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German legal issues for Indian technology companies - Presentation made for NASSCOM EMERGE Friday's 2.0
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German legal issues for Indian technology companies
Ulrich Bäumer
Delhi, 13. November 2009
Agenda
1. Co-operation between Indian and German companies
2. Common Law and Civil Law
3. European Legal System
4. Law of Associations
5. IT outsourcing Contractual Issues / The Market in Europe
6. Employment Law
7. German Tax Law
8. German Court System
… but first
a quick introduction to Osborne Clarke
About Osborne Clarke Alliance
• 600 lawyers in Europe
• Offices in 16 European cities + in Palo Alto, USA + in Shanghai, China
• Specialists in assisting international businesses in Europe
• Awards/recognitionBanking Law Firm of the year 2009 (by Acquisition Finance)
Law Firm of the year at M&A Awards (2009)
Law Firm of the year in Germany (West)– JUVE AWARD
Voted European Technology Law Firm of the Year by The European Technology Forum) in 4 of the past 7 years
UK Law Firm of the Year 2006
Recognizedby both Chambers Europe and Legal 500 directories as a leading European law firm
Where are we?
Country Cities
UK Bristol, London, Reading
Germany Cologne, Munich
USA Palo Alto
Osborne Clarke Alliance Offices
Belgium Brussels De Wolf & Partners
France Paris Stehlin & Associés
Italy Brescia, Milan, Padua, Rome
Studio Legale Associato
Luxembourg Luxembourg De Wolf & Partners
Netherlands Rotterdam Ploum Lodder Princen
Spain Barcelona, Madrid Osborne Clarke
Sweden Stockholm Hellström Law
Our Key Pratice Areas:
• Corporate/M & A
• Financial services/Banking
• Technology & Telecommunications
• IT outsourcing
• Taxation
• Employment
• Visa, staff benefits &related services
• Commercial law
• Intellectual property
• Competition law
• Construction and real estate
• Life Sciences
• Litigation/Arbitration
Examples of Advice Provided to Indian Companies• Infosys Technologies
• TCS
• Mahindra Satyam Services
• Wipro
• HCL
• Tata Motors
• Aricent
• MindTree
• Reliance Industries Ltd.
• Patni
• MPHASIS
• Hinduja Group
• ITC Infotech
• Larsen & Toubro
Recent Quotes
Another extraordinary success is based on the Indian Group led by IT partner Ulrich Bäumer
JUVE, November 2009
Information Technology
Particular strengths: Strong India expertise.
Often recommended solicitors: Ulrich Bäumer,
JUVE, November 2009
Osborne Clarke's Clients
1. Co-operation between German and Indian companies
Adapted Models for Co-operation
• Mergers
• Acquisitions
• Joint Venture
• Partnership
• Built- Operate- Transfer- IT Outsourcing
• Indo- German Strategic Alliance
Adapted Models for Co-operation
• Mergers: The combining of two or more entities into one, through a purchase or a pooling of interests.
• Acquisitions: An act of obtaining ownership of an asset through purchase, trade, or gift.
• Joint Venture: Joining together of two or more business entities or persons in order to undertake a specific business venture.
• Partnership: Form of business organization created by an agreement between two or more persons who contribute capital and/or their services to the organization.
• Strategic Alliance: An agreement between two or more individuals or entities stating that the involved parties will act in a certain way in order to achieve a common goal.
Strategic Alliance
• Meaning:
Strategic Alliance is the arrangement between firms to fulfill any number of corporate goals, including gaining scale, reducing costs, accessing new skirls, products, or markets, and sharing risk.
The term strategic alliance is term for describing some form of relationship but is not, in itself, a legal relationship.
Strategic Alliance
• Strategic Alliances are:
Contractual arrangements (such as license agreements, marketing agreements, and development agreements)
Minority equity investments
Joint ventures (such as corporations, limited liability companies, or partnerships)
Parties to define the legalities of their relationship by contract as there is no defined law for strategic alliance.
Parties to define their respective rights and obligations of their strategic alliance agreement.
Other issues to consider are variety of accounting, tax, antitrust, and intellectual property issues when structuring a strategic alliance.
Strategic Alliance
• Key Point:
The strategic alliance agreement must include a "Mutual Non-disclosure" provision that defines "Confidential Information" and expressly states the respective parties' rights and obligations.
