3 Ways of Selling into the German Market Direct Sales from abroadto individual customersto retailersSales via distribution intermediaries in Germanycommercial agentsauthorized dealersSales through own presence in Germanyestablishment of(i) branch office(ii) subsidiaryacquisition of existing company
4 1.a) Direct Sales to Individual Customers in Germany (i) Non-consumersNo restrictions with respect to choice of venue and applicable law.Jurisdiction of foreign courts can be opted for.Foreign law can be declared applicable.(ii) ConsumersGerman courts will have exclusive competence for most actions against consumers.Consumers cannot be deprived from protection granted by mandatory provisions of German law.
5 1.b) Direct Sales to Retailers in Germany Nearly identical to legal situation of sales to non-consumer individuals.
6 2.a) Distribution through Commercial Agent Commercial agent: independent self-employed contractor soliciting sales contracts for principal.No written agreement required, although highly advisable.German law applies, unless applicability of foreign law is agreed.However: commercial agency law has been harmonized throughout the EU.Commercial agent in Germany cannot be deprived of compensation claim at termination of contract.Principal may define scope of duties of commercial agent and can give instructions, but should not impair commercial agent’s independence.Otherwise commercial agent may be regarded as employee subject to German labor law.
7 2.a) Distribution through Commercial Agent (continued) Claim for commissionusually success fee for business solicited.may also be fixed fee or combination of both.In case of a defined exclusive territory: fee is due for every contract irrespective of commercial agent’s activity.Compensation claim in case of terminationunless commercial agent gave reason.complex calculation;maximum amount: average annual commission of the 5 years preceding termination.Post-contractual non-compete obligationonly effective, if made in writing and if it provides for reasonable compensation.cannot be longer than 2 years after termination of contract.
8 2.b) Distribution through Authorized Dealer Authorized dealer: independent contractor integrated in manufacturer’s sales organization, buying manufacturer’s goods and selling them in defined territory.No written agreement required.German law applies, unless applicability of foreign law is agreedNo harmonization of relevant laws in the EU.therefore: real differencesExclusivity arrangements may be critical under EU cartel law, but are generally allowedif the supplier’s market share in the relevant market does not exceed 30% andif passive sales are not excluded.
9 2.b) Distribution through Authorized Dealer (continued) Under German law: provisions on sales agency contracts apply by way of analogy.In particular: compensation claim upon terminationif dealer is obliged to reveal data on his customers to manufacturer.amount: average annual profit from sales of contractual goods of the 5 years preceding termination.Manufacturer is obliged to repurchase delivered goods still on dealer’s stockif dealer was obliged to maintain inventory of goods.
10 3.a)(i) Establishment of Branch Office Must be registered in the Commercial Register.Trade permit must be obtained from Trade Office of local municipality.Must file corporate income and VAT tax declarations.No liability shield: foreign company fully liable for all activities of branch office.Employment contracts with employees working in Germany are subject to mandatory provisions of German labor law.contributions to social security systemwithholding and payment of employee’s income tax owed on salary
11 3.a)(ii) Establishment of German Company Basic distinction between corporations and partnerships:Corporations (Kapitalgesellschaften)legally separate and independent entitiesno liability of shareholdersforms:GmbH (Gesellschaft mit beschränkter Haftung)limited liability companyAG (Aktiengesellschaft)stock corporationSE (Societas Europaea)stock corporation with links to at least two EU Member States
12 3.a)(ii) Establishment of German Company (continued) Partnerships (Personengesellschaften)no separate and independent legal entitiesin general, full liability of partnershowever, in many other respects treated as legally separate (except GbR)
13 3.a)(ii) Establishment of German Company (continued) forms:GbR (Gesellschaft bürgerlichen Rechts)Civil Code partnershipfull liability of all partners for any legal purpose other than pursuit of commercial businessOHG (Offene Handelsgesellschaft)general partnershipfor trade and commercial businessesfull liability of all partnersKG (Kommanditgesellschaft)limited partnershiponly one partner must be fully liableGmbH & Co. KGlike KG, but partner with full liability is a limited liability company
14 3.a)(ii) Establishment of German Company (continued) In particular: GmbH (Gesellschaft mit beschränkter Haftung)most popular legal formcombines high flexibility with relatively few obligations.designed for private businesses with clear and stable shareholder structure.full liability protection of shareholders.must have at least one shareholder.minimum share capital: 25, EUR (intended reform: 10, EUR)contribution in cash or in kind50% must be paid up when established.formation throughnotarization of deed of formationincluding Articles of Association(intended reform: only notarization of signature if standard Articles of Association are used)and registration in the Commercial Registercosts: approx. 1, EUR (plus additional attorney’s fees)
15 3.a)(ii) Establishment of German Company (continued) legally represented by Managing Directorat least onecan be foreign residentcan be given instructions by shareholderslegal duties:must ensure that the company keeps proper records.must ensure payment of employees’ income taxes and social securitycontributions;otherwise personally liable and subject to criminal charges.must file for bankruptcy if the company is over-indebted or insolvent(not later than 3 weeks);otherwise subject to criminal charges.
