G. General Legal Framework for Investments

I. Labor Law

1. General Employment Conditions

A uniform labor law codex does not exist in Germany. The provisions of German labor law derive from different laws and are supplemented and overlaid by provisions of the employment contract, European legislation, collective labor agreements and bargaining agreements. Protection of the employees is of great importance and a multitude of acts exists concerning, inter alia, working hours, maternity protection and protection against chemicals in the workplace. In a nutshell, one can say German labor law is highly regulated and predominantly employee- friendly.

2. The Employment

a) Employment Contracts

The majority of employment contracts are concluded for an indefinite period of time. However, employers are free to offer fixed-term contracts. German labor law stipulates several restrictions on this right. In general, a fixed-term employment contract can be entered into for a duration of up to two years. If the duration exceeds two years, the employer needs a special reason to justify the time limitation. Without such reason, the employment contract is valid for an indefinite term.

b) Temporary Work

Temporary work is allowed in Germany and available in nearly all industrial sectors and all kinds of jobs. A significant advantage of temporary work for the hirer is the greater flexibility compared to regular employment. The termination of temporary work contracts is independent from labor law restrictions and only subject to the contract between the hirer and the temporary work agency.

c) Social Protection

German employees are insured against illness, invalidity, age, unemployment and geriatric care by statutory social insurance. In general, employer and employees bear the costs in equal parts. Apart from such mandatory law, the employer is free to grant additional benefits, mainly occupational pension schemes, funded only by the employer or funded by employer and employees.

d) Termination of Employment
aa) Dismissal Protection and Reasons for Termination

Employees working for an employer with more than ten regular employees enjoy dismissal protection; the employment contract can only be terminated for specific reasons. Therefore, termination is only admissible for personal, conduct-related or operational reasons. Dismissal for personal or conduct-related reasons requires a previous warning and is supposed to be a last resort option. Dismissal for operational reasons is based on an organizational business decision. Labor law courts are not entitled to examine this entrepreneurial decision. However, an extraordinary dismissal is possible without a previous warning, if the default of the employee is of such great extent that the continuation of employment is not reasonable for the employer. Examples of reasons are mentioned in the specific labor acts.

bb) Social Selection

Dismissal for operational reasons is only admissible if there are no other vacant jobs within the company that the employee is capable of doing. Finally, a social selection has to be executed which means that the personal needs and social situation of potentially affected employees must be taken into consideration. Social selection is under the control of the labor law courts.

cc) Notice Period and Required Form

Notice periods for termination can be found in the employment contract, in collective labor agreements or in statutory law and normally depend on the length of employment of the employee with the employer. The termination notice must be in written form.

e) Employee Transfer in Case of an Asset Deal

In case of an asset deal, the employees who belong to the unit sold are automatically transferred to the purchaser if they do not object the transfer of their employment. The question of under what circumstances an employee belongs to the unit sold is not answered by law and is subject to extensive case law of the German Federal Labor Court and the European Court of Justice. A careful assessment on an individual basis is necessary to identify those employment relationships that will be transferred to the new owner.

3. Collective Labor Law

a) Collective Labor Law Agreements (Tarifverträge)

Unions are of great importance in the German working world, especially for the determination of remuneration and other working conditions. During the last several years, German unions have become more and more willing to conclude flexible collective labor agreements to consider specific economic conditions. As a general rule, there is one union for each major sector of the economy, usually mirrored by a corresponding employers’ association. The two sides represent the employers and employees in the periodic negotiations on collective labor agreements. Employment conditions set out in the collective labor agreement are binding for the employer, if the employer and employees are members of an employers’ federation or union. Some collective labor agreements allow deviations from provisions set forth therein, if the employer faces economic difficulties or other circumstances that jeopardize jobs. Employers who are not members of an employers’ federation are free to agree with the employees on deviating working conditions.

b) Workers’ Council (Betriebsrat)

Employees of an undertaking's business unit with more than five regular employees are entitled to set up a workers’ council. In case an undertaking operates more than one business unit, more than one workers’ council may be established. The size of the workers’ council depends on the number of employees. Workers’ councils have considerable consultation and information rights, e.g. relating to such issues as dismissals, organizational changes, conditions of employment, vacation schedules, etc. Further, the employer shall inform the workers’ council in full and in good time about an acquisition of the company, if a change of control occurs thereby. As a general rule, the briefing must occur before any decision on the deal is made. The relevant documentation shall include information regarding the potential acquirer and his intentions with respect to the company's future business activity and the resulting consequences for employees. The obligation to inform does not exist if the operation and business secrets of the target company are thereby endangered.

