Ensuring the legal validity of overseas acquisitions by Mittelstand

From growth drivers to legal implementation

For many Mittelstand companies, further growth can no longer be achieved within the German market alone. Rather than spending years establishing a new location or sales organisation, acquiring an existing company can significantly speed up market entry. The motivations for this are varied: new sales markets, more stable supply chains, additional production capacity, access to technology or proximity to international customers. For industrial companies in particular, an overseas acquisition can also serve to secure value chains or complement an existing customer base regionally.

From a legal perspective, such transactions are more complex than a corporate acquisition within Germany. Company law, tax, employment law, financing, approvals, registration procedures, contractual documentation and post-closing integration must all be coordinated across national borders. For Mittelstand, there is an additional factor to consider: management usually handles the transaction alongside day-to-day operations. Internal legal, tax or compliance resources are often limited. This makes it all the more important to have a management framework that sets priorities, prepares decisions and prevents the project from getting bogged down in individual issues and endless coordination loops.

At a glance

An overseas acquisition can open up significant growth opportunities for German SMEs. At the same time, the legal, tax and organisational complexity increases. Local solicitors and tax advisers in the target country are indispensable. They are most effective when their work is precisely commissioned, centrally coordinated and aligned with the German acquirer’s perspective. Maxfeld.legal acts as this bridge: from structuring the transaction, through due diligence and contract negotiation, to coordinating local advisers and supporting the signing and closing processes.

Why international corporate acquisitions work differently in the Mittelstand sector

A Mittelstand buyer operates differently to an international corporation. Decisions are often taken directly by senior management or the shareholders. The decision-making processes are shorter, but internal resources are usually more limited as well. 

In an international acquisition, therefore, it is not a matter of scrutinising every theoretically conceivable issue down to the last detail. What is crucial is that the transaction remains manageable and that the key economic and legal risks become apparent at an early stage. Several levels operate in parallel in this process.

Firstly, there is the question of the acquisition structure. Should the German parent company make the purchase itself? Would a local acquisition vehicle be appropriate? Is a holding structure required? What impact will the chosen structure have on financing, liability, governance, reporting, cash pooling and subsequent integration?

At the same time, the buyer must understand exactly what it is acquiring from a legal perspective. Proof of ownership, register information, the assumption of contracts, employee rights, licences, environmental obligations and warranty provisions may be structured differently in the target country than in Germany.

What may seem self-evident from a German perspective may require a specific form locally, need to be approved by the authorities, or operate quite differently from a legal standpoint. Then there is the matter of completion. In cross-border transactions, timelines often slip at the interfaces: powers of attorney are missing, register extracts are out of date, translations take longer than expected, or local approval and notarial requirements are taken into account too late. A sound purchase agreement alone is therefore not enough. An overseas acquisition requires a clearly managed process.

Local lawyers are indispensable – but their work must be coordinated

Anyone buying a company abroad needs legal advice in the target country. Only local lawyers can reliably assess how company law, employment law, licensing, registration procedures and enforcement work in practice.

The challenge lies less in the technical quality of their advice than in translating it for the specific transaction. Local advisers naturally view an issue from the perspective of their own legal system. However, the German management team needs an action-oriented assessment based on this. 

How significant is the risk in economic terms? Does it need to be resolved before closing? Does it affect the purchase price? Is a guarantee sufficient, or is an indemnity required? Can the matter be dealt with in a controlled manner after closing?

Without central coordination, extensive memoranda, parallel reviews and repeated queries can quickly arise. Sellers are presented with overly broad due diligence checklists, different advisers assess comparable risks using varying standards, and management must piece together individual legal assessments into an overall picture themselves.

This increases the workload and complicates negotiations. Unclear review mandates, duplicate coordination or delayed enquiries do not just cost money; they can also lead to key issues being identified too late or priorities being set incorrectly.

Experienced M&A management from Germany ensures that local advisers are deployed in a targeted manner. The scope of the review, reporting format, responsibilities and timetable are defined in advance. Local specificities are then translated into concrete options for the purchase price, contract drafting and closing.

This constitutes a key part of the advisory service, particularly in the case of international acquisitions by Mittelstand. It is crucial to ask the right questions at the right time and to focus the audit effort accordingly.