Strategic Alliance
Examples of Strategic Alliances:
1. Cognizant and T-Systems of Germany
2. Cisco and Wipro Ltd., to jointly develop and deliver information technology (IT) service solutions.
Acquisition History
Dr. Reddy’s Laboratories- 10 Acquisitions
Timeline: 1 in 1998, 5 in 1998, 1 in 2000, 1 in 2002, 1 in 2004, 1 in 2006
Target Industries: Pharmaceuticals & Healthcare
Target Countries: Germany, India, UK, US
Average Size of Acquisitions: US$87.78 million
Acquisition History
HCL Technologies- 14 Acquisitions
Timeline:1 in 1998, 4 in 2001, 2 in 2002, 2 in 2003, 2 in 2004, 1 in 2005, 1 in 2008
Target Industries: Capital Markets, Consumer Goods & Services, Insurance, IT Services, Telecommunications
Target Countries: India, Thailand, UK, US
Average Size of Acquisitions: US$43.73 million
Acquisition History
Ranbaxy Laboratories- 16 Acquisitions
Timeline:1 in 1998, 1 in 1999, 1 in 2000, 1 in 2001, 2 in 2002, 1 in 2003, 1 in 2005, 5 in 2006, 3 in 2007
Target Industries: Pharmaceuticals & Healthcare
Target Countries: Belgium, France, Germany, India, Romania, South Africa, Spain, US
Average Size of Acquisitions: US$80.80 million
Acquisition History
Tata Consultancy Services- 11 Acquisitions
Timeline:2 in 2002, 3 in 2004, 3 in 2005, 2 in 2006, 1 in 2007
Target Industries: Capital Markets, Consumer Goods & Services, IT Services
Target Countries: Australia, Brazil, Chile, India, Philippines, Switzerland
Average Size of Acquisitions: US$30.66 million
Acquisition History
Wipro- 14 Acquisitions
Timeline:1 in 2000, 2 in 2001, 4 in 2002, 3 in 2003, 3 in 2006, 1 in 2007
Target Industries: Consumer Goods & Services, Energy, IT Services, Pharmaceuticals & Healthcare,Telecommunications
Target Countries: Finland, India, Singapore, US
Average Size of Acquisitions: US$47.85 million
Acquisition History
• Tata Steel's $12.1 billion acquisition of the Anglo-Dutch firm Corus on January 2007, essaying the largest takeover by an Indian company.
• Vodafone's purchase of India's second biggest privately-owned mobile phone service provider Hutchinson-Essar.
• Daiichi Sankyo Co. of Japan acquiring 34.8 per cent stake in Ranbaxy Laboratories Ltd. for $2.40 billion in 2008.
An Overview on Cross-Border Deals
Hailing Cross Border Trade-Highlights in Indian Press• Indian companies becoming active globally- Low-cost
operating environments in India and strong balance sheets with potential for leveraging, make Indian firms ideal acquirers even in international markets.
“The Economic Times, Jun 13, 2008”
• Indian firms are mature to handle M&A’s now- Indian companies looking to tap opportunities offshore and seen as a lucrative asset by foreign companies.
“The Economic Times, Jun 29, 2008”
Hailing Cross Border Trade-Highlights in Indian Press• India's acquisition appetite intact despite credit crunch-
Bullish Indian companies are continuing to lead the charge for acquisitions within developed economies despite the current turmoil in global financial markets.
“The Economic Times, Jul 9, 2008”
• Indian firm buys Jaguar and Land Rover- Creating history, Tata Motors buys luxury auto brands Jaguar and Land Rover for $2.3 billion from Ford Motor Company.
