Signing

What does signing mean?

Signing (German: Unterzeichnung or Vertragsunterzeichnung) refers to the point at which the parties to a transaction conclude the final contract in a legally binding manner. For contracts that require notarial certification, such as the purchase of shares in a GmbH (German limited liability company), signing is the notarial certification. With signing, the contractual obligations arise; the transfer of the shares and the payment of the purchase price or contribution follow only at completion (closing). A comparable case is the binding order of a new car: with the signature the purchase is binding, but car and money change hands only on delivery.

The term comes from transaction practice and is used in company acquisitions as well as in financing rounds. What is signed is the final contract (definitive agreement), that is, the company purchase agreement or the contract package of a round, the investment agreement. Those involved are the contracting parties, their law firms and, for shares in a GmbH, the certifying notary. Whether signing and closing coincide or are separated depends on whether conditions still have to be met before completion.

Signing and closing (completion)

Signing creates the obligation, closing fulfils it. Between the two lie the conditions to closing (closing conditions), such as regulatory clearances, consents of contracting partners or the repayment of existing financing. If no such conditions are outstanding, signing and closing can take place on the same day (simultaneous signing and closing).

If the points in time diverge, the parties are bound from signing even though nothing has yet changed in the ownership. Neither side can withdraw unilaterally unless the contract provides for it; statutory rights of withdrawal are largely excluded in company purchase agreements. The seller continues to run the business, while the buyer has already committed to a price based on a particular condition of the company. The contracts therefore contain their own rules for this interim period.

Notarial certification in a share purchase

For the purchase of shares in a GmbH, both the contract that obliges the seller to assign and the assignment itself require notarial certification (Section 15(3) and (4) of the German Limited Liability Companies Act, GmbHG). Signing is therefore a notary appointment at which the notary in principle reads out the deed in full, including its annexes (Section 13 of the German Notarisation Act, Beurkundungsgesetz, BeurkG). Extensive annexes such as disclosure schedules are often certified in advance in a reference deed to which the main contract refers (Section 13a BeurkG); the parties can then waive a further reading aloud.

In German share purchase agreements, the assignment is usually declared at signing but subject to the condition precedent of payment of the purchase price. A second notary appointment for closing is then unnecessary. Once the condition has been met, the notary files the amended shareholder list with the commercial register (Section 40(2) GmbHG). Vis-à-vis the company, the buyer is regarded as a shareholder only once included in this list (Section 16(1) GmbHG).

In an asset deal, the purchase of individual assets instead of shares, certification is required only in exceptional cases. This applies, for example, if land is sold along with the business (Section 311b(1) of the German Civil Code, BGB) or if the seller undertakes to transfer its entire present assets (Section 311b(3) BGB). Otherwise the contract is signed by the parties in writing.

Signing in a financing round

In a financing round, the participation agreement, shareholders' agreement and capital increase resolution are notarially certified at signing. The investors declare the takeover of the new shares, and the shareholders resolve the amendment of the articles of association with the required three-quarters majority. The investors then pay in their contributions, and the management files the capital increase with the commercial register. The new shares come into existence only on registration (Section 54(3) GmbHG). Between signing and an effective capital increase, there are therefore often several weeks even without special closing conditions.

The period between signing and closing

• Conduct obligations: The seller undertakes to continue running the business in the ordinary course (ordinary course of business). Extraordinary measures such as larger investments, new financing or changes to employment contracts require the buyer's consent.
• Merger control standstill obligation: If a concentration must be notified to the Federal Cartel Office (Bundeskartellamt), it may not be completed before clearance (Section 41 of the German Act against Restraints of Competition, Gesetz gegen Wettbewerbsbeschränkungen, GWB). Excessive influence by the buyer on day-to-day business can also be regarded as premature completion.
• Rights of withdrawal: A clause on material adverse changes (material adverse change) allows the buyer to withdraw under narrow conditions. Disputes usually arise over what counts as material and what is expressly excluded.
• Latest closing date: A drop-dead date determines by when the conditions must have been met; after that, either side may withdraw.
• Warranties at two points in time: Warranties are often given at signing and repeated at closing. This is sometimes done by a completion confirmation (bring-down certificate) in which the seller declares that the warranties are also accurate on the closing date.

Preparing the signing appointment

A certification appointment presupposes that the final versions of all documents and annexes are settled and reach the notary in good time. Committee approvals on the buyer's side, for example of a supervisory board or investment committee, are obtained beforehand wherever possible so that the contract is not signed subject to committee approval. If evidence that the notary needs under the German Money Laundering Act to identify the parties is missing, the appointment may be postponed.