16 3.a)(ii) Establishment of German Company (continued) EmploymentContract does not require written form to become effective, but employer is obliged to issue a written statement on employment terms.Applicable law may be chosen, but employee cannot be deprived from protection of mandatory German law.
17 3.a)(ii) Establishment of German Company (continued) Costs of employmentsalarysocial security contributionsEmployer has to pay half ofold age pension insurance (19.9%)long term care insurance (1.7%)unemployment insurance (3.3%)health insurance (approx. 15%).obligation to withhold and to transfer employees’ income tax and social security contributionsother costspaid holidays (minimum 24 days)sick pay (up to 6 weeks)
18 3.a)(ii) Establishment of German Company (continued) Termination of employmentminimum notice period depending on length of employment: 4 weeks to 7 monthsReasoning/justificationnot required when company does not have more than 10 employees.No severance pay!required when company has more than 10 employees.allowed only if required due to business reasonsand if socially justified.Severance is usually paid to make employee renounce on his employment (rule of thumb: 1/2 monthly brut salary x completed years of employment).Special protectionwhile on maternity leavefor disabled employeesemployees sitting on the company’s work council
19 3.b) Acquisition of Existing Business No special laws or regulations applying specifically to acquisition of businesses(except for merger control laws).General provisions of German Civil Code (BGB) apply.Contracts subject to German law are usually much shorter and less detailed thanAnglo-Saxon contracts.Unless parties agree otherwise, statutory law applies with respect to all aspectsof the transaction.Basic distinction under German law between(i) Sale and purchase agreementParties establish obligations to transfer title to the sold asset(s) and to paypurchase price.Parties are free to choose the applicable law.(ii) Transfer agreementParties effect transfer of ownership of asset(s) sold.Parties cannot choose the applicable law; transfer is mandatorily governedby the laws of the state where the assets being transferred are located.
20 3.b Acquisition of Existing Business (continued) Distinction between(i) asset deal(ii) share deal
21 3.b Acquisition of Existing Business (continued) ad (i) Asset DealAll assets sold and transferred must specifically be described; general description as such is not sufficient.Transfer of accounts payable / contracts requires consent of respective creditors and contractors (differently from assignment of claims receivables).Public licenses and permits relating to the operation of the business may be transferred, but not those licenses and permits relating to a specific person.Usually no form requirement, unless assets include real estate (in that case notarization required).
22 3.b Acquisition of Existing Business (continued) Labor law: Sec. 613a BGB !Employment contracts are automatically transferred to new owner of the business, unless employee objects to the transfer.Notice of objection can be given by employee within one month upon being notified on business transfer.Purchaser is not entitled to terminate employment merely on the grounds of the business transfer.
23 3.b Acquisition of Existing Business ad (ii) Share DealAssets of the company do not have to be described in detail for an effective transfer, because interests / shares are sold and transferred.Interest in a German partnership (OHG, KG, GmbH & Co. KG) are not freely transferable; approval of all partners are required unless partnership agreement provides otherwise.Shares in a German corporation (GmbH, AG) are freely transferable unless the company’s bylaws provides otherwise.Form requirements:Partnership and AG: no specific form requirement.GmbH: notarization required.