4. Co-Determination

Co-determination in bigger corporations is also realized by the election of supervisory boards. The proportion of shareholder and employee representatives depends on the branch and the number of persons employed by the company. The proportion of employee representatives ranges between one third and one half (see A.II.1.g) and A.II.2.b)bb)). The chairman of the supervisory board provided with a casting vote is always a shareholder representative.

II. Public Law Issues

1. Building and Planning Law

The general compliance of a real estate property with building and planning law has to be reviewed in the course of due diligence of a property. Of course, any investor has to ensure that no risks with regard to building and planning law exist. In particular, there may be restrictions on the use of a property which have an impact on the investment decision, e.g. restrictions on the conversion into luxury real estate or on the permitted amount of rent charged in certain underprivileged areas. However, some aspects of planning law may not constitute a risk but may nevertheless have a material impact on the process of the transaction itself (such as the pre-emption right of a municipality, see F.IV.2.) or even on the pricing.

a) (Re)Development Areas

Municipalities may decide that a certain area needs to be developed for the first time or that an older area needs to be redeveloped. The aims of such (re)development will be set out in a (re)development plan that is binding in nature. In the land register of the affected real estate properties, a respective notice of (re)development will be registered (and may therefore be identified in course of the due diligence). The effect of such a (re)development area is that certain transactions require the prior consent of the municipality, inter alia:

  • rection, demolition or change of use of a building, as well as material investments in a building;
  • sale of a real estate property or the creation or sale of a heritable building right (see A.III.2.d));
  • creation of encumbrances, e.g. a land charge for a financing bank or easements;
  • conclusion of lease agreements or other usages for a fixed period of more than one year.

Therefore, basically all transactions of interest for an investor require the prior consent of the municipality.

As all urban (re)development measures aim to improve a certain area, such measures will most likely result in an increase of the value of the affected real estate properties. This increase in value, however, is collected from the owners of the real estate properties by way of a so-called compensation payment. The amount of such payment equals the amount of the increase of the value of the real estate property. An investor should therefore consider these costs in his investment decision.

b) Energy Performance of Buildings Directive and Green Building

The energy efficiency of buildings and the integration of renewable energies in modern architecture are becoming increasingly important. There are both compulsory rules and voluntary standards.

Upon the erection or significant alteration of a building, an energy pass is to be issued according to the Energy Performance of Buildings Directive (EnEV 2009). EnEV 2009 is part of German building law and stipulates technical requirements for the efficient use of energy in residential and office buildings, as well as in some industrial buildings.

Since January 1, 2009 owners of a building generally have to provide an energy pass for their building to potential purchasers. Content and format are specified by the EnEV. There are two different qualities (based on the building or based on the actual usage in case of existing buildings). Certificates may only be issued by qualified individuals (e.g. architects, construction engineers). In case a sale or lease agreement is concluded without respective documentation, the owner may be fined up to EUR 15,000. However, in case the owner of an existing building does not intend to sell or lease the property, an energy pass is not required. The goal of EnEV 2009 is to diminish the energy demand of buildings by 30 % in comparison to the former EnEV 2007. In 2014 the provisions of EnEV 2009 will be further tightened.

The Renewable Energies Heating Act (EEWärmeG) came into force on January 1, 2009. It stipulates that the owners of new buildings are obligated to generate a percentage of their heat (and cooling) requirements from renewable energies. This applies to both residential and non- residential buildings whose building application or building notification, respectively, was filed after January 1, 2009. The owner may decide at his own discretion which type of renewable energy is to be used. It is merely important that a certain percentage of the required heating and/or cooling is generated by the use of renewable energies. The percentage is dependent on the type of renewable energy chosen. Building owners who do not wish to use renewable energies may chose from a variety of so-called compensation measures. The EEWärmeG was amended with effect as of May 1, 2011. Since this date, the obligation to use renewable energies not only applies to new buildings but also to existing public buildings. This exemplary function must be complied with in respect to any buildings owned by public authorities. In addition, this obligation applies to any buildings leased to public authorities.

Besides these statutory requirements, so-called green buildings are en vogue. Green buildings are generally recognized as having lower energy consumption and a lower environmental impact than standard buildings and combine particular design features with special materials und utility systems (ventilation, heating, water etc.) to obtain a structure with very low to no impact on the environment. The exact definitions may vary, but the growing number of possible green solutions and approaches that emerged led to the development of national standards for green buildings such as the Leadership in Energy and Environmental Design, Green Building Rating System developed in 2000 by the U.S. Green Building Council, the Green Star Rating System developed by the Green Building Council Australia launched in 2002 and the BREEAM in the UK provided by the United Kingdom Green Building Council launched in February 2007.

