A. Investment Possibilities

I. Share Deal vs. Asset Deal

1. Basic Differences

Investments in German companies can be structured as share deal or as asset deal. Both types of transactions are significantly different in terms of their economic and legal effects.

In a share deal the purchaser acquires all (or a part of the) shares in the target company from one or more sellers. With the acquisition of such stake, the purchaser automatically becomes the owner of the legal entity as a whole including all of the target company’s assets, rights, claims and liabilities. Also, all of the target company’s contracts with third parties (e.g. banks, customers suppliers, trade agents etc.) with all related rights and obligations as well as all public approvals, permits and registrations (including registered IP rights) are automatically taken over. Thus the target company’s business operations continue to be performed virtually irrespective of the change in ownership.

In an asset deal the purchaser acquires either all or individual assets as for example real estate, production facilities, machines, computers, licences, etc. directly from the target company. As a result, the business operations are henceforth continued under a new, different legal entity (the purchaser itself or one of its subsidiaries/special purpose vehicles). The purchaser can select the most attractive assets and avoid the take-over of assets which are inappropriate or even contain certain risks or liabilities (so-called cherry-picking ). Such an approach is advisable if the target company has already filed for insolvency, for instance, or if the purchaser intends to acquire only one of several business units consolidated under one company.

2.Transfer of Liabilities

Since a share deal leads to the assumption of all the existing claims and liabilities of the target company whether known or unknown to the purchaser, a thorough review of the target company (legal due diligence) is recommendable. In an asset deal, by contrast, there is no such automatic transfer of rights, claims or liabilities. Nevertheless when continuing the existing business (or at least its substantial core) the purchaser of assets may be liable for debts or obligations initially incurred by the seller according to the following exceptional provisions:

  • When using the existing business name the purchaser may be liable for debts incurred by the previous owner pursuant to section 25 para. 1 of the German Commercial Code (HGB), however this assumption can be excluded by agreement with the seller and entry in the commercial register.
  • The purchaser may also – to a limited extent – be liable for previous taxes (in particular value added tax, trade tax, wage tax and withholding tax) pursuant to section 75 of the German Fiscal Code (AO), however this liability is excluded in case of an acquisition from the insolvency administrator in the course of insolvency proceedings.
  • Existing employment agreements are transferred to the purchaser together with a business or a business unit pursuant to section 613a of the German Civil Code (BGB) unless the respective employee explicitly objects. Other contracts with third parties related to the acquired assets stay with the selling company; i.e. any transfer to the purchaser is subject to the consent of the respective other contractual party (this may lead to renegotiations and loss of beneficial terms and conditions).
  • The acquisition of real estate can render the purchaser responsible for existing contamination and clean-up costs pursuant to section 4 para. 3 of the German Federal Soil Protection Act (BBodSchG).
  • Theoretically, under EU Law the purchaser can be made liable for the repayment of unlawful subsidies granted to the seller by the EU or for damages and fines resulting from a violation of EU competition rules committed by the seller.

3.Tax Issues

Against the background of the overall lower taxation of capital gains (especially if the seller is a corporation) sellers will tend to prefer to structure a transaction as a share deal. From a purchaser’s point of view an asset deal is advantageous because the hidden reserves (the difference between book values and purchase price) for depreciable movable assets can be written off (so-called step-up). In addition most of the transaction expenses are deductible immediately or by way of depreciation. However, tax losses carried forward incurred by the selling company cannot be used by the purchaser in order to reduce tax base. The tax situation ist similar in a share deal, if the selling company has no substantial hidden reserves. In the event of a transfer of more than 50 % of the shares in a corporation the unused losses expire pursuant to section 8c para. 1 of the German Corporation Tax Act (KStG). Following an asset deal at least the seller can seize unused tax losses carried forward in order to reduce profits. The direct transfer of real estate in the course of an asset deal is subject to real estate transfer tax (in most federal states approx. 5 %). If instead the real estate is held by a corporation or a partnership and less than 95 % of the shares in the respective company are sold, no real estate transfer tax will be triggered. Therefore structuring a real estate transaction as a share deal (involving 94.9 % of the shares) can be a means to avoid real estate transfer tax.

4. Contract Design

In practice, share deals are more common than asset deals. A share purchase agreement regularly focuses on more extensive representations and warranties (in order to reduce risks resulting from the assumption of liabilities, inter alia) whereas the drafting of an asset purchase agreement requires detailed identification of every single asset to be transferred. Share purchase agreements concerning shares in German limited liability companies (GmbH) have to be notarized in front of a German notary public (subject to fees) whilst asset purchase agreements only require notarization if they involve the transfer of real estate. Ultimately appropriate and creative contract drafting can adapt the legal and economic effects and balance to a certain extent the respective disadvantages of both types of transactions.

