Change of Control

What is a change of control?

Change of control (in German, Kontrollwechsel) refers to the transfer of control over a company to another person or group. Typical cases are the acquisition of the majority of the voting rights, the acquisition of the right to appoint the majority of the management, and the sale of all or almost all of the business. What counts as a change of control in an individual case, and what consequences it has, is determined by the relevant change of control clause (in German, Kontrollwechselklausel).

There is no general statutory definition in German civil law. The term is defined separately in each case in customer, financing and participation agreements, in shareholders' agreements, employment contracts and employee participation programmes. Individual statutes use their own concepts of control, such as the German Securities Acquisition and Takeover Act (Wertpapiererwerbs- und Übernahmegesetz, WPÜG), merger control or Section 8c of the German Corporation Tax Act (KStG). In a company sale, change of control clauses determine which contracts can be terminated, which payments fall due and which shareholder rights come into effect.

Definition and triggers of a change of control

Typical triggers

• Acquisition of more than 50% of the voting rights or the capital by one person or several persons who coordinate their conduct (acting in concert)
• Acquisition of the right to appoint or remove the majority of the managing directors or of the members of a supervisory body
• Sale of all or almost all assets by way of an asset deal (sale of the individual assets instead of the shares)
• Merger or other reorganisation after which the existing shareholders no longer hold the majority
• Indirect change of control, in which control changes over a shareholder that in turn holds the majority

In a GmbH (German limited liability company), each euro of a share carries one vote (Section 47(2) of the German Limited Liability Companies Act, GmbHG), unless the articles of association provide otherwise. The change of control is generally triggered only when the shares transfer at closing, not already on signing the purchase agreement. Many clauses specify this point in time expressly.

Exceptions

Exceptions are customary for intra-group restructurings, such as the contribution of the shares to a holding company in which the shareholdings remain unchanged. This also includes moving to a new, often foreign parent company before a funding round, known in the market as a flip. An IPO, capital increases without a new majority shareholder and transfers on death are also frequently excluded.

Where change of control clauses appear

In a sale of the company shares (share deal), the company itself remains the contracting party of its customers, suppliers and lenders. Without a special clause, the share sale therefore does not affect its contracts. Change of control clauses give the counterparty a right precisely for this case. In an Asset Deal, by contrast, every contract transfer requires the counterparty's consent anyway.

Customer, supplier and licence agreements

Larger customers, suppliers and licensors often have a termination or consent right granted for the case that their contracting party is taken over by third parties. Behind the clause there is often a concern about being connected with a competitor in future. For a software provider with a few large corporate customers, a considerable part of recurring revenue can depend on such clauses.

Financing agreements

Loan agreements, venture debt (growth loans for venture-backed companies) and promissory note loans (Schuldscheindarlehen) regularly provide a termination right of the lender or an obligation of early repayment on a change of control. In the loan agreement, the rule is usually found among the grounds for termination or among the borrower's obligations (change of control covenant). In some cases a prepayment penalty is then incurred, a compensation for lost interest. With convertible loans, the change of control is usually a conversion or repayment event, often with a premium on the loan amount. In a sale, the amounts due enter the purchase price calculation as financial liabilities.

Participation agreements and shareholders' agreements

The participation agreement of a funding round defines which transaction counts as an exit. The distribution of proceeds under the liquidation preference, the obligation to sell along (drag-along) and the right to sell along are linked to it. Articles of association also often regulate the case that a shareholder is itself a company. If control over it changes, the other shareholders can demand the assignment of its share or resolve its compulsory redemption. A redemption without the consent of the person affected is permissible only if the articles of association have allowed it beforehand (Section 34(1) and (2) GmbHG). Grant award notices can also contain notification or consent obligations on a change of shareholders.

Employment contracts and participation programmes

Employment contracts of managing directors sometimes provide a special termination right with severance pay in the event of a change of control. Participation programmes attach to it payouts from virtual shares and the accelerated vesting of shares not yet earned (accelerated vesting). In some cases the acceleration applies only if a second trigger is added, such as the end of the engagement (double trigger).

Tax consequences

A corporation may in principle offset losses of earlier years against later profits (loss carry-forward). Under Section 8c KStG, however, these losses are in principle forfeited if more than 50% of the shares or voting rights are transferred to one acquirer or persons close to it within five years. A capital increase that shifts the shareholding ratios accordingly has the same effect. The same applies correspondingly to trade tax loss carry-forwards. Exceptions exist, among others, for restructurings within a group and up to the amount of existing hidden reserves, that is, the difference between actual value and book value. On application, a going-concern-based loss carry-forward under Section 8d KStG may also be available. For loss-making growth companies, this affects the value that an acquirer attributes to the loss carry-forwards.

Change of control clauses in due diligence

In legal due diligence, all contracts with change of control clauses are recorded. The financial review quantifies their consequences: affected share of revenue, repayments falling due, severance payments and payouts from participation programmes. From this a list of the required consents and waivers arises. Buyer and seller then decide which consents are obtained before signing, which become closing conditions and which are taken into account as a risk in the purchase price.