“Hindustan Times, March 26, 2008”
2. Common Law and Civil Law
Common Law and Civil Law
Common Law (inductive)Problem à Judgment à Ratio decidendi
Civil Law (deductive)Statute à Problem à Application
3. European Legal System
European Legal System
• 27 Member States
• European DirectivesHorizontal and direct effect
• National Law
• The European Courts and National Courts
• Dispute ResolutionCommonly used venues, choice of law
Arbitration - pros & cons
4. Law of AssociationsBranch office or subsidiary
Types of associations
Reasons for the Establishment of a Branch Office in Germany• Legal requirements: Registration with company register
• Presence treated as branch office, if"own" business activities
Some degree of independence
Establishment of a Branch Office
• Notification of the trade office (Gewerbeamt)
• Registration with commercial register (Handelsregister)notarial form
local management
signing authorities
procedure, timing, costs
Establishment of a Subsidiary –German Types of Associations
Capital Company Partnership
GmbH -> limited liability company(Gesellschaft mit beschränkter Haftung)
GbR -> BGB company(Gesellschaft bürgerlichen Rechts)
AG -> stock corporation(Aktiengesellschaft)
OHG -> general commercial
partnership(Ordentliche Handelsgesellschaft)
e.V. -> registered association(eingetragener Verein)
KG -> limited partnership(Kommanditgesellschaft)
Differences in the Law of Associations
Capital Company Partnership
• Limited liability
• Not dependent on members
• One man association possible
• Legal capacity
• Mainly unlimited liability
• Depended on members
• No one-man association
• Partial legal capacity
GmbH – Private Limited Liability Company• The GmbH is a trading partnership with a corporation structure and
its own legal personality
• Most commonly used in Germany for small and medium size firms
• The structure is straightforward and flexible
organisation with at least two independent bodies
the managing director(s)
the meeting of shareholders
the appointment of a supervisory board is admissible
• Reformation of the GmbHG by the implementation of the MoMiG in 1.11.2008
MoMiG: Law for the Modernization of the GmbH and to combat its Abuse
GmbH - Formation
• Formation by the execution of the articles of association and its by-laws before a German notary
• Registration in commercial register
• Filing of documents
• Formation possible by one shareholderUnlimited number of shareholders possible
German and foreign natural persons and corporations may become shareholders
GmbH - Formation
• Mandatory by-law provisions:
Purpose of the company
Name of the company
Registered domicile
Amount of nominal capital
Amount of original capital contributions
GmbH – Share Capital
• Minimum share capital of EUR 25,000
• Possibility to form an entrepreneur company (limited liability) with a minimum share capital of EUR 1.00
• The formation requirements for an entrepreneur company are
Full share payment in cash before registration
No contributions in kind
Name must include entrepreneur company (limited liability)
Requirement to save 25% of its annual profits for accumulation
GmbH – Board and Directors
• The management board consists of one or more managing directors (Geschäftsführer)
• The managing director has to be a natural person, not necessarily a shareholder or a German citizen/ resident
• The power of appointment lies with the shareholders
• By law the director's duties are:Not to disclose the GmbH's trade secrets
To file for bankruptcy if the company is over indebted
To call a shareholders' meeting if more than half of the GmbH's share capital is lost
To ensure that the GmbH keeps proper books
AG - Formation
• The AG formation procedure is similar to the GmbH
• One shareholder can form an AG
• The founders of an AG can be individuals and legal entities, including foreign ones, and commercial partnerships
• The formation (simple formation) takes place in the following stages:Determination of Articles (Memorandum & Articles)
Contribution of share capital
Appointment of organs
Part-payment of capital
Provision of formation report
Formation scrutiny
Notification and entry in the commercial register
AG – Share Capital
• The minimum share capital must be EUR 50,000
• Share certificates are issuedpar value shares (Nennbetragsaktie)
non par value shares (Stückaktie)
• The par value shares must be EUR 1.00
• The non par value shares have an equal share in the share capital, which must not fall below EUR 1.00
• Different classes of shares with different rights can be issued
AG – Structure, Organs and Liability• The AG is organized on corporate lines
no dependency on any membership
has autonomous organs
• The law (AktG) prescribes three organs:
Supervisory board
Board of management
Shareholder meetings
• The liability of an AG is limited to the value of its assets
AG – Supervisory Board
• The members are appointed by vote of the shareholders for not longer then 5 years
• The members themselves elect the chairman
• The main functions are:appointment/ dismissal of the board of management and their employment contracts
supervision of the board of management
representing the AG in litigation involving the validity of shareholders resolutions
consenting to the business decisions of the board of management if required by the articles or the supervisory board itself
taking part in the production of the annual statement
AG – Board of Management
• AGs with more than EUR 3 million capital must have at least two people on the board of management