The key legal issues in an overseas acquisition

The deal structure influences liability, taxation and integration. The transaction structure is one of the first decisions to be made during a corporate acquisition. In a share deal, the buyer takes over the target company as a legal entity. Existing contracts, employees, licences, assets and liabilities generally remain with the company.

An asset deal may be appropriate if only individual assets, business divisions, customer relationships or technologies are to be acquired. However, this requires the specific assets and legal relationships to be transferred to be identified in detail.

In international transactions, both options may have different consequences than in a purely German corporate acquisition. The transfer of contracts, transfers of undertakings, real estate, licences and liability risks are governed by the relevant local law. Tax and financing considerations also influence the structure at an early stage.

The acquisition structure should therefore first be developed from the perspective of the German buyer and then aligned with local legal and tax requirements. For a Mittelstand acquirer, what ultimately counts most is practical viability. Financing, governance, managing directors, reporting, compliance and subsequent integration must all fit together.

Legal due diligence provides a sound basis for decision-making.

Legal due diligence is intended to enable the buyer to make an informed decision. It must identify the risks present in the target company and how these should be taken into account in the purchase price, the company acquisition agreement or the integration plan. Typical areas of review include:

Company law and ownership. Are the shares validly issued? Are there pre-emption rights, approval requirements, shareholder disputes or restrictions on transfer?

Key contracts. Do customer, supplier, lease, licence, financing or cooperation agreements contain change-of-control clauses, termination rights or approval requirements?

Employment law. What rights do employees, managing directors, works council members or trade unions have? Are there pension commitments, variable remuneration schemes or special protection rights for key personnel?

IP, IT and data. Do trade marks, patents, software, domains and data actually belong to the target company? Are rights of use adequately documented and transferable?

Compliance, sanctions and export controls. Are there any risks relating to supply chains, end customers, dual-use goods, embargoes, anti-corruption measures or export licences?

Regulatory matters and authorisations. Does the target company hold all the licences, approvals and regulatory authorisations required for its business? Regulatory issues can be critical to a transaction, particularly in the sectors of energy, healthcare, financial services, infrastructure, transport, technology, telecommunications and defence.

Due diligence for Mittelstand does not need to provide definitive answers to every theoretical question. Rather, it should clearly identify five key points relating to the following questions: Which risks are material to the decision to purchase? Which issues influence the purchase price? What needs to be set out in the purchase agreement? Which matters must be resolved before closing? What can be resolved after closing with reasonable effort?

The purchase agreement must be legally sound and enforceable in practice.

The company purchase agreement – often referred to as a Share Purchase Agreement or SPA – allocates the key risks between the buyer and the seller.

In the case of a cross-border corporate acquisition, additional issues arise. Which law governs the contract? Which court or arbitration tribunal should have jurisdiction? In which language are the negotiations conducted? Which language version is binding? What guarantees and liability provisions are customary in the target market? How are local legal concepts incorporated into the international contract? How are earn-outs, purchase price adjustments, escrow arrangements, seller loans and closing conditions structured?

Particularly in the case of transactions outside Germany, it is important to assess at an early stage whether claims can actually be enforced at a later date. Depending on the country and the contracting parties, an arbitration agreement may be more appropriate than recourse to the state courts.

For a Mittelstand buyer, there is no need for an unnecessarily complicated contract. The contract must be comprehensible, commercially reasonable and enforceable. Risks are translated into specific mechanisms: warranties, indemnities, purchase price adjustments, closing conditions, security and clearly defined responsibilities.

Merger control and investment control should be addressed early on in the timetable.

Even corporate acquisitions of medium-sized companies can trigger regulatory approvals. Whether a notification under merger control law is required depends, amongst other things, on the structure of the transaction, the turnover of the companies involved and their market presence in the countries concerned.

In the case of a cross-border acquisition, it is not sufficient to consider only the target country. Depending on the distribution of turnover and the activities of the companies involved, several jurisdictions may be relevant at the same time. Merger control approvals are regularly a prerequisite for completion. If they are identified too late, the closing date is postponed or the transaction must be adjusted retrospectively. In addition, many countries have their own investment control regulations. These foreign direct investment regimes may come into play, particularly in the case of investments in companies operating in the sectors of critical infrastructure, technology, energy, healthcare, defence or telecommunications.