The timing of the approach is delicate. If an important customer is informed too early, this endangers the confidentiality of the sale process; if informed too late, there is no time for an agreement. It is common to approach key customers shortly before or after signing together with the buyer.

Worked example: change of control with a stepwise acquisition

A GmbH has share capital of EUR 100,000, divided into shares of EUR 1 each. Founder A and Founder B each hold 27%, Investor 1 holds 30% and Investor 2 holds 16%. The change of control clause in the loan agreement is based on one person holding more than 50% of the voting rights. A strategic investor acquires step by step:

• Year 1: acquisition of Investor 1's 30%. Shareholding 30%, no change of control.
• Year 2: acquisition of 12% from Founder A. Shareholding 30 + 12 = 42%, no change of control.
• Year 3: acquisition of 9% from Founder B. Shareholding 42 + 9 = 51%, the change of control occurs. Afterwards Founder A holds 15%, Founder B 18% and Investor 2 16%, together with the acquirer 100%.
• Had the clause covered only an acquisition of more than 50% in a single transaction, it would not have been triggered, because the largest single acquisition was 30%.
• For tax purposes, the transfers within five years are added together: 30 + 12 + 9 = 51% to one acquirer. Unused losses of the company of, for example, EUR 6 million are therefore in principle forfeited, unless an exception applies.
• Corporation tax, solidarity surcharge and trade tax burden profit at around 30% (as of 2026). A possible future tax saving of up to EUR 6 million × 30% = EUR 1.8 million is thus lost. Because corporation tax falls gradually from 2028, the value would later be somewhat lower.

The example shows that contractual and tax concepts of control must be examined independently of one another and that the wording of the clause determines its effect.

Distinctions: change of control, exit event and control under the WPÜG

• Exit event: the term from the participation agreement to which the distribution of proceeds is linked. It can be wider than the change of control and include, for example, an IPO.
• Concentration in merger control: The German Act against Restraints of Competition (GWB) has its own triggers, which can apply at lower shareholdings, such as on the acquisition of 25% of the shares or of competitively significant influence.
• Control under takeover law: For listed companies, holding at least 30% of the voting rights already counts as control (Section 29(2) WPÜG).

Common mistakes

• Stepwise acquisitions not captured. A clause that looks only at individual transfers disregards a majority acquisition in several steps.
• Indirect changes of control overlooked. If control over a majority shareholder changes, the shareholder list remains unchanged, but control changes nonetheless.
• Restructurings not excluded. Without an exception, even the contribution to a holding company can trigger termination rights or payouts.
• Different definitions. If the participation agreement, participation programme and employment contracts differ from one another, the same sale triggers different legal consequences.
• Loss carry-forwards valued wrongly. Anyone who does not examine the consequences of Section 8c KStG attributes to tax losses a value that they no longer have after the sale.

Frequently asked questions

Is an IPO a change of control?

As a rule, no. In an IPO the shares are widely spread, and a new controlling person generally does not arise. Participation agreements and programmes therefore regulate the IPO separately.

Is there a change of control on the sale of 49% of the shares?

Not under most clauses. It can be different if the acquirer also receives the right to appoint the majority of the management or acts in concert with other shareholders. For merger control purposes, such an acquisition may nevertheless have to be notified.

Does a funding round trigger a change of control?

Usually not, as long as no investor and no group acting in concert obtains the majority. Loan agreements and convertible loans, whose definitions can be narrower, should nevertheless be checked. For tax purposes, a capital increase through which an investor receives more than 50% can lead to the loss of loss carry-forwards under Section 8c KStG.

Can a contracting party prevent the sale?

Not the sale itself as a rule, but its consequences for its contract, by terminating or refusing its consent. A share sale can above all be prevented by co-shareholders if the articles of association make assignment subject to their consent.

What does a typical change of control clause look like?

A simple version reads, in essence: “A change of control occurs if one person or several persons acting together acquire, directly or indirectly, more than 50% of the voting rights.” Often the right to appoint the majority of the managing directors is added. The legal consequence is attached to this, such as a termination right from notification of the change of control. In the articles of association of a GmbH, the rule is usually found in the provision on compulsory redemption.

What does deemed liquidation mean?

A term from US participation agreements: a change of control is treated for the distribution of proceeds like a liquidation of the company. German shareholders' agreements achieve the same by expressly extending the liquidation preference to a share sale or asset deal as well.

The Roemer Capital view

Before a company sale, we compile with the client all change of control clauses from customer, financing, participation and employment contracts. We quantify their consequences: revenue at risk, repayments falling due, payouts to management and employees. We reflect these amounts in the bridge from enterprise value to purchase price and plan which consents are obtained before signing.

In funding rounds, we check whether the exit definition of the participation agreement matches the definitions in the participation programme and in the employment contracts. Only then does a later sale trigger the consequences that all parties expect. The clauses themselves are drafted by the law firm.