II. Acquisition of Various Share Types

1. Limited Liability Company (GmbH)

a) General

The GmbH is by far the most frequently used corporation form in Germany. According to current statistics, around one million commercial entities are organized as GmbHs. One of the main advantages of a GmbH is that the shareholders are not personally liable for the company’s debts. However, foundations of a GmbH, as well as capital increases and share transfers, require notarization by a notary public.

b) Share Capital

The nominal share capital must be determined in the articles of association and amount to a minimum of EUR 25,000. Before the 2008 reform of the Limited Liability Companies Act (GmbHG), each shareholder was only permitted to subscribe to one share in the company and each share was required to have a minimum amount of EUR 100 and be divisible by 50. The 2008 reform of the GmbHG granted shareholders much greater flexibility regarding the amounts of their contributions. Shareholders may now subscribe to as many shares as they wish and such shares must be denominated in an amount of at least EUR 1.00. This new flexibility has particularly simplified the purchase of shares if a shareholder intends to sell only a part of his stake, as well as joint ventures and management participation programs.

c) Maintenance of Share Capital

The GmbHG provides for the maintenance of the nominal share capital insofar as it is not permitted to make distributions to shareholders if the remaining assets (at book value) would not cover the company’s share capital and its liabilities. In other words, only free reserves and accumulated profits are allowed to be distributed to shareholders. The 2008 reform of the GmbHG reinstated the traditional balance sheet-based approach of determining whether a transaction between a shareholder and a GmbH affects its net assets and therefore constitutes a distribution. Such approach – and thereby the permissibility of balance sheet-neutral transactions such as cash pooling systems, as well as upstream securities in connection with leveraged buy-outs – had been questioned by a decision of the German Federal Supreme Court in 2003. The lawmaker of the 2008 GmbHG reform overruled such decision, in particular aiming to put cash pooling systems on a secure footing.

d) Authorized Capital

The 2008 reform of the GmbHG implemented the instrument of authorized capital as known in the German stock corporation. The primary purpose of authorized capital is to facilitate the financing of the limited liability company through the allocation of new equity capital. The GmbHG now enables the shareholders to authorize the managing directors of the company for a maximum term of five years to increase the registered capital of the company by issuing new shares against contributions in cash or kind. The nominal amount of the authorized capital may not exceed half of the existing registered capital at the time of authorization. Making use of the authorized capital does not require another shareholder resolution. In this light, the authorized capital may be a flexible and cost-saving instrument for German limited liability companies to increase their share capital. The possibility to create authorized capital gives the management of a GmbH an instrument with which to obtain further financial means or to set up management incentive programs without convening general meetings.

e) Commercial Register

It is important to know that only such shareholders who are registered in the shareholders’ list are deemed to be shareholders of the respective GmbH. A copy of such shareholders’ list must therefore be filed with the competent commercial register and is publicly available to anyone who is interested. The 2008 reform of the GmbHG introduced the possibility of acquiring shares in a GmbH in good faith whereby the shareholders’ list serves as a point of reference. In principle, a purchaser can trust that a person entered in the list actually is a shareholder in the company. However, this applies only if the respective entry has been incorrect for at least three years without objection, so the theoretical possibility of good faith acquisitions will not actually make due diligence procedures superfluous.

f) Management

A GmbH is led by one or more managing directors. Contrary to the legal concept in a German stock corporation, the applicable law allows shareholders of a GmbH to appoint and remove managing directors relatively easily at any time. Further, managing directors are bound by instructions provided by the shareholders’ meeting. In general, the managing directors are responsible for business management and the representation of the GmbH. A legal entity is not allowed to serve as managing director. For some business transactions, the managing directors need to obtain the prior consent of the shareholders’ meeting. Usually, such business transactions are described in detail in the articles of association or in the rules of procedure for the management.

g) Advisory Board/Supervisory Board

Moreover, the shareholders of a GmbH can opt to implement an advisory board or a supervisory board. Managing directors must not be members of a supervisory board. If a GmbH (together with its subsidiaries) has more than 500 employees, the foundation of a supervisory board is required by mandatory labor law, whereby the employees are entitled to appoint at least one third of its members. In the event that a GmbH has more than 2,000 employees, half of the members of the supervisory board are appointed by the employees. In cases of a tie vote, the chairman of the supervisory board appointed by the shareholders has a casting vote.

