Exits

Term and Fundamentals: Exits in the Legal Context

The term “exit” in a business law context refers to the (complete or partial) withdrawal of a shareholder, investor, or company from an investment, enterprise, or contractual relationship. Exits play a central role particularly in corporate law, tax law, contract law, and in the area of corporate transactions (Mergers & Acquisitions, M&A). The following provides a comprehensive overview of all legal aspects of exits, with detailed explanations of the various exit forms, legal frameworks, and their practical implementation.

Exit Forms and Their Legal Classification

Company Sale (Share Deal and Asset Deal)

A company sale refers to the complete or partial sale of business shares (share deal) or individual assets (asset deal) of a company. Legally, these are different transaction structures, each with its own requirements:

Share Deal

In a share deal, shares (e.g., stocks, GmbH shares) themselves are sold. Essential legal bases are corporate and stock law provisions (§§ 15 ff. GmbHG, §§ 405 ff. BGB, AktG). Execution, especially for GmbH shares, requires notarization (§ 15 (3) GmbHG).

Asset Deal

In an asset deal, individual assets and contractual relationships are sold. The focus here is on the transfer of items and rights in accordance with §§ 929 ff., §§ 398ff. BGB. Frequently, employment law and industrial property rights as well as lease and supply agreements under § 613a BGB and § 566 BGB are transferred. The asset deal usually results in singular succession, so separate arrangements are necessary for the transfer of each asset.

IPO (Initial Public Offering) as Exit

An IPO represents a form of exit in which shares in a company are placed on the capital market for the first time. The legal basis is provided by the Securities Prospectus Act (WpPG), Securities Trading Act (WpHG), and the Commercial Code (HGB). Strict prospectus and disclosure requirements also apply.

Trade Sale and Secondary Sale

In addition to the classic company sale, a so-called trade sale—the sale of the company to a strategic investor—as well as the secondary sale—the sale of shares to other investors—are exit options, which are carried out based on the typical principles of company, contract, and, where applicable, antitrust law.

Legal Frameworks of Exits

Corporate Law Principles

Exits are subject to corporate law restrictions and formalities:

• Requirement for Consent: In many corporate forms (especially GmbH), the sale of shares requires the consent of the shareholders’ meeting (§ 15 (5) GmbHG).
• Tag Along / Drag Along Rights and Obligations: Shareholders’ agreements often contain provisions regulating the rights and obligations of shareholders regarding the exit. Tag along rights grant minority shareholders the right to sell their shares on the same terms; drag along obligations enable majority shareholders to require minority shareholders to sell their shares.
• Rights of First Refusal and Approval Procedures: Articles of association and shareholders’ agreements often contain rights of first refusal in favor of existing shareholders.

Contractual Aspects

The preparation and execution of an exit process are governed by extensive agreements between the parties (e.g., purchase agreements, share purchase agreements, shareholders’ agreements). The following legal elements are particularly relevant:

• Warranties and Liability: Sellers typically owe extensive warranties regarding the condition of the investment/company. Breaches may result in claims for damages or rescission.
• Indemnities: In practice, indemnities are often agreed upon to protect the buyer from specific risks.
• Purchase Price Adjustments (Purchase Price Adjustment Clauses): The final purchase price can be adjusted according to contractually defined criteria, such as the working capital position on the cut-off date.

Employment Law Consequences

In the case of an exit via asset deal, and sometimes in share deals, employment law requirements must be observed:

• Transfer of Business (§ 613a BGB): In an asset deal, employment relationships usually transfer automatically to the acquirer; employees must be informed in advance of the planned transfer.
• Co-determination Rights: In larger companies and certain legal forms, the participation and co-determination rights of employee representatives according to the Works Constitution Act (BetrVG) or Co-determination Act (MitbestG) must be observed.

Tax Law Particularities

An exit always has tax consequences, which may affect different types of taxes:

• Taxation of Profits: Both profits from the sale of shares and from the sale of assets are generally subject to income or corporate tax. Relevant, among others, are the provisions of § 17 EStG (sale of shares in corporations).
• Real Estate Transfer Tax: In transfers of real estate as part of an asset deal, real estate transfer tax may be incurred (§§ 1 ff. GrEStG).
• Value Added Tax: Certain transfers within the scope of an asset deal may be subject to value added tax, with exceptions for transfers of a whole business (§ 1 (1a) UStG).

Antitrust and Merger Control

For larger transactions, notification to the antitrust authority may be required. Merger control is reviewed under the provisions of the Act Against Restraints of Competition (GWB) as well as, in some cases, European law according to the Merger Regulation (FKVO). Without the necessary clearance, the transactions may not be completed (prohibition of implementation).

Process and Implementation of an Exit: Legal Key Steps

Preparation

• Due Diligence: Before the completion of an exit, a thorough examination of the legal, economic, and tax circumstances of the target company or the assets to be sold is carried out.
• Structuring the Transaction: Selection of the optimal exit structure, taking into account all corporate, tax, and antitrust aspects.

Contract Execution and Completion

• Signing: Conclusion of the required agreements.
• Closing: Fulfillment of the agreed closing conditions, e.g., payment flows, corporate approvals, antitrust clearance.
• Transfer of Ownership and Rights: Legal transfer of the investment/company to the purchaser.

Post-Contractual Rights and Obligations

Subsequent to the exit, post-contractual obligations (e.g., non-compete clauses, residual liability, confidentiality agreements) may remain in effect. Claims arising from warranties and indemnities can also be asserted after the transaction is complete.

Special Forms of the Exit and Current Developments

Distressed Exit

In the course of restructurings and reorganizations, so-called distressed exits occur, in which investments or assets are sold out of a crisis situation. Legally, the regulations of the Insolvency Code (InsO) predominate, especially in the case of company sales by the insolvency administrator.

