I. Significance of the issue for company acquisitons

In practice, it is not uncommon that the company to be acquired is located abroad and that there is therefore a cross-border dimension. For both share deal and asset deal the question arises – in the event that there is no agreement on the choice of applicable law and/or agreement on the jurisdiction – where to institute legal proceedings and which substantive law applies to the company acquisition agreement.

1. Jurisdiction (without an agreement)

If, for example, a German company acquires shares in a French SARL from a French company and subsequently wishes to assert claims for damages on the basis of a breach of warranty, the place of jurisdiction is determined by EuGVVO (Regulation on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters).
According to Art. 4 para. 1 EuGVVO, legal action against natural persons domiciled in a Member State shall be sued in the courts of that Member State. Companies or legal entities have their domicile at the location of their statutory seat, central administration or principal place of business, Art. 63 EuGVVO. This would mean that a French court would have jurisdiction in this case. In the case of contractual claims, the special place of jurisdiction of Art. 7 para. 1 lit. a EuGVVO must also be observed, according to which it depends on the place where the obligation in question has been performed or would have to be performed. In contrast to the general provision of Art. 4 EuGVVO, this not only determines the international jurisdiction of the court, but also the local jurisdiction of the court.
The special place of jurisdiction would in certain circumstances be advantageous for a German company if the obligation in question had to be performed in Germany. However, the applicable law must always be examined additionally: If, for example, an action before a German court is theoretically possible, but foreign law nevertheless applies, the decision of a foreign court on its own law should be given preference in case of doubt.

2. Substantive law (without an agreement)

If a German court is entrusted with the question of assessing the applicable law, it will make a strict distinction between the purchase contract as such (contractual transaction) and the assignment of the shares or transfer of the individual assets (transfer of the ownership; view of the lex fori). Furthermore, there are differences between share deals and asset deals.
a) Purchase contract

(1) Share deal

The sale of company shares does not qualify as a purchase of goods, so that the UN Convention on Contracts for the International Sale of Goods (CISG) does not apply to share deals. The Rome I Regulation (Regulation on the Law Applicable to Contractual Obligations) is therefore decisive for determining the applicable law. Since no special provisions of Art. 5 to 8 Rome I Regulation is relevant and, furthermore, the company acquisition agreement does not correspond to a special type of contract of Art. 4 para. 1 lit. a to lit. h Rome I Regulation, the applicable law shall be determined as follows: Either (i) according to Art. 4 para. 2 Rome I Regulation the contract shall be governed by the law of the country where the party required to effect characteristic performance of the contract (= seller of the shares) has his habitual residence or (ii) according to Art. 4 para. 3 Rome I Regulation where it is clear from all circumstances of the case that the contract is manifestly more closely connected with a country the law of that country shall apply.
The views on this are not yet uniform. While in part the seller’s habitual residence is regarded as decisive, the applicable law is determined in another view by the overall circumstances of the contract, according to which the place of the head office of the sold company should be relevant. This leads to differences if the seller has his habitual residence in a country other than that of the head office of the sold company.
The legal questions of the company acquisition agreement are in principle comprehensively regulated by the appointed contract statute, unless it is to be limited by overriding mandatory provisions, cf. Art. 9 Rome I Regulation. Overriding mandatory provisions are provisions the respect for which is regarded as crucial by a country for safeguarding its public interests to such an extent that they are applicable to any situation falling within their scope, irrespective of the law otherwise applicable to the contract under the Regulation. These can be, for example, mandatory import and export regulations or labor law regulations.
It should also be noted that questions of form with regard to the obligatory transaction are subject to the law determined in accordance with Art. 11 Rome I Regulation. This means that alternatively the law of the place of conclusion or the law applicable to the purchase contract applies. These questions are essential, for example, for the possible obligation to certify such contracts.

(2) Asset deal

In an asset deal it is not clear whether the UN Convention on Contracts for the International Sale of Goods (CISG) is applicable, since at least the sale of goods falls within the scope of the CISG. Nevertheless, the prevailing opinion is that the CISG does not apply if the total value of the intangible assets outweighs the total value of the goods. The relevant law is therefore again determined by the Rome I Regulation, so that reference must be made to the above remarks on share deals.