• Bears the sole responsibility for managing the AG
• A term cannot exceed five years
• An appointment can be revoked by resolution of the supervisory board and only if an important cause exists
• The representation manner must be specified e.g. singly, jointly, restricted
GmbH in Comparison with an AG
• The main advantages of a GmbH over an AG are:
It is simpler to set up a GmbH
The articles of association of a GmbH can more flexibly reflect the requirements of the shareholders
A GmbH is not subject to as many legislative regulations as an AG
The rational for this is that the public can invest in AGs and should receive a greater protection
Partnerships
• Several types are available
General commercial partnership (OHG)
Limited partnership (KG)
• By a partnership agreement, the partners mutually put themselves under a duty to promote the achievement of a common purpose
• Under a general commercial partnership there is no liability limitation
• Under a limited partnership the liability of at least one of the partners is unlimited
• The most common type is the GmbH & Co. KGThe GmbH & Co. KG is a limited partnership with a limited liability company as general partner
5. IT Outsourcing Contractual Issues / The market in Europe
The market in Germany
German legal issues to beware
IT Outsourcing:An Update from Germany
Outsourcing in Germany
in billion Euro
10 11 1420
25
60
2002 2003 2004 2005 2006 2010
Quo Vadis Indian IT Service Providers in Germany?• trend No. 1:
The Indian IT service provider have discovered Europe as an attractive market
The reasons are the strong Europe and a saturated US market:
US market for outsourcing in 2006: 148 transactions (2005: 163)
EU market for outsourcing in 2006: 157 transactions (2005: 142)
(Source: Technology Partners International, TPI Index 2007)
Quo Vadis Indian IT Service Providers in Europe?• trend No. 2:
Indian IT service provider climb the value chain:
2000: Y2K problems
2004: larger outsourcing projects (IT-, Application Management-, Infrastructure-, Business Process Outsourcing)
2006: takeover of smaller companies in Europe (Wipro –NewLogic)/ Business Consulting
2007: Collaboration / takeover of business units
2009: takeover of larger companies in Europe
India, China, Eastern Europa: What Is The Next Trend?India: Offshoring services are popular
• Almost 75 % of the companies interviewed are Offshoring or are planing to do so in the near future.
• Forrester Research: 67% of German companies are using Indian IT service providers for Offshore Outsouring
Source: Forrester Research, 2005
2
26
1710
18
27
Larger projects live
Smaller projects live
Started pilot projects
Activities planned in next 12 months
No activities planned in next 12 month
Do not know
in %
India, China, Eastern Europa: What Is The Next Trend?China:
• According to the Global Delivery Index from IDC the Chinese cities Bejing, Shanghai and Dalian will overtake the Indian IT hubs (Bangalore, Neu Delhi, Mumbai) in 2010
India, China, Eastern Europa: What Is The Next Trend?• Eastern Europe:
Bulgaria, Estonia, Latvia and Lithuania have already overtaken the old centers in the Czech Republic and Hungary
Eastern Europe is an outsourcing destination because of the European law (e.g. data protection) and because of the language skills of the staff (German, French, etc)
Nevertheless, Eastern Europe is trailing compared to the outsourcing hubs in India, China, Malaysia, Brazil and Mexico
(Quelle: Jahresbericht AT-Kearney 2006)
Outsourcing Contracts –8 Key Issues
1. statute
2. EVB-IT (in Germany)
3. industry standards
governed by1. Warranty
2. Liability
3. Acceptance
4. Delay
5. Change requests
6. IP-rights
7. Contractual penalty
8. Data Protection
1. Warranty
• Statutory period for warranty, Sec 634 a BGB
As of 1st January 2002: 24 months
It is possible for two enterprises to agreecontractually to less than 24 months of warranty
Industry standard in Germany: 12 to 18 months
1. Warranty
… billable… free of charge
Warranty is … Maintenance is …
1. Warranty
"Garantie"
Guaranty
"Gewährleistung"
Warranty is …
2. Liability
Damages are given for
• Delay
• Non performance of a contract
• Bad performance
2. Liability
Scales of liability
• Simple negligence:Breach of duty of care(running a red light in bad weather conditions)
• Gross negligence:
Significant breach of duty of care(knowingly driving in the Alps in Decemberwithout snow tires)
• Intent
2. Liability
Different types of damages
• Direct damage:Loss suffered as the immediate result of defects
• Indirect damage:Other loss suffered as result of the defect(e.g. financial loss, loss of use)
• Consequential damage caused by a defect:Loss from a peril that is not the immediate cause of loss (provider is responsible for a system failure and customer cannot sell goods; the goods rot)
2. Liability
Simple negligence Gross negligence IntentConsequential damage caused by a defect &
Indirect damage
Unlimited Liability
Limited Liability
ExcludedLiability
û û û ûû û
ûû
ûû
= Contract rsp. industry ? standard Limit: 1 to 3 times contract value
= Statutory ? predictable damage
8. Data Protection
• An array of DP law implemented across the EU since 1984
But many local nuances (not least level of fines)
• "processing" of "personal data" regulated
ie info that directly or indirectly identifies living individuals
• Consequences of failure to comply – fines, criminal liability
• Relevance to Indian companies
Beware what you agree to
Data protection officer
Data transfers of HR and customer data
Have you executed model contracts re your HR data?