Private Equity and Venture Capital

In the private equity and venture capital sector, exits are structured early on in shareholders’ agreements. This often establishes preferred liquidation preferences, conversion rights, or exit options, which require special contract structures and legal review.

International Exits

In cross-border contexts, the peculiarities of international corporate, contract, and tax law must be observed. Cross-border disposals may also be subject to international merger control law and foreign investment control.

Literature and Sources

1. BGB – German Civil Code
2. GmbHG – Limited Liability Companies Act
3. AktG – Stock Corporation Act
4. GrEStG – Real Estate Transfer Tax Act
5. InsO – Insolvency Code
6. WpHG, WpPG – Securities Trading Act, Securities Prospectus Act
7. GWB – Act Against Restraints of Competition

The term “exit” in a legal sense encompasses a wide variety of transaction, tax, and structuring forms, the legally compliant implementation of which requires compliance with numerous special statutory and general civil, employment, and public law provisions. Careful legal review and structuring are essential for a successful exit.

Frequently Asked Questions

What legal reviews are necessary prior to an exit?

Before an exit, conducting a so-called legal due diligence is essential. This involves a comprehensive legal review of the company to identify and mitigate potential risks for prospective buyers or investors. The review particularly covers shareholders’ agreements, shareholder lists, management employment contracts, employee participation schemes, existing and pending contracts with business partners, proper registration of intellectual property (including trademarks, patents), ongoing legal disputes, and compliance with regulatory requirements. In addition, it is checked whether all tax obligations have been fulfilled. The results of this review feed into the exit negotiations and contract drafting, as they are crucial for the valuation of the company and the determination of warranties, indemnity clauses, or purchase price adjustments.

What types of legal agreements are typically concluded in an exit?

Various contracts are regularly concluded in the context of an exit. The central agreement is the share purchase agreement (SPA), which regulates the transfer of shares as well as all conditions and warranties. Ancillary agreements, such as non-disclosure agreements (NDAs) or non-compete agreements, are usually required. Provisions on earn-out structures are also relevant if parts of the purchase price are linked to future business developments. In certain exits, such as asset deals, the transfer of individual assets is contractually regulated instead of the sale of shares. Furthermore, shareholder agreements, settlement agreements with departing shareholders, as well as agreements regarding the transfer of IP rights and software, may also be necessary.

What statutory information and publication requirements apply in an exit?

The statutory information and publication obligations mainly depend on the legal form of the company and the parties involved. For companies such as the GmbH or AG, notification to the commercial register is generally required in the event of a change of shareholders (§ 40 GmbHG, §§ 67, 67e AktG). If thresholds are exceeded, there may also be an obligation to notify the Federal Cartel Office or the relevant antitrust authority (merger control). In listed companies, ad-hoc notifications under Art. 17 MAR are mandatory as soon as a material, price-sensitive fact—such as an exit—arises. Furthermore, notification requirements under the Foreign Trade and Payments Act (AWG) and the Foreign Trade and Payments Ordinance (AWV) may arise with the Federal Ministry for Economic Affairs and Climate Action (BMWK), especially when foreign investors are involved.

What is the role of warranties and indemnities in a company purchase agreement during an exit?

Warranties and indemnities are core elements of a company purchase agreement during an exit. Their purpose is to provide the buyer with legal protection regarding certain characteristics or risks of the company. Warranties usually relate to the existence, value, and legal status of the company (e.g., no undisclosed liabilities, all IP rights belong to the company, no pending litigation). If it is later discovered that a warranty was false, the buyer may assert warranty claims, often for damages. Indemnities pertain to specifically identified risks for which the seller is liable regardless of fault. Typical examples include ongoing litigation, tax risks, or environmental liabilities.

Which regulatory approvals may need to be obtained before an exit?

Whether and which regulatory approvals must be obtained before an exit depends in particular on the size of the company, its industry, and the parties involved. If certain revenue thresholds are exceeded, a merger control filing must regularly be made to the Federal Cartel Office or the European Commission. For companies operating in security-relevant sectors (e.g., telecommunications, energy, defense) and in cases of investments from non-EU countries, an additional investment review under foreign trade law is necessary. Approval by the Federal Ministry for Economic Affairs and Climate Action (BMWK) may be required. Violations of notification or approval obligations result in the invalidity of the acquisition and may be subject to significant fines.

How is the liability of outgoing shareholders regulated after an exit?

The liability of outgoing shareholders after an exit is governed by specific clauses in the purchase agreement. Generally, liability is limited to the warranties and indemnities agreed upon in the contract and is often time-limited and capped in amount (e.g., liability caps, limitation periods, de minimis thresholds). In cases of intentional or fraudulent misrepresentation, however, extended liabilities apply, including those arising from general statutory provisions. Specifically in a GmbH, after registration of a new shareholder in the commercial register, outgoing shareholders are usually not liable unless expressly agreed or resulting from tax arrears or public charges.

What tax obligations must be observed in the course of an exit?

In the context of an exit, there are extensive tax obligations. In particular, the capital gain, which results from the difference between the sale proceeds and the acquisition costs of the shares, is subject to taxation. For individuals, capital gains tax usually applies in Germany; for shareholdings within business assets, corporate or trade taxes may be relevant. Additionally, so-called exit taxation (in the event of relocating tax residence abroad before the exit) can become relevant. Taxation varies depending on the size of the shareholding, the holding period, and the participation structure. It is absolutely necessary to conduct detailed tax analyses prior to the exit. Furthermore, the company has tax filing obligations concerning, for example, value-added tax, real estate transfer tax (in the case of asset deals involving real estate), as well as documentation obligations for the valuation of shares.