h) Administrative Seat Abroad

The 2008 reform of the GmbHG eliminated the requirement that the registered seat of the GmbH had to be identical with its principal place of business. Therefore, it is now possible for a GmbH to have its administrative seat abroad while its registered office remains in Germany. This allows for a more flexible handling of GmbHs, which may now move their principal place of business to any other country without any corporate restrictions. This is not restricted to the European Union as long as the third country recognizes the applicability of German law to the GmbH. The possibility to operate abroad in the familiar legal form of a GmbH might be a particularly attractive option for German groups and their foreign subsidiaries.

i) Entrepreneurial Company (UG)

The government’s first draft of the 2008 reform of GmbHG intended to reduce the minimum share capital of a GmbH from EUR 25,000 to EUR 10,000. The legislator ultimately decided to maintain the previous minimum capital. For new businesses that only have a limited amount of nominal capital at the start of operations and only require a small amount of capital, the reform introduced an alternative to the established form of the GmbH called an entrepreneurial company (UG) which can be founded with an initial share capital of EUR 1.00. An UG is more or less a GmbH with the special characteristic that a quarter of the annual profits must be put into the capital reserves until the share capital amounts to EUR 25,000. Since the implementation of the UG, foreign corporate entities, which, after being acknowledged by German law, used to attract increasing attention due to their low share capital, have disappeared from the scene. The English limited liability company, which used to be the preferred choice in this regard, has been almost completely replaced by the UG. The UG has found great reception, especially in the field of small enterprises or used solely as an investment or trust vehicle. The number of UGs has increased over the short period of its existence to around 75,000 registered entities.

2. Stock Corporation (AG)

a) General

Alongside the GmbH, the second major type of German corporate entity designed for mid-cap and larger corporations is the stock corporation (AG). The shares in an AG may be, but must not necessarily be, publicly listed. In fact, most of the German AGs are not listed, but are privately held.

The legal regime that applies to an AG is considerably stricter than the one that applies to a GmbH. As a rule of thumb, the articles of association of an AG may only contain provisions that deviate from those contained in the German Stock Corporation Act (AktG) when this is expressly permitted by the Act, whereas the articles of a GmbH may contain any provision unless such provision is prohibited under the German GmbHG. As a consequence, the flexibility in structuring an AG is quite limited, in particular with respect to its corporate governance.

b) Corporate Governance

The three mandatory corporate bodies of an AG are the management board, the supervisory board and the shareholders’ meeting.

aa) Management Board

The management board is responsible for the management of the company. The authority of the management board to represent the company may not be restricted vis-à-vis third parties. In addition, the management board is not subject to instructions from the shareholders’ meeting or the supervisory board. However, the articles of association may impose certain restrictions on their powers of representation (internally, i.e. vis-à-vis the company), by decision of the supervi- sory board or the shareholders’ meeting and by the rules of procedure of the management board, if any.

The members of the management board are appointed by the supervisory board for a term not to exceed five years, with dismissal only possible for cause.

bb) Supervisory Board

The members of the supervisory board are elected by the shareholders’ meeting, unless employee representatives are delegated to the board according to mandatory codetermination law. As a general rule, if an AG has more than 500 employees, one third of the board shall consist of employee representatives, and if it has more than 2,000 employees, half of the supervisory board members shall be elected by the employees (see 1.g) above). The supervisory board shall, in particular, supervise the management board and is competent for the (internal) consent to certain operative measures.

cc) Shareholders’ Meeting

The shareholders’ meeting shall resolve on all matters expressly attributed to it by law or the articles of association. The shareholders’ meeting is not allowed to instruct the management board with respect to the operative management of the AG unless the management board itself has requested that a decision be made by the shareholders’ meeting. However, according to a doctrine established by the German Federal Supreme Court in its so-called “Holzmüller” decision, the shareholders’ meeting shall grant its consent to matters relating to the management of the company which materially affect the membership rights of the shareholders, in particular upon the intended sale and disposal of material assets.

c) The German Corporate Governance Code

The German Corporate Governance Code, adopted in 2002, does not constitute statutory law. It contains recommendations and suggestions for German listed stock corporations that aim to make the German corporate governance system transparent and understandable, and to promote the trust of international and national investors, customers, employees and the general public in the management and supervision of listed AGs. The management board and the supervisory board shall declare annually that the recommendations of the Code have been and are complied with, or which of the Code’s recommendations have not been or are not applied and why they are not applied (comply or explain). Some important recommendations of the Code relate to, inter alia, the composition of the overall compensation of members of the management board, reports on the shareholdings in the company held by individual members of the management board and the supervisory board, and the information of shareholders and third parties during the fiscal year by means of interim reports.

