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Modernisation in Germany05/12/2007. Source: SJ Berwin. Christian Cornett
 Over the last decade, the German government has made some real improvements to the legal framework for commercial activity. Private equity has benefited from many measures and (although the connection may not be a direct one) deal volumes have reached an all-time high, writes SJ Berwin.
While, in the past, Germany has had a reputation for imposing burdensome regulations on legal and tax structures, most market participants now feel that - in many respects - things are significantly better than they used to be. In fact, deal costs are often lower than in Britain or the United States.
Some of the improvements have included: a takeover law, a court ruling on management participation in buyout structures, establishment of a Real Estate Investment Trust (REIT) vehicle and, most recently, a new private equity law. Also relevant are the introduction of a German Corporate Governance Code, various new transparency rules, and the ability to use International Accounting Standards. Unfortunately, it remains true that frustrating legislative processes have often delayed the changes, and diluted their impact. The new private equity law is a case in point: it has not yet been implemented and, when it does come into force, will only assist the venture sector.
Perhaps the next notable modernisation initiative for the private equity sector - expected to become effective in the second quarter of 2008 - is a plan to update the legal framework for the GmbH, the German private company. A GmbH currently requires shareholders to use notarised transfer agreements, has bothersome minimum capital requirements, and requires a lot of paper shuffling to set up. The plan is to give it a face lift: under the abbreviation MoMiG ("Act Modernising the Law Concerning the GmbH and Combating Abuses"), new rules will eliminate some of the most anachronistic procedures, seeking to make the GmbH more internationally competitive. The changes will, among other things, make share transfers easier to administer, amend the very formal rules on contributions in kind, update the capital maintenance regime and cash pooling regulations (which often give rise to issues on buyouts), and change the complex rules on shareholder loans. The basic structure will remain, but life will get a little easier for private companies and their investors - particularly given changes also being made to the German commercial register - finally establishing an accessible electronic system.
So, step by step, the legal environment for German business is improving. An appropriate legal and tax environment is a huge benefit to an economy that faces stiff competition from its European partners, and the rest of the world. Recognition of the need for change is welcome, and - when combined with firm indications of an economic recovery - augers well for private equity in Germany in the coming years. But problems clearly remain, and fund structuring remains a particular issue - those structuring private equity funds still encounter unacceptable hurdles, with no real solution yet in sight. Pressure on policy makers remains essential. They must continue to demonstrate Germany's willingness to modernise, and to compete on the international stage.
SJ Berwin is a pan-European law firm with a particular focus on private equity. It has offices in London, Frankfurt, Munich, Berlin, Madrid, Paris and Brussels. For more information go to www.sjberwin.com.
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