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Compliance Due Diligence of a German Target


  1. Compliance liability by acquisition of a company: Compliance due diligence
  2. Practical relevance: Purchaser agreement and compliance due diligence
  3. Solution: Professional compliance due diligence
  4. Reduction of compliance liability risks: Compliance due diligence
  5. Professional compliance due diligence has a special evidentiary function

I. Compliance liability by acquisition of a company: Compliance due diligence

Compliance due diligence of a German targetis of upmost importance in the context of corporate transactions, even if smaller companies are to be sold. Why is that so? It is not the buyer’s fault if the company has not complied with the law in the past before it has been sold to him, or is it? This can be left aside from a legal point of view. German law holds the buyer of a company accountable for violations of the law he has not committed (administrative offense law liability/liability for damages). If you are a Chinese or US investor, you need to know how German law enforcement can bring you or your management to court even being fully unaware of any wrongdoing.

The purchaser’s management is obliged to evaluate all available information in all important corporate decisions (business judgment rule). This is why company acquirers can be liable, even if they had nothing to do with a compliance violation from the past, but did not conduct a proper compliance due diligence. According to German law, a sufficient connection is already the mere acquisition of a company and continuation of the business without changing anything. Therefore, a purchaser can also be considered as liable when a business is continued after closing without detecting a compliance violation that dates back to the past. German law assesses this as an original breach of a supervisory duty. In legal terms, the acquirer of the company is accused of a completely new offense. As far as German law is concerned, the purchaser is operating a company that violates compliance regulations, and he is not stopping this (although he is not aware of any violations).

II. Practical relevance: Purchaser agreement and compliance due diligence

Compliance risks are usually reflected in the sale and purchase contract by an indemnification clause or a seller’s guarantee (unknown risks). If you purchase a company, an indemnification clause for a protected compliance risk if preferable as it is not subject to the same restrictive limitations as a guarantee in most of the cases. As we still have a quite seller-friendly market in Germany at the moment, from experience, a purchaser is unlikely to get an assurance that the target is not in breach of the law generally. German officials focus on compliance with data protection law, antitrust law, customs and corruption/bribery. First and foremost, we see corruption and antitrust law as the biggest issues in practice. We have mentioned competition authorities before. For corruption matters, the general local law enforcement authorities are competent (For Munich, “Staatsanwaltschaft München I” and the police) Here, the most serious consequences have to be faced. German law enforcement probably believes that its limited resources may be spent most effective in this area (the highest fines).

III. Solution: Professional compliance due diligence

The greater goal of every compliance due diligencetherefore is to determine the standards relevant to the German target which might be the cause of compliance violations within the framework of a legal risk analysis of the companies´ specific business fields. Especially the additional use of tax specialists which are experienced in criminal defense has proven effective in practice. Initially, the potential liability situation of the target has to be assessed. In a further step, it has to be considered as to how the results of the compliance due diligence are to be dealt with. Findings should be reflected in the purchase price and contract (indemnity clause). In a worst-case scenario, the acquisition of the company as a whole should be avoided.

IV. Reduction of compliance liability risks: Compliance due diligence

To reduce the risk of liability for compliance violations initiated in the past, a favorable body of evidence should be created additionally. A content-based focus is to be laid on the areas of law just mentioned above. In doing so, you are preparing for the future. If they suddenly try to hold you accountable in this context, you can prove a court in law that you have done everything in your power to be compliant and to detect wrongdoings of the past. Fulfilling the business judgment rule when buying a company, you are unlikely to be held accountable by a court in law. A bad business decision is not a violation of the law. The aim is to show that the violation (damage) could not have been foreseen even within a proper audit.

V. Professional compliance due diligence has a special evidentiary function

A professional compliance due diligence (usually a pre-signing and post-closing phase) has a special evidentiary function. This is usually proof that a purchaser of a company could not have known about violations that come to be known later at the time of the acquisition. You will generally have a good position in Court. Of course, in reality, things are not that easy. Acquisitions between direct competitors will make internal investigations difficult, but not impossible. For being protected against the accusation of a violation of supervisory duties, you should be able to show a working compliance management system. German courts do not demand an expensive or very complex compliance management system. It is sufficient to be able to show that there is not a standard compliance management system, but one that is tailor-made for the needs of the specific company. And – most important –, the system is really applied in day-to-day business, not just a facade.

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