Even if the Code does not constitute statutory law, according to a decision of the German Federal Supreme Court, approval given by the shareholders’ meeting for the actions of the management board and the supervisory board may be set aside by the court if an incorrect declaration of compliance with the Code has been issued. The court has also noted that, in case certain recommendations of the Code are no longer complied with, the declaration has to be amended immediately.

d) Share Capital, Shares, Sale and Transfer of Shares

The minimum stated share capital of an AG amounts to EUR 50,000. The minimum nominal amount per share is EUR 1.00. The creation of preference shares is possible. The shareholders’ meeting may resolve upon an authorized or contingent capital.

In contrast to the law governing the GmbH, the sale and transfer of shares in an AG does not require a specific form. According to the articles of association, however, the transfer of registered shares – as opposed to bearer shares – may be subject to the consent of the company. Consent is generally granted by the management board through consideration of the best interests of the company.

Any actions with respect to the shares in a listed AG must comply with insider trading law. The violation of insider trading directives routinely constitutes a criminal offence.

As set out in F.III.1., certain notification requirements must be complied with for shareholdings in both listed and non-listed companies. A violation of these rules results in a suspension of the respective shareholders’ rights, in particular the voting right at the shareholders’ meeting.

3. Limited Partnership (KG)

a) General

A German KG consists of at least one general partner and one limited partner. The general partner has personal and unlimited liability for the partnership's debts but generally no participation in the share capital of the KG. He is responsible for the management and representation of the KG. Limited partners are not liable for the partnership’s debts once they have paid their subscribed capital contributions committed to be registered with the commercial register. Prior to payment, the liability is capped at the agreed and registered contribution amount. Unless otherwise agreed, limited partners are excluded from the management and representation of the KG. They are generally only entitled to receive certain relevant information relating to the annual financial statements and have the right to object to the general partner’s decisions only to the extent that they go beyond the ordinary course of business.

b) GmbH & Co. KG

It is legally permissible and very common to implement a GmbH as general partner, offering the opportunity to investors to manage the KG via a GmbH, thereby avoiding the risk of personal liability as general partner. Thus, investors can benefit from the advantages offered both by a KG and a GmbH.

c) Partnership Limited by Shares (KGaA)

The legal form of a German KGaA is a combination of a KG and an AG (see 2. above). As with an AG, the limited partnership interests are shares that can be traded via stock exchanges. The minimum share capital of the KGaA amounts to (in total) EUR 50,000. Similarly to a KG, the shareholders of a KGaA are divided into limited and general partners. Thus, except for some special provisions in the Stock Corporation Act (AktG) for a KGaA, the general provisions of the AktG for an AG and the provisions of the German Commercial Code (HGB) for a KG apply.

4. Other Partnerships

a) Silent Partnership

Silent partnerships are advisable for investors intending to invest and participate in a company without disclosing their participation to third parties.

In the absence of detailed legal regulation, the internal relationship between the silent partner and the company is to be agreed upon by the partners of the silent partnership in the silent partnership agreement. The agreement typically provides for certain funding obligations of the silent partner in exchange for participation in the profits of the company. Statutorily, the silent partner does not have any managing rights (typical silent partnership). However, such (internal) managing rights may be stipulated in the silent partnership agreement (atypical silent partnership).

In relation to third parties, the company is managed by the non-silent partners only. The external legal structure of the silent partnership is therefore similar to a (subordinated) loan.

b) Public Private Partnership (PPP)

In PPPs, private investors and public bodies cooperate to develop, operate or maintain certain long-term projects. Infrastructure projects like the building of highways (e.g. the Autobahn), toll charge systems, waste management or waste water disposal are typical examples for PPPs. PPPs in Germany are not governed by any specific statutory law. As a consequence, PPPs require detailed written joint venture contracts. Generally, but subject to the contractual agreement between the parties, the private investor is responsible for planning, establishing and financing the project. In exchange, the private investor gains access to new business areas generally engaged by the public sector.

5. European Companies

In addition to the aforementioned national legal entities for the incorporation or establishment of a business in Germany, one legal form based on European law has become available in the member states of the European Union (EU) and the European Economic Area (EEA), notably the SE. Another supranational form of entity, the SPE, has not yet been agreed upon at the European level.

a) European Stock Corporation (SE)

The European Company (denoted by its Latin name Societas Europaea, abbr. SE) is a European AG. The legal framework of the SE is based on Community law directly applicable in all EU and EEA member states as well as – on a larger practical degree – on the respective relevant national legislation enacted to implement the SE in the different jurisdictions. An SE can be incorporated in five ways:

  • merger of two stock corporations;
  • incorporation of joint holding SE;
  • incorporation of joint subsidiary SE;
  • conversion of German stock corporation; and
  • incorporation of an subsidiary SE by another SE.