Similarly, the German Sustainable Building Council was founded in 2007 and started to certify buildings in 2009. The German Sustainable Building Council has developed a German standard, also under consideration of EU requirements. It provides three certificates: "bronze", "silver" and "gold".

2. Environmental Law

a) Environmental Permits

In the course of a due diligence it is important to clarify whether the target company has obtained all required environmental permits and whether these permits have been complied with in all respects. Permits pertaining to immission control, water rights and waste legislation, as well as such permits for storing and discharging hazardous substances are the most common environmental permits.

Where an environmental permit is required for a certain business, a distinction is to be made between those types of permits granted to a particular natural or legal person and those granted in respect of a particular installation. Where a permit is granted to a particular person (e.g. the target company), it is personal and attached to the person and cannot be sold and transferred to a third party. Therefore, if the transaction shall be made by way of an asset deal (see A.I.) and the permit is required to carry on the business, the purchaser will have to apply for a new permit after the transaction. If the transaction shall be made by way of a share deal (see A.I.), the permit granted to the target company will generally remain unaffected by the sale and transfer. Where a permit is granted in respect of a particular installation, the permit is attached to that installation and will remain unaffected as well, irrespective whether the transaction is an asset deal or a share deal.

The permits issued by the authorities mainly include supplementary provisions such as, for instance, limit values or deadlines, with which the holder of the permit must comply. The business management should take particular care to comply with such supplementary requi- rements. Otherwise, the authorities may be entitled to withdraw the permit and stop operations.

b) Environmental Liability

>With respect to damages inflicted on the environment, a number of laws regulating liability exist. The type of liability that occurs most frequently in practice is liability for contaminated sites. The party that caused the contamination and his universal successor, the current and the former owner of the property, as well as the occupant of the relevant property (e.g. the tenant) and – by way of exception and under certain conditions – the shareholder of a company may be obliged to remediate the contamination at their own expenses.

In connection with transactions, it is advisable to obtain special administrative information, e.g. from the register for contaminated sites, and to involve specialized companies which follow standardized procedures to examine environmental issues. In an initial phase, required documentation will be reviewed, the site will be inspected and the persons in charge will be interviewed. In the event that these activities result in indications of environmental risks, technical and environmental examinations will be made in a second phase.

Due to the liability risks described above, it is advisable for the purchaser to include a guarantee in the sale and purchase agreement concerning the absence of contaminated sites or detrimental changes to the soil. Both in the event that contaminations have already been disclosed and in the event that the presence of such contaminations cannot be excluded, the purchaser should require the coverage of that risk by way of an indemnity.

3. Public Procurement Law

Due to German history, the state is the owner of a great deal of land, in particular in East Germany. Therefore, the state often appears as the seller of real estate properties. In case the state is involved, certain contracts have to be put out to tender. A violation of the public procurement law would render any respective contract void. Generally, this obligation exists only for contracts regarding the procurement of goods, building work and services. Therefore, the sole sale of land generally was and continues to be not subject to tender. However, the conclusion may change in cases in which the purchaser assumes further obligations, e.g. an obligation to build. In this case, the entire transaction may be legally regarded as constituting a building order or a building concession – and thereby be subject to the obligation to put out to public tender. Before 2009, there was still some uncertainty due to the so-called "Ahlhorn jurisdiction" as to which transactions have to be, in fact, put out to tender. This uncertainty has, in the meantime, been remedied to a large extent by the amendment of section 99 of the Act against Restraints of Competition (GWB) which came into force on April 24, 2009, as well as the judgment of the European Court of Justice dated March 25, 2010 in the matter "Helmut Müller", which confirms the new version of section 99 as being consistent with European law. However, side agreements in purchase contracts which – even if merely partially – relate to services in which a public authority as the seller of a property takes a direct economic interest still remain subject to the regulations under public procurement law.

III. Investment Grants and Subsidies

Investors in Germany can benefit from numerous publicly offered incentives to all investors – regardless of whether they are from Germany or not. The German government, the individual federal states and the European Union provide funds. The support ranges from cash incentives to labor-related incentives, as well as incentives for research and development. Cash incentives provided in the form of non-repayable subsidies make up the main components of this package. Various forms of funds may be combined.