For a German outbound acquirer, it is particularly important to check whether the target country controls the acquisition by a foreign investor. Depending on the ownership structure and transaction volume, the EU Regulation on third-country subsidies may also be relevant. The regulatory review should therefore not be left until the end of the transaction. It must be taken into account as early as the structuring phase, the letter of intent and the timetable. Any necessary approvals must subsequently be incorporated into the due diligence, the purchase agreement and the closing plan.

When it comes to signing and closing, form is often the deciding factor.

Many delays arise during the formalisation of the transaction. Typical questions include: Who is authorised to validly sign the transaction documents? What powers of attorney are required? Do documents need to be notarised or certified? Is an apostille or legalisation required? Which register entries are relevant for completion? At what point do shares or assets legally change hands? Which closing conditions must be fulfilled or effectively waived?

International documentation, translation and regulatory requirements can significantly impact the timetable. It is therefore important to assess, as early as the LOI phase, which closing documents are required and which party is responsible for obtaining which documents. A structured closing plan protects the deal, which has been negotiated on commercial terms, from avoidable delays.

Common mistakes in international acquisitions by Mittelstand

Many problems with international corporate acquisitions arise from a series of minor ambiguities in the process.

• Local advisers are brought in too late. Anyone who only has local legal issues reviewed shortly before signing risks renegotiations, delays and undiscovered liability risks.
  
• German standards are applied without scrutiny. Registration procedures, warranty systems, employee rights, powers of attorney and approval processes may operate very differently in the target country compared with Germany.
  
• Legal, tax and financing aspects are planned separately. An acquisition structure must be legally, fiscally and economically compatible. Legal advisers, tax advisers and financiers should therefore work together on a common basis at an early stage.
  
• Compliance is only considered after closing. Sanctions, export controls, data protection, anti-corruption, competition law and regulatory approvals can be decisive even before signing.
  
• Local law firms operate without a standardised briefing. Without a coordinated scope of due diligence, clear responsibilities and a standardised reporting format, this leads to duplication of effort, overly broad questions and unnecessary coordination loops.
  
• Integration only begins after the acquisition. Governance, reporting, managing directors, compliance, IP, employment law and group structures should already be taken into account during the transaction. Anyone who only starts addressing these issues after closing will lose valuable time.
  

Key questions to consider before signing a letter of intent

Before signing a Letter of Intent, German buyers should clarify a number of fundamental issues, including the following questions.

• What acquisition structure makes sense from a legal, tax and organisational perspective? Which approvals, registration procedures or regulatory clearances could affect the timetable?
  
• Based on experience, which employment law, regulatory or compliance issues are particularly relevant in the target country? What information should be reviewed before the exclusivity period begins?
  
• Which local advisers are required? Who will coordinate the law firms and other advisers involved?
  
• Which risks should be addressed through the purchase price, warranties, indemnities or closing conditions? How can the target company be integrated into governance, reporting, compliance and operational processes following closing?
  

Answering these questions at an early stage enables a more targeted negotiation of the Letter of Intent. Key points are established whilst there is still sufficient scope for manoeuvre. Particularly in international M&A transactions, early structuring often determines whether the subsequent process remains efficient, manageable and economically viable.

When legal advice should be sought

Legal advice should be brought in as early as possible – ideally before the letter of intent is signed. At this stage, key aspects can still be finalised without undue time pressure, such as the transaction and financing structure, exclusivity and confidentiality, and the scope of due diligence. The agenda should also include purchase price mechanisms, warranties and liability arrangements, as well as regulatory approvals. The selection and coordination of local advisers, the signing and closing timetable, and post-closing integration should also be clarified at an early stage.

Involving these parties at an early stage often saves more than just time and money; it also prevents legally or economically significant issues from being anticipated in the Letter of Intent without their implications having been sufficiently assessed.

Legal governance makes international corporate acquisitions manageable

An overseas acquisition can be a significant step towards growth for a Mittelstand company. It can open up new markets, stabilise supply chains, secure technologies, expand customer access or accelerate a succession and expansion strategy.

However, the international context increases legal and organisational complexity. A successful cross-border M&A transaction therefore requires a sound structure, risk-based due diligence and a process that aligns German expectations with implementation in the target country. Local expertise remains indispensable in this regard. Centralised management makes all the difference: clear responsibilities, targeted due diligence mandates, early prioritisation and a clear interpretation of the findings to inform business decisions.