Practical example: signing and closing in the sale of a software GmbH

A strategic buyer acquires all shares in a software company. The purchase agreement is certified in week 0, and the assignment is subject to the condition precedent of payment of the purchase price. The conditions to closing are merger control clearance and the consent of a major customer whose contract contains a change of control clause, that is, a right of termination in the event of a change of owner. The latest closing date agreed is 16 weeks after signing.

1. Week 1: notification of the concentration to the Federal Cartel Office
2. Week 5: clearance within the one-month first review phase
3. Week 6: written consent of the major customer
4. Week 7: closing with payment of the purchase price, satisfaction of the condition for the assignment and handover of the completion confirmation
5. Weeks 7 to 8: filing of the new shareholder list by the notary

Between signing and closing there are seven weeks, during which the management may take extraordinary measures only with the buyer's consent. The buffer up to the latest closing date is 16 minus 7 = 9 weeks. Had the Federal Cartel Office opened an in-depth main review procedure, for which the law provides up to five months from complete notification, the agreed date would not have sufficed. The latest closing date is therefore based on the clearance periods that apply in the unfavourable case.

Distinctions: signing, closing, certification and signing bonus

• Closing: completion, that is, the transfer of the shares and the payment of the purchase price or contribution. It follows signing on the same day or after the conditions have been met.
• Definitive agreement: the document that is signed at signing. Signing refers to the act, not the contract.
• Notarial certification and notarial authentication: In certification (Beurkundung), the notary reads out the text and advises the parties; in authentication (Beglaubigung), the notary merely confirms the genuineness of a signature. Share purchase agreements must be certified; for commercial register filings, authentication is sufficient (Section 12(1) of the German Commercial Code, HGB).
• Term sheet and LOI: upstream, predominantly non-binding heads of terms. An obligation to complete arises only with signing.
• Signing bonus and signing fee: payments that fall due on conclusion of the contract, for example a joining bonus in an employment contract or an arrangement fee on a loan. They share only the word with signing as a transaction step.

Common mistakes

• Cash inflow planned from signing. Liquidity is available only at closing; liquidity planning must cover the interim period.
• Vague closing conditions. Conditions such as “satisfactory clarification” effectively give the other side a free right of withdrawal.
• No latest closing date. Without one, both sides remain bound for an indefinite period, even if a condition evidently will no longer be met.
• Consents requested only after signing. Foreseeable consents from banks, landlords or customers can be obtained in advance or at least prepared.
• Conduct obligations too narrow. A catalogue of measures requiring consent that captures day-to-day business hampers the company for weeks.
• Signing subject to committee approval. If the approval of a supervisory body of the other side is still missing, signing carries economically hardly more weight than a declaration of intent.

Frequently asked questions

Can signing and closing take place on the same day?

Yes, if no closing conditions are outstanding. This is common in financing rounds and in smaller company purchases that need no clearance. The effectiveness of a capital increase, however, still depends on registration with the commercial register.

Who bears the risk between signing and closing?

The contract regulates this. With a purchase price mechanism with a fixed reference date (locked box), opportunities and risks pass to the buyer even before signing. The seller warrants that no value flows out to the seller until completion (leakage). With a purchase price adjustment based on accounts at the closing date, changes up to closing are reflected in the price. A material adverse change clause additionally gives the buyer a right of withdrawal for extraordinary deteriorations.

Do all parties have to appear in person before the notary?

No. Parties can be represented by authorised agents; in practice, notaries require written, often authenticated powers of attorney for this. For foreign parties, evidence of authority to represent is often added and must be available in good time before the appointment.

What determines the costs of notarial certification?

The German Court and Notary Costs Act (Gerichts- und Notarkostengesetz, GNotKG) and the transaction value, in a share purchase essentially the purchase price. The fees rise less than proportionately with the value, and for very high transaction values the law provides maximum amounts. Who bears the costs is regulated by the contract; the buyer often assumes them.

Does real estate transfer tax arise at signing or at closing?

That depends on the taxable event and on the conditions in the contract. In a share purchase, real estate transfer tax threatens only if the company holds German real estate and at least 90% of the shares come together in one hand or pass to new shareholders within ten years. If the contract is subject to a condition precedent, the tax in principle arises only when the condition is met (Section 14 No. 1 of the German Real Estate Transfer Tax Act, GrEStG). Tax advisers and the notary clarify the timing before signing.

The Roemer Capital view

Before signing, we go through the closing conditions one by one with the management and the law firm and assign a responsible person and a target date to each condition. We prepare consents that are foreseeably needed so that they are available shortly after signing. This yields a realistic closing date on which the latest closing date in the contract can be based.

In financing rounds, we calculate liquidity up to the actual cash inflow, not up to signing. In a sale, we agree early with the buyer which measures require consent between signing and closing, so that the management can continue day-to-day business without delay.