(1) Share deal

The assignment of shares is governed by the company statute. Since the case law of the European Court of Justice on the freedom of establishment, the company statute for EU companies has to be determined according to the incorporation theory. This means that the applicable law is the law of the country in which the company was founded. If, for example, the shares are purchased from a Dutch BV, Dutch law applies to the assignment of the shares.
For companies outside the EU, on the other hand, the so-called real seat theory would apply in Germany, i.e. the law at the current headquarters of the company would be decisive for determining the company statute. From the point of view of the German lex fori, the assignment of shares is always determined by the company statute and cannot be subject to the choice of law. The form decisive for the transfer is determined – in the absence of special provisions in the Union law ordinances – according to Art. 11 EGBGB (Introductory Act to the Civil Code), which essentially corresponds to Art. 11 Rome I Regulation.

(2) Asset deal

An asset deal depends on the various assets that are to be transferred. For example, according to Art. A3, para. 1 EGBGB, objects are transferred according to the law of the country in which they are located (lex rei sitae). According to Art. 14 para. 2 Rome I Regulation, the transferability of claims is subject to the law to which the claim itself is subject. The company name is transferred in accordance with the company statute. With regard to the form of the transfer itself, Art. 11 EGBGB must again be observed.

3. The necessity of a contractual arrangement

The above remarks show that, in order to create legal certainty, the place of jurisdiction and the applicable law should always be agreed on in the contract. Below is a more detailed explanation of what needs to be taken into account.

II. Agreement on jurisdiction

The admissibility and validity of an agreement establishing the place of jurisdiction is determined in the context of Union law by Art. 25 EuGVVO. According to this provision, the agreed court of a Member State has jurisdiction unless the agreement is null and void under the law of that Member State or other conditions, in particular formal requirements, of Art. 25 EuGVVO have not been observed. The material conditions of effectiveness of the respective state to be examined are, for example, the legal capacity of the contracting parties and the lack of intentional deficiencies when concluding the agreement on jurisdiction.
It should be mentioned in particular that, in the absence of an agreement on choice of applicable law, the prevailing view of German case-law and literature is that, on the basis of the agreement on jurisdiction, an implicit choice of law has been made in favor of the law of the country in which the agreed court has its domicile. Recital 12 of the Rome I Regulation refers to the chosen place of jurisdiction at least as a “factor to be taken into account” with regard to the examination of whether there is at least an implied choice of law. However, since it is not possible to assess sufficiently whether the competent court in question per se assumes that its choice of law is in favor of its own, it is advisable to include an explicit agreement on choice of applicable law in the contract.

III. Agreement on choice of applicable law

Due to the problems described above with regard to the determinability of the applicable law on the company acquisition contract, it is advisable to include a choice-of-law clause in the contract.
The admissibility of choice of law regarding the contract under the law of obligations results from Art. 3 Rome I Regulation. In the area of application of the Rome I Regulation, according to Art. 20, referral back and forth is excluded, which specifically means that only the substantive law of this chosen country is applicable to the exclusion of private international law. The often quoted clause “The contract is governed by […] law, excluding the provisions in the conflict of laws” is therefore superfluous within the scope of the Rome I Regulation and, in order to avoid misunderstandings, should rather be avoided. In the case of an asset deal, it should be noted that the CISG may apply in such cases. Since, for example, this is part of Federal law in Germany, it would be applicable if the parties chose the application of German law without explicit exclusion of the CISG.
It should be noted that the chosen law does not have to be factually or locally related to the company acquisition. In theory, the choice of a “neutral law” is thus also possible. However, in order to avoid, for example, legal fragmentation with regard to the law applicable to the transfer of ownership, which at least from the point of view of the German lex fori is not freely determinable, the choice of law should regularly be based on the law which is applicable to the transfer of ownership, provided this is possible and not disadvantageous due to any special regulations of this country or if it is a conglomerate of acquired companies, each of which is executed locally.
In addition, a synchronization between the agreed place of jurisdiction and the chosen law is recommended, as the court seized is best placed to apply and interpret its own local law. If the place of jurisdiction and the applicable law differ, it may be necessary for the court to carry out a time-consuming and costly investigation of the content of the law, which should be avoided. It should also be noted that the application of so-called overriding mandatory rules cannot be ruled out by a choice of law.