An SE can thus be used as a vehicle for cross-border mergers, since it may be established by way of merger of two or more companies in different EU/EEA member states. However, since the European Directive on Cross-Border Mergers was implemented in Germany in 2007, certain corporations existing under German law may also directly be merged with entities in other EU/EEA member states.

The SE provides two different corporate governance systems and allows for more flexibility with respect to employee participation (each see below). The SE has the following main features:

  • Once registered, the SE has legal personality.
  • An SE is required to have a minimum amount of subscribed share capital of at least EUR 120,000.
  • The shares of an SE can be traded on a stock exchange.
  • The registered office of the SE and its head office, meaning the place where effective control of the SE is exercised and the management of the SE is situated, must be in the same EU/EEA member state, but may be moved from one member state to another without the SE being dissolved or wound up. However, an SE must offer those shareholders objecting the move across the border to acquire their shares against equitable compensation in cash.
  • The articles of association of an SE can either provide for a one-tier-corporate- governance-system with an administrative board which is responsible for both, the management, including the election of managing directors, and the supervision of the affairs of the company, or a two-tier structure consisting of a management board and a supervisory board like in a German AG (see 2.b) above).
  • An SE is not subject to national employee participation or co-determination law. Instead, employee participation and co-determination is – subject to certain limitations – governed by an agreement between the management and the employees, represented by a so- called Special Negotiating Body. The negotiations are mandatory part of the process of establishing an SE and a prerequisite for its registration.
  • An SE must be treated by the EU/EEA member states as if it were an AG, i.e. laws applicable to an AG in the member state where the SE is registered, in Germany in particular the Stock Corporation Act (AktG), are applicable to the SE, unless the EU regulation or the national implementation laws provide otherwise.

The administration and management, shareholder rights and corporate governance of a German SE are primarily governed by its articles of association and by national statutory laws. In essence, German laws have more of a practical influence on the governance of an SE than the European legal framework.

b) European Private Company (SPE)

As of June 2008, the European Commission intends to implement a European GmbH (denoted by its Latin name Societas Privata Europaea, abbr. SPE) for the medium-sized businesses. Contrary to the SE, with only few exceptions, the SPE shall be entirely governed by European Community law directly applicable in all EU/EEA member states. This is expected to significantly facilitate cross-border business and reduce costs and complexity normally associated with setting up and maintaining a business in another member state.

However, since June 2008, the legislative process on this matter has been stalled. Neither the draft legislation of the European Commission nor the compromise proposed by the Hungarian EU-Presidency in 2011 have been agreed upon. Some member states fear interventions in certain national interests governed by its statutory laws on a GmbH. It is therefore not clear if and when the SPE will, in fact, become available.

6. Joint-Ventures (JV)

Two or more enterprises can cooperate in the form of a JV. Reasons for the establishment of a JV can be that a participant of the JV is seeking access to a new market or has very special know-how which is of great interest to the other JV partner. Usually, both JV partners benefit from the cooperation.

JVs can appear in various forms. In the case of a contractual JV, the cooperation is only based on bilateral agreements without forming an independent organization. Such JV agreements can be entered into by any legal entity regardless of their legal form. The contractual JV is preferably used for specific projects or a time limited cooperation. The parties to the contractual JV agreement should be cautious not to form a partnership (GbR) to prevent its several and joint liability. In the case of an equity JV, the partners of the JV set up a single-purpose vehicle for their collaboration. Such entity often adopts the legal form of a German KG or a GmbH, rarely an AG. An equity JV is usually accompanied by an agreement between the involved entities regulating their relationship regarding the new established legal entity, in particular with respect to the financing of the JV, share transfers and exit related rights. A JV may be subject to German or European antitrust laws and merger control.

III. Acquisition of Real Estate

1. Description of and Title to Real Estate

a) Cadastral Map

In Germany, land is registered both with the land survey office and the land register. Therefore, a title search is quick and reliable.

