[Last updated: 1 January 2025, unless otherwise noted]

7.1 Squeeze-out

If, following the takeover bid or at a later stage, the Bidder holds 95% or 90% of all voting rights, they can initiate a squeeze-out procedure. German law provides three different squeeze-out procedures, namely under the Takeover Act, under the Stock Corporation Act and under the Transformation Act (a so-called 'merger squeeze-out'). The rules applicable to each procedure differ, except that for all procedures the shares of all other shareholders are transferred to the Bidder in exchange for cash compensation.

If, following a takeover bid, the Bidder holds at least 95% of all voting rights, they can initiate a squeeze-out procedure under the Takeover Act. In this case, the squeeze-out will need to be applied for in a court of law and shall be decided by way of a court decree. A significant advantage of a squeeze-out under the Takeover Act is that in some cases the amount of compensation to be paid to the minority shareholders is equal to the offer price. The compensation is deemed to be adequate if at least 90% of the shares that were subject to the offer have been tendered. Such threshold of 90% of shares subject to the offer has in practice not been reached except in one rather unusual transaction. If the 90% target is not met, it is not recommended to use the post-takeover squeeze-out procedure because of the need to establish the amount of compensation by way of expert valuation reports. These valuations are prone to challenge from minority shareholders, so that considerable delays are to be expected. A pending post-takeover squeeze out procedure in court will also block all other methods of squeezing out the shareholders.

For a squeeze-out under the Stock Corporation Act, the major shareholder must send a squeeze-out demand to the management of the target company. While the target company must prepare a general meeting in which the shareholders will vote on the squeeze out, it is the shareholder who has to prepare a specific report in anticipation of the general meeting and the "fairness", of the compensation has to be reviewed and confirmed in a report prepared by an independent auditor appointed by the court. Dissenting minority shareholders may successfully block the effectiveness of the squeeze-out by court action at least for some time, and may claim for higher compensation.

A 'merger squeeze-out' under the Transformation Act has the advantage that the majority shareholder can implement a squeeze-out with a holding of only 90% or more of the registered capital. The squeeze-out under the Transformation Act is subject to the condition that it is implemented in connection with a statutory merger (Verschmelzung) between the majority shareholder and the target, meaning that the shareholder resolution on the squeeze- out has to be adopted within three months of the signing of the merger agreement. Furthermore, the squeeze-out under the Transformation Act is only possible if the majority shareholder is a German stock corporation (Aktiengesellschaft), a German partnership limited by shares (KGaA) or a European stock corporation (SE). Such legal form of the majority shareholder can easily be achieved though, with the relevant corporate actions.

7.2 Sell-out

If a Bidder was to be permitted to carry out a squeeze-out under the Takeover Act, i.e. the 95% post-bid ownership referred to in 7.1, the security holders that did not accept the takeover bid shall have the right to continue to accept the offer within an additional period of three months after the end of the acceptance period. The relevant provision has not really been used in practice yet.

7.3 Restrictions on acquiring securities after the takeover bid period

If the Bidder and the persons acting in concert with the Bidder (i) directly or indirectly acquire any securities that were subject to the takeover bid in an "off-market" transaction (ii) during the period of one year following the end of the takeover bid period (iii) for a consideration which is higher than the consideration offered in the takeover bid, the price difference will have to be paid to all security holders that tendered their securities to the Bidder during the original takeover bid period.

7.4 Domination agreements/Profit and loss pooling agreements

If the requirements for a squeeze-out are not fulfilled, a common post- offer integration measure under German law is a domination agreement which may be entered into between the Bidder and the target company. The target company becomes a "dependent company" dominated by the Bidder who can give binding instructions which have to be followed by the management of the dependent company.

From the Bidder's perspective the main advantage of such binding instructions is that the strict standards of the maintenance of capital set out by the German Stock Corporation Act are reduced. Once the domination agreement has become effective, the Bidder has far more options for refinancing the prior offer.

In particular, in simplified terms, all cashflow can be up-streamed to the level of the bidder company to pay interest and repay the acquisition debt and the target company can give additional collateral to the banks financing the bid. As the dominating shareholder, the Bidder may also enter into non-arms-length intragroup agreements with the target company as long as this is in the best interests of the overall group.

Before a domination agreement becomes effective (with its registration at the commercial register of the dependent company), the following major steps are required:

• A shareholder resolution by the shareholders of the target company with at least a 75% majority of the share capital represented at the shareholders' meeting.
• The domination agreement has to include an offer to acquire the shares of the target company which are held by minority shareholders against payment of a fair compensation. If the dominating shareholder is not a German stock corporation, the compensation must be paid in cash.
• The dominating shareholder has to pay a guarantee dividend to the remaining minority shareholders of the target company as long as they remain shareholders.
• During the term of the domination agreement the dominating shareholder has to compensate the target company for any annual loss it suffers.

In addition to a domination agreement, a profit and loss pooling agreement may be entered into. It is concluded the same way as a domination agreement and is usually agreed upon at the same time. The legal consequences of a profit and loss pooling agreement are similar to those of a domination agreement. The main advantage of entering into a separate profit and loss pooling agreement is the creation of a fiscal unity for tax purposes.