & Dempsey L.L.P. 3 M&A in Germany and Europe 4 Due Diligence Chinese Investment Policy • “Go West“ policy • World‘s largest foreign currency reserves • Outbound direct investments – USD 7bn in 2005 – + 93% over 2004 • Asian Legal Business October 2006: – Germany is EU favorite for Chinese investors – Survey amongst 96 top Chinese companies Table of Contents 1 Profile of Squire, Sanders & Dempsey L.L.P. 2 China Services of Squire, Sanders & Dempsey L.L.P. 3 M&A in Germany and Europe 4 Due Diligence Issues Objectives of M&A transactions • M&A is attractive for Chinese investors. They can: – Acquire technology and intellectual property – Acquire solution/problem solving competence – Acquire brands – Acquire sales networks – Acquire management know how – Enter the EU market and diversify globally – Expand market share – Access EURO currency – Avoid trade barriers M&A Process Preparation Transaction Integration Letter of Intent Communication Strategy Due Diligence Integration Search Final Evaluation Change Screen Agreement Approach Closing Forms of M&A transactions • Asset Deal: – Investor buys the business of a company, i.e. assets – Subject to full capital gains taxation for selling company – Transfer of name, business relations and contracts – Step-up of assets and higher basis for depreciation – Largely avoids assumption of hidden liabilities • Share Deal – Investor buys the shares in a company – Tax benefits for seller – No need to transfer the name, business and contracts – No step-up of tax base for depreciation – Risk of assuming hidden liabilities, therefore: Due diligence • Therefore, only share deal is covered in the following Preparation • Strategy – Define objectives and target companies • Search – Market and companies’ survey • Screen – Compliance of identified companies with strategy and objectives – Obtain macro view of legal situation – Decision to approach target company • Approach Transaction • Analyze the target enterprise (technical due diligence): – Research and development, intellectual property – Products, production, capacities – Sourcing, procurement – Sales and marketing – Identify synergies • Cooperate and negotiate with seller of the target – Basis: confidentiality agreement – Unavoidable: tentative price range or formula Transaction • Sign Letter of Intent – Protocol of the parties‘ current understanding of the negotiations – Agreement on next steps – Try to avoid stating a fixed price, range or formula is better – Usually legally non-binding with exceptions, e.g. • Confidentiality clause • Exclusivity clause • Non-solicitation clause Transaction • Determine purchase price more precisely – Empirical multiple method • Multiple of sales, EBIT, EBITDA • Multiple derived from market or listed companies – Discounted cash flow valuation • Cash flow x discount rate – Asset based valuation • Valuations methods consider past, not future – They may not consider synergy effects, good will etc. Transaction • Conduct due diligence – Identify risks that are not recorded in the financial statements – Legal due diligence – Tax due diligence – Financial due diligence – Environmental due diligence – Management, commercial, cultural due diligence • Final evaluation of the target company • Final negotiations of the essential terms of agreement Transaction • Negotiate Share Purchase Agreement • Most common negotiation problems: – Purchase price • Adjustable purchase price – Representations and warranties • Title or environmental insurances – Other „deal breakers“ specific to the transaction Transaction • Most common „unpleasant surprises“: – Approvals for sale of shares, preemptive rights • No approval required from trade unions or workers council – Use of losses carried forward (change in 2008) – Anti-trust procedures – Real Estate Transfer tax: 3.5% (4.5%) of property value • Assessed on share transfer of 95% or more • Signing of Share Purchase Agreement: notarization required – Power of attorney: notarization plus apostille Transaction • Prepare conditions precedent for exchange of shares and purchase price • Exchange of shares and purchase price („Closing“) • Restructuring of the target company – Management – Articles of Association • Integration Specific cases • Listed companies (Take-over Code) – Voluntary offers for non-control interest (below 30%) – Voluntary offers for control (over 30% voting rights) – Mandatory offers in case of control – Acting in concert regime – Notification procedures (Exchange authority etc.) – Short deadlines – Minimum price = weighted average over last 3 months • Joint Venture situations – Shareholders’ agreement Specific cases • Insolvent targets (Insolvency Code) – Acquisition prior to insolvency • May be challenged if within 3 months of insolvency • In case of discrimination of creditors • Acquisition reversed but purchase price returned only proportional – Acquisition after insolvency • Asset deal executed by administrator with approval of creditors’ committee • No liability for debts of the insolvent company • Simplified termination of employments Specific cases • Auction sale – Initial Information letter („teaser“) – Confidentiality agreement – Detailed Information Memorandum – Letter of Procedure – Indicative offer – Due diligence, management presentations – “Binding offer” (legally non-binding) – Share purchase agreement German taxation • Total profit tax for corporations around 30% (2008) – 15% Corporate Tax – 15% Local Trade Tax (trade and business) – Dividend income is 95% tax exempt • Dividend withholding tax to China: 10% • The tax treaty provides for the following tax credits: – Dividend withholding tax of 10% – German tax paid by the German subsidiary Table of Contents 1 Profile of Squire, Sanders & Dempsey L.L.P. 2 China Services of Squire, Sanders & Dempsey L.L.P. 3 M&A in Germany and Europe 4 Due Diligence Issues Legal Due Diligence Issues • Corporate structure – Shareholders – Articles of Association – Share capital – Board of Directors • Staff – Complete list of employees – Employment agreements – Collective agreements – Pension plans Legal Due Diligence Issues • Corporate assets – Immovable property – Movable property – Encumbrances – Information technology • Intellectual Property – Patents – Brands – Know-how – Licenses Legal Due Diligence Issues • Main agreements – Suppliers – Customers – Agents – Co-operations, Joint Ventures – Leases – Utilities – Consultants Legal Due Diligence Issues • Corporate finance – Cash accounts – Loans – Collaterals • Corporate reorganizations • Insurances • Environmental issues • Business licenses • Litigation Financial Due Diligence Issues • Business relations • Products and markets • Customers, distribution, marketing • Organization of target company – Internal controlling – Reporting systems • Audited financial statements – Inventories, accounts receivable – Provisions, accounts payable – Profit and loss Financial Due Diligence Issues • Cost accounting • Business plans Tax Due Diligence Issues • Tax compliance, tax assessments • Tax audits • Appeals • Losses carried forward • Tax accounts • Transfer pricing • Shareholder loans • Withholding taxes Tax Due Diligence Issues • Trade tax • VAT • Real Estate Transfer Tax • Tax effects of corporate reorganizations and finally ... Please raise any additional questions you may have Q & A Contact information Squire, Sanders & Dempsey L.L.P. Taunusanlage 17, 60325 Frankfurt, Germany Tel: +49-69-17392-400 Fax: +49-69-17392-401 ©Squire, Sanders & Dempsey L.L.P. All Rights Reserved Thomas Busching Stefan Peters Senior partner Associate German lawyer, certified tax advisor German lawyer Direct +49-69-17392-445 Direct: +49-69-17392-425 [email protected] [email protected] ©Squire, Sanders & Dempsey L.L.P. All Rights Reserved.

Load more