Every piece of land is divided up into cadastral plots. Each piece of land consists of at least one cadastral plot but may consist of several. Each cadastral plot is given a corresponding plot number and is registered with the land survey office. The cadastral map contains valuable information on the exact boundaries, the cut and the location of the cadastral plots. It is also important to examine the cadastral map to ensure the property is accessible by public roads. In addition, the cadastral maps contain information on the existing development and superstructures, i.e. buildings crossing the boundaries.

b) Land Register

The cadastral plots are also registered in the land register. The land register is maintained at the local courts. It is divided up into an inventory and three sections. The inventory contains the plot number. Section 1 contains information on ownership of the plot of land, i.e. the owner or, in case of several co-owners, the shares of the co-owners, and sometimes notes of registrations of easements in favor of the plot of land. Section 2 contains encumbrances, including easements, limited personal easements, usufructs, priority notices (of conveyance) and restraints on disposal such as heritable building rights (see 2.d) below). Section 3 contains the liens such as mortgages, land charges and annuity land charges. The rights registered in the land register have different priorities/ranks. Generally, the priority of the rights depends on the time of their registration, i.e. the older right is ranked higher than the more recent right.

c) Good Faith

Anyone may rely on the content of the land register in good faith and is protected to the extent that the content of the land register is considered to be correct, regardless of its actual correctness. Therefore, it is possible to acquire land from the owner registered in the land register even if he is not the true legal owner. Further, encumbrances that are not registered in the land register are generally deemed as nonexistent vis-à-vis a purchaser. This leads to great transparency and makes real estate transactions reliable and safe.

Unlike the commercial register, the land register can only be inspected online by a notary public. Furthermore, in order to receive information from the land register a valid interest must be demonstrated. However, the purchaser of a real estate property generally has such valid interest. Cadastral maps are publicly available (and in some municipalities even online).

2. Types of Ownership in Real Estate

Every person and every public or private legal entity (e.g. German federal states, cities, municipalities, stock corporations or limited liability companies, as well as registered partnerships or private partnerships) may be the owners of land. There are different types of real estate ownership.

a) Sole, Co- and Joint Ownership

The most common form of ownership is sole ownership, i.e. one person or company owns a piece of land. Where land is owned by several persons or companies, they are co-owners or joint owners. In the former, more common case, every co-owner has a share of the property to a certain fraction, e.g. one half. Each co-ownership share can be sold and encumbered separately and generally without the consent of the other(s). In case of joint ownership, each owner owns the whole land jointly with the other owner(s) and is therefore restricted by the rights of the other owner(s). The whole piece of property can only be sold and encumbered by all joint owners, but not separately.

b) Buildings and Other Components

Ownership of land includes all objects firmly attached to the land, e.g. buildings and garages (as to the exception of a heritable building right, see 2.d) below). The premises attached to the land consist of all components used for their construction. Under certain circumstances this can include the fixtures and fittings of a building, if they were customized to the building structure, if they form a unity with the building and they have considerable impact on the appearance of the building as a whole. The sale of real estate thus regularly includes the building located on it. By contrast, in the newly-formed German states (Brandenburg, Mecklenburg-Pomerania, Thuringia, Saxony, Saxony-Anhalt) and the eastern part of Berlin before 1990, usually ownership was only procured for buildings, whereas the land on which it was located was simply leased. This regulation was continued after reunification of the German states, so this concept of independent ownership of buildings still exists in Eastern Germany.

c) Condominiums
aa) General

German law also acknowledges the individual ownership of condominiums, which can also include the right to the exclusive use of parking spaces, cellars or balconies. The individual ownership of the condominium itself includes the co-ownership of all commonly used spaces in the condominium building. This co-owned common property embraces the land itself, as well as all those sections and facilities of the building that are not subject to individual ownership. A fund for maintenance work is created for the maintenance of the common property which is not refunded upon the sale of the condominium.

bb) Conversion into Condominium

To convert a property into condominiums and common property a notarized partition deed must be drawn up containing a description of each apartment and colored plans of the building illustrating the individually owned condominium spaces. Generally the ratio of co-ownership of the common property corresponds to the ratio of the individually owned condominium space in relation to the whole building, but may alter due to subsequent expansions within the building, e.g. in the attic. Such conversion requires a governmental certificate confirming separated units. Each condominium is individually recorded in a separate folio in the land register (condominium land register) and is henceforth, with respect to the applicable law, independent of other condominium property on the same site.

cc) Transfer

Like land, a condominium is independently transferrable and can be independently charged or otherwise encumbered. Likewise, a foreclosure sale does not affect other condominiums. The sale of the condominium can, however, under certain circumstances require the approval of other condominium owners on the same site or of the building administrator.