The level of grants available principally depends on the size of the enterprise and the number of new employees. Schemes are subject to alteration, a fact that must be taken into consideration. Grants and subsidies in Germany are generally approved or allowed under certain conditions, e.g. retaining in supported industry sector, minimum number of employees for a definite period, all associated assets must remain in the manufacturing facility. The intention of these conditions is to preserve the purpose of the subsidy.

1. Subsidies in the EU

The legal and financial framework of public funding throughout Europe is provided by the European Union, meaning that public funding must meet certain criteria applicable to all EU member states. The East German states (Brandenburg, Mecklenburg-Western Pomerania, Saxony, Saxony-Anhalt and Thuringia as well as special areas of Berlin) are supported as a convergence region on a high level of public funding. The EU institutions review this Cohesion Policy once every seven years. The next round of programs is to be launched in 2014.

2. Subsidies in Germany

Grants and subsidies from the German federal and regional governments are generally provided in the following ways:

  • subsidies (some of which are repayable under certain conditions);
  • loans at low interest rates (granted by various public credit institutions; maturities between ten and twenty years; maximum amount between EUR 500 and EUR 25 million, depending on the subsidy scheme);
  • capital resources aid (also available from various public institutions); and
  • guarantees (provided for investments in projects and equity holdings).

If the target of an investment is subsidized by any public grant or subsidy, the aid will not be granted automatically after the sale of the company. Furthermore, the repayment of grants or subsidies under certain conditions must be taken into consideration. In case of subsidies which breach the EU framework of public funding, certain subsidies can be reclaimed for an unlimited period. It is possible that the investor may be obliged to reimburse grants or subsidies. Hence, grants and subsidies are a considerable subject of due diligence, because reclaimable payments could be a crucial risk for an investor in various scenarios. A preventive subsidies- compliance may be installed.

If the development or restructuring of real estate is subsidized by any public grant or subsidy, the aid is commonly dependent on the fulfillment of specified conditions. The nature of these conditions is determined by the nature of the investment. The conditions can lead to restrictions on the permitted amount of the rental fees. They have to be met for a fixed period of time (between 5 and 30 years). Any violation of the conditions may lead to an obligation by the investor to reimburse grants or subsidies. In case of the purchase of subsidized real estate during the fixed period of time, the existing conditions commonly also apply to the purchaser. Failure to meet these conditions may lead to an obligation by the purchaser to reimburse grants or subsidies or may cause penalties to be imposed. Therefore, careful review in the due diligence process is absolutely necessary.

IV. Intellectual Property (IP)

1. Situation of Intellectual Property Rights

Germany is a member of all important international intellectual property treaties and its IP system complies with international standards concerning the types of protectable IP and the enforcement of IP rights. The German legal framework is said to be highly efficient, predictable and reliable. The protection of intangible assets has always enjoyed great importance in Germany, which is for instance reflected by Germany’s ranking as no. 10 (of 144 nations) in innovation, including protection of intellectual property in the Global Competitiveness Report 2012/2013, as well as by the fact that the European Patent Office is based in Munich, Germany.

Most intangible assets enjoy protection as exclusive rights only after registration. Technical inventions are protectable (if they meet the requirements of the German Patent Act) as patents (max. 20 years), utility models (max. 10 years) or as topographies (max. 10 years); only in certain cases may duration of protection be extended (for pharmaceuticals and petrochemicals for 5 years). Non-technical intangible assets that enjoy protection after registration are trademarks (renewable for 10 year terms, indefinite protection possible), design patents (max. 10 years) or domain names (indefinite term).

However, further protection exists for intangible assets without any registration, like copyright protection for works, which also includes software programs. Copyright protection is granted for a period of 70 years after the death of the author for works. Protection without registration is also granted for secret know-how, mainly by the Unfair Trade Practices Act (for the period of secrecy) and trademarks/trade names may also enjoy protection through use (i.e. well-known trademarks). As Germany is an EU member, European IP rights are in place (community trademarks and community designs) which automatically provide protection in Germany without a requirement for further national registration. Unitary European patent protection is on its way but not yet enacted.

