What are the main differences in German M&A transaction terms?
The main difference may be that the financial sponsor requires a clean exit. That means that they require a certain specific amount of proceeds that need to be upstreamed to the investors. This has an effect on the purchase price on the one hand, but also the coverage of reps and warranties and indemnities that are offered. As regards to purchase price, this means that there is a preeminent use of the locked-box mechanics and not closing date accounts. As regards to reps and warranties, a financial sponsor requires the acquirer to take out the W&I insurance for the operational warranties and also the tax indemnity in most cases.
How prevalent is the use of locked-box pricing mechanisms in Germany?
The locked-box mechanism is the most common approach in the current market. It gives the advantage that you have a specific purchase price that is paid at closing — you don’t have any purchase price adjustment after closing. That means that the seller receives a specific amount at the time of closing which is already fixed at the time of signing. It also has the advantage that the management of the target is not held up in the preparation, review and sometimes even dispute of the closing date accounts.
How often do you see W&I insurances in your transactions?
W&I insurances have become an essential element in private equity transactions in Germany. We’ve seen a lot of development in this market over the last years, and it will be fair to say that now more than maybe 50% of all transactions require W&I insurance on the side of the buyer.
During the recent years, we’ve seen a lot of competition in the W&I insurances market, and therefore also a lot of new policies that are offered. While at the beginning they only covered operational reps and warranties, we now see zero liability insurances being offered and also title insurances, and also insurances for specific tax issues, and oftentimes they don’t come along with an increase in premiums.
What other important legal developments for PE transactions do you see?
Well an important development over the last years was the increase in foreign investment control. We saw it in the U.S. with CFIUS and now it has also reached Europe, and more specifically Germany, with their foreign investment control laws. Germany has tightened its foreign investment control laws over the last two years, and now provides for a potential review of any transaction by a non-EU investor in case certain thresholds are exceeded. The thresholds are in general 25%, and for specific industries even 10%.
There are also current legislative initiatives on the EU level which may lead to even more complexity when it comes to investments from a non-EU investor into European targets. As a result, the clearance under the German foreign investment control regime is now introduced as a closing condition in most of the SPAs.
Overall, it’s important to have an eye on the market and to be familiar with all the latest developments, whether it comes to W&I insurances, purchase price mechanics, or foreign investment control laws.
At Kirkland & Ellis, we are familiar with all of these issues since we constantly advise our clients on very complex transactions in Germany.