d) Heritable Building Right

Finally, heritable building rights can be created under German law. A heritable building right entitles one to build and own a building on a piece of land (or below ground, e.g. underground parking) for a certain period of time, e.g. 99 years. The building is considered an integral part of the heritable building right and not of the land. Heritable building rights are often used by municipalities or the Church in order to retain ownership of land while receiving an annual ground rent, usually 4 to 5 % of the value of the land per year. Like rent, ground rent can be subject to indexation, i.e. increase in accordance with a certain index such as the consumer price index. A heritable building right is created by way of a contract between the owner of land and the beneficiary and has to be registered in the land register (see 1.b) above). Moreover, a separate folio, the heritable building right register, is created in which the beneficiary of the heritable building right is registered as the owner of the heritable building right. Like land, the heritable building right can be sold and purchased and may be encumbered with easements and charged with land charges. However, the owner of the land will usually reserve the right to approve such transactions, i.e. prior consent is required for any transaction. Upon the expiration of the heritable building right, the owner of the land automatically becomes the owner of the building and therefore has to pay compensation to the beneficiary. Lease agreements concluded by the beneficiary automatically devolve to the owner of land. It is also possible to agree on a right to acquire the land in favor of the beneficiary.

3. Encumbrances and Charges

a) Priority Notice

A priority notice secures the enforcement of a claim relating to a property, e.g. the right of conveyance. It is recorded in the land register (see 1.b) above) and has, at that point in time, the immediate effect of invalidating any subsequent transaction concerning the same plot of land to the extent that the beneficiary’s claim would be impaired. It thus preserves the priority of the beneficiary’s position over any right with respect to the estate which was created subsequent to the beneficiary’s own claim. Any dispositions by way of foreclosures, distress warrants or insolvency proceedings, as well as any contractual dispositions made by the seller, are invalid vis-à-vis the beneficiary to the priority notice. In case of insolvency of the seller, such priority notice will entitle the purchaser protected by such priority notice to claim performance despite the insolvency proceedings without being subject to an insolvency quota. Consequently, German purchase agreements regularly stipulate that the purchase price shall not be due before the priority notice of conveyance has been registered in the land register.

b) Easement

An easement obliges the owner of the encumbered plot of land to tolerate specific conduct by someone else (the beneficiary of the easement) on his or her plot of land or to refrain from specific conduct on the plot of land for the benefit of someone else. The easement may be registered in favor of and restricted to a certain person/company, a limited personal easement, e.g. a tenant’s right to run a retail store or a permanent right of residence. More often, easements are registered in favor of the respective owner of a plot of land, e.g. to secure a right of way or a pipe way leave. Since easements have a material impact on the value of a property because they restrict the right of use or secure an adequate use of the property, all existing or required easements should be reviewed in the course of due diligence.

c) Usufruct

A usufruct on a plot of land entitles the beneficiary to possess the land and to take the emoluments of the land and accessories, e.g. rent payments.

d) Charge on Land

A plot of land may be encumbered in such a way that recurring acts of performance are to be made from the plot of land to the person in whose favor the encumbrance is created (charge on land). It is possible to agree as to the content of the charge on land that the acts of performance to be made are adjusted to changed circumstances without notice if, based on the requirements stipulated in the agreement, the type and scope of the encumbrance of the land can be determined. The charge on land may be created in favor of a certain person/company or the respective owner of another plot of land. Often, a charge on land is created to ensure that credit facilities are repaid which were concurrently agreed upon between the parties.

e) Other Land Charges

German law provides for a number of security interests in real estate. The most important security interests are mortgages and land charges, the difference being that the mortgage secures a specific debt and the land charge does not, for which reason the land charge is the preferred security interest in most transactions. They both give the beneficiary (primarily banks) the right to collect a specific sum of money by way of a forced sale or forced management of the encumbered plot of land. The transferability of a mortgage/land charge can be increased by the creation of a certificate.

4. Transfer of Title and of Leases

A peculiarity of German law is that, in addition to the purchase agreement, a special agreement regarding the conveyance itself is required. Usually this agreement is included in the purchase agreement, i.e. seller and purchaser agree that the title of property shall pass from the seller to the purchaser (see B.IV.).

If the agreement regarding conveyance is concluded separately from the purchase agreement, it must be notarized like the purchase agreement itself. However, the agreement regarding conveyance must be concluded before a German notary in the physical presence of both parties, whereby either party may be represented by an agent. It can only be unconditional and must not contain any sort of time limit (however, this stipulation does not apply to the purchase agreement). The entire agreement, including the agreement regarding conveyance, is valid only if the seller is the owner with unrestricted authority to dispose or a third person with authority granted by the unrestricted owner. If the seller does not have the authority to dispose, the purchaser can only acquire the title if the seller is registered as owner in the land register and the purchaser acts in good faith (see 1.c) above).