2. Specific IP Issues in Transactions

After having identified all intellectual assets of the target (including the non-registered rights) specific issues should be observed in its acquisition.

a) Inventions/Patents

Under German law, an invention principally belongs to the inventor (mostly an employee) and in the past, the invention had to be claimed by the employer in writing vis-à-vis the employee within a period of 4 months after notification to be transferred to the employer. The respective statutory provision was changed as of October 1, 2009 – for employee inventions notified thereafter, the employer is now deemed to have acquired the invention by law if he does not release it to the inventor within 4 months. Payment of certain compensation to the employee/inventor by the employer (usually small standardized amounts if agreed in advance) is mandatory. If patents registered in the name of the target company are based on third parties' inventions acquisition from the inventor has to be proven.

b) Copyrights

Under German law, the copyright as such cannot be transferred but the author may only grant exclusive rights of use and exploitation to the purchaser/transferee. The author always retains his personality rights (moral rights) to the work. There is no work-for-hire principle in Germany, except in cases of software programs. Concerning other works created by employees, the economic rights to such works have to be transferred to the employer which can be provided in the employment agreement (also implicitly if the circumstances permit such interpretation).

c) Transfer of Rights and Availability

For registered IP rights, the transfer of rights should be filed with the relevant registers, even if it is not mandatory for validity of transfer, but necessary for later enforcement of rights against third party infringers. Another issue particularly in many share deals is to make sure that the relevant technology/know-how is accessible after acquisition. This may be effected by documentation and post-contractual non-compete obligations of the relevant people in the target which must be limited in time and scope and subject to certain compensation to be enforceable. With regard to software, respectively IT, the crucial points are to safeguard access to and availability of customized software (source codes, documentation), as well as to assure continuing disposability of the IT infrastructure and access to the data (data transfer is subject to rather strict data protection laws) after closing an asset deal or acquiring a separate business division.

d) Licenses

With respect to (exclusive) license, technology transfer and R&D agreements, no permit or registration is required but there are certain anti-trust issues that merit attention as they could affect validity of the agreement. Transfer of any such agreement to the purchaser (in case of asset deals) requires the approval of the other contractual partner.

V. Information Technology (IT)

1. General Situation in Germany

Germany offers attractive conditions for either forming or acquiring IT- or IT-related companies. Four of the top 10 European software developers and vendors by revenue are German, including SAP, by far the largest one. The reasons for Germany’s leading position are a stable and predictable legal framework, a sound economic environment, the availability of highly skilled personnel and a tradition of innovation (note that of all European countries German companies have the most patents and Germany is ranked fifth among the patent holding countries worldwide).

2. Specific IT Issues in Transactions

In Germany IT-related software and technology is protected by special provisions in the Copyight Act (UrhG) and, in some cases, by the Patent Act (PatG). The former type of protection comes into force ex lege, i.e. there is no formal registration necessary or even possible. The software’s author – or the company employing the author – becomes owner of the copyright the moment he finishes his work. In contrast, protection by a patent is granted by the German Patent Office (Bundespatentamt) after a formal application has been submitted and the claim has been thoroughly examined and the validity recognized by the Office. Since the prerequisites for obtaining a patent for software are very strict, most developers do not attempt to file an application.

When acquiring a company in Germany due diligence (see B.III.) usually covers the following IT aspects: examination of the company’s contracts in order to make sure that it has the necessary licenses and other intellectual property rights to operate the software in use. This becomes particularly important if the company uses individually developed or customized software. In this case it is important to make sure that the company has access to the source code in case the developer becomes insolvent. If the company itself develops software (or other products protected by the Copyright Act), it must be ensured that the license agreements it has entered into are sufficiently safe. If the outcome of such due diligence is not satisfactory, the purchaser has to either ensure that there will be no negative effects (e.g. by renegotiating the relevant contracts) or take such possible effects into account when calculating the price he is prepared to offer for the company.

3. Specific Issues regarding E-Commerce and other Internet-Based Activities

For companies which are active in E-Commerce (i.e. sell their products or services via the internet), there are specific laws which need to be taken into account, most of them dealing with consumer protection. Those laws, however, are based on European Union standards and are therefore virtually identical throughout the EU member states.

VI. Product Liability

In Germany, the manufacturer, respectively the first importer to the EU, can be held liable for defects of its products that cause death or physical harm or damage other products. The German Product Liability Act is based on EU law and provides for a strict liability independent of default or a contractual relationship. Three types of product defects cause liability: design defects, manufacturing defects, and defects in marketing (improper instructions, failure to warn of latent dangers). Liability for personal harm is limited by law to EUR 85,000,000; any further limitations of liability (e.g. in general terms and conditions) are invalid. Thus, due diligence mainly serves to identify potential liability risks that require building up a reserve and/or proof of insurance coverage and can be reflected in the purchase price or in the SPA through indemnifications.