What is the difference between an asset deal and a share deal?
With an asset deal the buyer acquires only the property itself and is registered as its new owner in the land register. According to Section 566 (1) of the German Civil Code [BGB – Bürgerliches Gesetzbuch], existing rental agreements are transferred from the seller to the buyer by act of law (rental agreements prevail over sale). All other agreements (e. g. loan agreements, insurance contracts, property management agreements, etc.) the buyer wishes to take over together with the property have to be transferred to the buyer separately. In this respect it has to be taken into account that the transfer of contracts generally requires the consent of the respective contracting party, which has to be obtained individually. This can be very time-consuming and difficult, and obstruct the whole transaction process.
With a share deal, in contrast, the buyer acquires shares in the target company and becomes its shareholder. The target company remains the owner of the real property, but in their position as shareholders the buyers gain indirect control and authority to dispose of the real property. As such, the buyers indirectly acquire all assets and liabilities of the target company, including the real property. Therefore, transferring individual assets or agreements of the target company is not required.
With an asset deal, both the property purchase agreement and the agreement as to the conveyance of land have to be notarised in any case (cf. Section 311b (1) BGB and Sections 873 (2), 925 BGB). In contrast, with a share deal the notarisation requirement is dependent on the legal form of the target company. For example, the acquisition of a limited partner’s interest is in principle not subject to formal requirements, whereas notarisation is required for the acquisition of shares in a GmbH (cf. Section 15 (3) and (4) of the German Limited Liability Companies Act [GmbHG – GmbH-Gesetz]).
Advantages and disadvantages of an asset deal or share deal
The purpose of due diligence is to examine the object of purchase prior to concluding the purchase agreement, and to identify potential risks for the buyer. The risks identified may have an impact on the purchase price, or they may need to be taken into account in the purchase agreement by means of guarantees and additional collateral provided by the seller.
Due diligence for an asset deal is mainly confined to the real property and the liability risks resulting from it. In case of a share deal, however, also further risks to which the target company may be subject (e. g. the company’s liabilities and contractual relationships to third parties), have to be examined. As such, due diligence for a share deal is generally more comprehensive and time-consuming.
If the asset deal is restricted to acquiring a real property, the buyer basically has to deal with liability risks related to the real property or possibly with tax risks resulting from Section 75 of the German Tax Code [AO – Abgabenordnung]. With a share deal, however, the buyers may at least indirectly be exposed to additional liability risks, as they take over the target company holding the property together with all its other assets and liabilities.
Real estate transfer tax
The acquisition of real property by way of an asset deal invariably triggers real estate transfer tax (cf. Section 1 (1) No. 1 and 2 of the German Real Estate Transfer Tax Act [GrEStG – Grunderwerbsteuergesetz]). As opposed to this, a share deal is in principle only subject to real estate transfer tax if the buyer acquires at least 95 % of the shares in the target company (cf. Section 1 (2a) and 3 GrEStG). Accordingly, the acquisition of 94.9 % of the shares in the target company does in principle not trigger real estate transfer tax. Insofar, also after the revision of Section 1 (3a) GrEStG, from an economic perspective a share deal may serve to acquire significant parts of a real property without triggering real estate transfer tax.
The automatic transfer of contracts and assets, as well as the significant rise in real estate transfer tax rates in most of the Federal States in Germany are good arguments for a share deal. Nevertheless, it can be more reasonable for the buyer, in particular in the case of opaque liability risks with the owner of the real property, to conclude an asset deal.
It is highly recommendable to seek professional advice prior to a planned real estate transaction in order to be in a position to assess the legal and especially the tax particularities of the individual case, identify opportunities and risks resulting from them and make use of this knowledge in contract negotiations.