Germany
Answer ... As the locked-box mechanism provides the private equity fund with economic certainty, this approach is the preferred closing mechanism in private equity deals in Germany. However, the locked-box is not a one-size-fits-all solution: for example, in complex carve-out scenarios where historical financials are not available for the carved-out division, reliance on closing accounts appears to give more comfort to the investor.
Germany
Answer ... Yes, break fees are possible in principle, but the (formal) requirements that must be observed to validly agree thereon have not been definitively clarified by the Federal Supreme Court. Typically, such penalties are agreed in advance of the conclusion of the acquisition agreement, especially in the form of liquidated damages should one of the parties withdraw from the negotiations without cause or fail to comply with exclusivity. Very rarely are break fees found in the purchase agreement itself (eg, for cases in which an official permit that is required for the transaction is not granted). Private equity investors typically find it very difficult to deal with any form of break fee not agreed in their favour, as the non-occurrence of the event triggering the penalty is typically not under the affected party’s full control.
Germany
Answer ... The purchaser will seek indemnification for known risks that have been disclosed or otherwise identified in the due diligence review. It will also try to cover other potential (material) risks by requesting the sellers to provide respective representations and warranties on the (non-) existence of certain facts and circumstances.
The sellers will typically try to mitigate risks by negotiating with the aim of agreeing on baskets and thresholds, whereby only damages in excess of those amounts will be recoverable by the purchaser. Additionally, the sellers will aim to agree on specific and overall liability caps, and will request a rather short period for the statute of limitations. The sellers will also typically try to negotiate and implement comprehensive disclosure concepts, whereby any and all information given to the purchaser, its advisers and so on in the context of the transaction will be deemed to be known by the purchaser, whether positively known or negligently unknown; this then results in the sellers not being liable for breach of guarantee if the underlying facts were known by the purchaser. In this regard, the purchaser will most likely be willing to agree only to concepts of ‘fair disclosure’ constituting the purchaser’s knowledge.
Germany
Answer ... All resolvable risks and issues that are identified in the course of the due diligence review must be cured or resolved before the conclusion of the purchase agreement at the latest. Market-standard representations and warranties in private equity transactions at minimum cover the sellers’ right and title to the sold shares (or assets) and the sellers’ capacity. In most cases, the representations and warranties also extend to operational aspects of the target in favour of the private equity fund – for example, the existence of relevant contracts and IP rights.
Under German law, the representations and warranties are made as independent promises of guarantee. If a guarantee is breached, the purchaser can typically first request restitution in kind from the sellers. If the sellers fail to remedy the breach by putting the purchaser in the position it would have been in had the guarantee not been breached within a reasonable timeframe following the purchaser’s breach notice (eg, six weeks), the purchaser may claim monetary damages. It depends on the agreement of the parties in the individual case whether compensation for damages will cover only actual damages incurred by the purchaser, or whether consequential damages, lost profits and so on will also be included. Nevertheless, the right to rescind or otherwise withdraw from the purchase agreement due to breach of a guarantee is typically excluded by the parties.
As regards exits, there is a clear preference of private equity investors towards non-recourse deals. Thus, warranty and indemnity (W&I) insurance is an instrument of choice, as it allows the selling investors to allocate the warranty/liability risks to the insurance and to ‘cash in’ the full amount of the purchase price immediately – that is, there no security retention for potential purchaser claims, no escrow account or similar (a so-called ‘clean exit’). In this respect, private equity funds directly offer potential buyers of their portfolio companies coverage through W&I insurance as part of the package of their sale offer. In such cases, the private equity fund will initiate the entire process of finding and negotiating with a suitable W&I insurer, and only at a later stage will pass this on to the buyer, which then takes out the pre-negotiated insurance (‘seller-buyer flip’).