The conveyance will only become effective upon its registration in the land register, which may take a long time. However, the parties may enable the purchaser to use the property as soon as possible. It is thus common practice in real estate transactions to agree that the economic ownership (transfer of possession) will be passed on earlier, irrespective of the registration of ownership in the land register, but generally not before the registration of a priority notice of conveyance (see 3.a) above) and the payment of the purchase price. This includes, inter alia, the right to collect rent.

The legal transfer of the lease agreements from the seller to the purchaser, however, will occur by operation of law upon the registration of the purchaser in the land register. However, this automatic transfer only applies in case the seller, owner of the real estate and landlord under the lease agreement are identical. If not, it is not sufficient to agree upon the transfer in the purchase agreement. Rather, an agreement between all three parties involved – purchaser, seller and tenant – is required. In case a lease agreement has been concluded but the premises have not yet been handed over to the tenant, the purchaser has to assume all obligations of the landlord in the purchase agreement in order to ensure a transfer of the lease. As the purchaser assumes all obligations of the landlord, including the liability for any deposit made by the tenant, it should be ensured that all deposits are in fact transferred to the purchaser.

IV. Acquisition of Leveraged Loans

1. Attractiveness

Despite the recent strong improvement in the German economy, some portfolio companies of private equity investors are still suffering from the credit crunch or over-leveraging in the pre- crisis years as the economy slows. Those are prepared to or have no alternative but to breach the financial covenants of the facility agreements, even if they struggle to find new lenders for necessary refinancing. As a consequence, the prices of leveraged loans of these companies fall well below par. This, on the other hand, attracts investors to acquire leveraged loans.

2. Necessity of Banking License

According to the German Banking Act (KWG), the acquisition of a leveraged loan does not necessarily require a banking license, so that even private equity funds may generally purchase the loans of their portfolio companies. A banking license is only needed if an entity carries out credit business, i.e. inter alia, professional loan granting. The acquisition of leveraged loans, the facility repayment and/or the enforcement of claims as such do not constitute a credit business. However, this might be different in the case of refinancing a loan, if the acquisition also comprises unused commitments or if a facility agreement gives the lenders certain ancillary rights, e.g. determination of new interest rates. Therefore, it is advisable to examine in each individual case whether a banking license is required in connection with the acquisition of a leveraged loan.

3. Transfer of Loans

Under German law the transfer of a loan does not have to meet any specific formal requirements, i.e. a loan transfer agreement can be signed on the parties’ private capacity without notarization. The transfer of a loan, however, should always be indicated to the borrower in order to avoid his making payments to the transferor with debt discharging effect.

4. Assignment Clause

Another legal aspect concerning the acquisition of a leveraged loan is the assignment clause in the facility agreement. Does the assignment clause permit the assignment of the lender’s rights arising from the facility agreement to the respective acquirer of the leveraged loan? In this respect, some facility agreements restrict the potential circle of acquirers to banks and financial institutions and expressly exclude any funds or other such entities. Further, many facility agreements require the consent of the company to the change of lender.

5. Specialties

If the acquirer of a leveraged loan is simultaneously a shareholder of the borrower and the lender, two main issues arise from a German legal perspective: first, the subordination of any repayment claims of the acquirer arising from the facility towards other creditors in case of borrower’s insolvency and, second, the conflict of interest as the shareholder will be both owner of the borrower and its creditor.

a) Subordination

According to German insolvency law, any outstanding shareholder loan or similar contribution is always a subordinated insolvency claim and the repayment of any shareholder loan or similar contributions within the time period of one year before or after insolvency proceedings are filed can be reclaimed by the insolvency administrator. Since this rule also applies to a loan which a shareholder has acquired from a third party, an investor must always be aware of his subordinated position in case of the insolvency of the portfolio company. However, the aforementioned rules do not, inter alia, apply to shareholders holding less than 10 % of the registered capital of the borrower.

b) Conflict of Interest

If the leveraged loan was granted by a syndicate and the shareholder only acquires a part of the facilities granted to the portfolio company, the shareholder might encounter a significant conflict of interests to the possible disadvantage of other creditors: On the one hand, the shareholder represents the owner of the borrower and, on the other hand, it is part of the syndicate. Due to this conflict of interests, there is a material risk that the shareholder ́s voting rights in the lenders’ syndicate might be withdrawn under German law. Facility agreements sometimes even expressly provide for the disenfranchisement of the acquiring sponsor or sponsor affiliate for voting purposes.