Thinking about buying a Volkswagen car? What about buying Volkswagen the company? On November 1st , BCLBE hosted a talk by Dr. Joachim Rosengarten of Hengeler Mueller, who guided listeners though the process by which a U.S. corporation acquires a German company. Dr. Rosengarten, who had attended Boalt Hall as an LL.M. student, shed light on the patchwork of laws governing international mergers and acquisitions by proposing and then analyzing a hypothetical acquisition of a German company by a U.S. operation.
Dr. Rosengarten’s lesson can be broken down into three rules: know the laws, get the stocks, and get the price right. The first challenge in acquiring a German corporation is to understand the applicable laws that will govern the purchase. German shareholders want the best deal if their company is to be purchased by a foreigner. German law applies to the acquisition, which is overseen by BaFin, the German equivalent of the Securities and Exchange Commission. Moreover, once an investor or corporation owns just a two percent share of a German company, it must disclose its stake to regulators and the public.
Acknowledging the challenges of navigating German regulations that favor shareholders, Dr. Rosengarten turned to the question of how many shares to obtain for a successful takeover. There are three significant thresholds in acquiring a German company. When an American company secures fifty percent of a German company, it constitutes a de facto group and can make some board level decisions for the company. Unfortunately, at this level of control, the company may not merge the critical research and development efforts of the parent and subsidiary company. Furthermore, German law prevents the parent company from making decisions for the subsidiary that would harm the value of the subsidiary company.
At seventy-five percent foreign ownership, the relationship is restated as a domination agreement. The domination agreement allows the parent company to instruct the management of the German company to make decisions that could ultimately harm the value of the German company. German law protects the twenty-five percent of German shareholders who might be harmed by these actions by fixing the value of the remaining shares so that their value cannot decline.
At ninety-five percent ownership, the parent company may “squeeze-out” the remaining shareholders and force them to sell their stocks. Again, German law operates to protect the shareholder, requiring that the company pay fair market value for any outstanding stocks.
The third element, “getting the price right,” is particularly challenging because German law secures shareholders the best possible value for their stocks during an acquisition. When an American company provides its required notice in the form of a prospectus to all unknown voters, it must offer to buy stocks at the average market price of the stock over the last three months. Furthermore, if the parent company purchases stock at a higher price, such as in a bulk purchase from a large private shareholder, it must offer the same price to all free-floating (unknown) stockholders.
An acquiring company also cannot condition its purchase on special government support, such as subsidies for renewable energy projects. Moreover, the acquiring company cannot require that all previous contracts with the subsidiary company remain in force after the acquisition. Nevertheless, Dr. Rosengarten advised that the buyer could condition its purchase on obtaining a domination agreement so that it may take immediate action to merge resources between the parent and subsidiary.
Dr. Rosengarten’s three rules offer a framework for aspiring and experienced M&A lawyers to navigate the challenges of German acquisition law—a microcosm for the rest of the European Union.