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The Germany content consists of this summary page, and separate pages for Preferred Shares in a German Limited Liability Company (“GmbH”), Silent Partnership in a Corporation, and Debt.
Executive Summary1
In the German (debt/equity) market there is no classical “revenue-based finance” in the sense of a (customary) shareholders’/finance arrangement under which the investor has a priority right to receive repayment/distributions up to an agreed portion of “gross revenues” or “free cash flow”, until an agreed return on the investment is reached. However, the following three options come closest thereto: (1) preferred shares in a German Limited Liability Company (“GmbH”), (2) a silent partnership in a German corporation (GmbH or a stock corporation (“AG”)) or (3) a loan to a GmbH, AG or a limited partnership by shares (Kommanditgesellschaft auf Aktien (“KG aA”)) in combination with a warrant against the company’s/borrower’s shareholder(s) to call for shares (or, alternatively, to opt for a cash settlement) upon a specific trigger event.
Preferred Shares in a GmbH entitle the holder of such shares to a preferred treatment in regards of the priority of distribution of profits among the shareholders, i.e., the other (ordinary) shareholders accept that the investor has a right to repayment by way of distributions of profit (based on the revenue of the GmbH) and that such right needs to be discharged prior to other (ordinary) shareholders receiving their portion of the (remaining) amount to be distributed. Distributions and redemptions are limited by capital maintenance provisions applicable under German law to ensure that the GmbH’s funds in the amount of its registered share capital (Stammkapital) are not diminished by any profit distributions.
A silent partnership in a German corporation is an undisclosed civil law partnership. It can be designed with or without membership rights. In both scenarios, the investor participates in the corporation’s profit. In the typical case of a silent partnership, membership rights are excluded, and the investor solely participates in the corporation’s profit, for which reason the silent partnership is considered a debt instrument. The atypical silent partnership includes membership rights and/or entitles to participate in hidden reserves. Therefore, for tax and insolvency purposes, it is categorized as an equity instrument.
The combination of a loan to a GmbH, AG or KG aA combined with a warrant against its shareholder(s) combines a debt and an equity instrument. The warrant to call for shares or, alternatively, to opt for a cash settlement is mostly designed in the form of a right to demand release of proceeds. Usually, the warrant is designed without any membership rights or equivalent influence in order to avoid subordination in an insolvency scenario.
In any of the three options contestations by an insolvency administrator of repayments/distributions made to the investor needs to be considered on a case-by-case basis in the light of German insolvency law. For the instruments qualifying as equity or the investor qualifying as a shareholder or as shareholder like – which can only be assessed on a case-by-case basis -, investor’s claims are subordinated pursuant to German insolvency law.
Withholding tax on payments received by the investor is triggered in case of preferred shares. In case of the other instruments, it needs to be assessed on a case-by-case basis (details below).