Binding Corporate Rules – worth considering?
6. Employment Law
What is it?
Anti Discrimination Law
Sending Indian Employees to GermanyWorking in Germany for more than 3 months:
• residence permit which also grants access to the labour market is needed
• Indians may apply for the necessary permit even after their arrival in Germany but before starting to work
Payment of Social Contribution
• Agreement on social security (only pension insurance) ratified 8.11.2008
The agreement applies, when
employee is sent to Germany for not more than 48 months (with an option of another 12 months extension)
employee performs services for his/ her Indian employer within the context of his Indian employment
• According to the German law (§ 5 SGB IV – Einstrahlung) Indian social security legislation will apply when the employee
is sent to Germany by his/her Indian employer
performs services within the context of his/her Indian employment-contract
is sent to Germany for a (predictable) limited period of time
Height of the social contributions, which have to be paid by the employer in addition to the salary
Insurance % total % paid by Employer
Social contribution assessment
ceiling
Employers' max. costs
Pension 19,9 % 9,95 %EUR 64,800 p.a.
(EUR 5,400 p.m.)
EUR 537,30 p.m.
Unemployment 2,8 % 1,4 % EUR 75,60 p.m.
Health Insurance 15,5 % 7,3 %EUR 44,100
p.a. (EUR 3,675
p.m.)
EUR 268,28 p.m.
Nursing Care 1,95 %(plus 0,25 %
for childless
employees)
0,975 % EUR 35,83 p.m.
Flexible Variation of the Size of the Work Force• Contract of employment for a limited period
up to 4 years for entrepreneurs; any number of extensions
up to 2 years without a reason for the limitation; max. 2 extensions
• Use of temporary workers
Application of the German Unfair Dismissal Act• In establishments in Germany with more than 10 employees
part-time employees are counted partially
• After 6 months of employment (waiting period)
Ø unfair dismissals are invalid, employee will be reinstated
Ø valid dismissals terminate employment without severance payment / compensation
Protection against Dismissals
• Reasons for dismissal
conduct (usually warning notice first)
reasons relating to the employees person (e. g. illness)
redundancy
• Notice period
depending on the period of employment
starting with 2 weeks during the probation period
standard period is 4 weeks to the 15th or end of a calendar month
• No claim for compensation
Employees Rights of Participating
• Works Constitution Act applies for establishments in Germany with at least 5 employees
• Works Council's (elected by all employees) rights:information and consultation, e. g. before giving a notice
codetermination in social matters (e. g. working hours, payroll principals)
collective in house agreements (but not on wages)
works council has no trade union rights (i.e. strikes)
establishments with more than 20 employees: consultation before any proposed alteration (e. g. transfer a of department), agreement to reconcile employees interests, social compensation plan
Application of Collective Agreements (with Unions)• Collective agreements (with unions) only apply:
both parties of the employment contract are organized or
employee member of trade union
employer member of employers' federation
or
declaration of a collective agreement as generally applicable or
employment contract refers to the stipulations of the collective agreement
Anti Discrimination Law (AGG)
• Employers are prohibited from discriminating against job applicants or employees
• on the basis of gender, race or ethnic origin
religion or belief
age, disability, or
sexual orientation
• Damage claims are possible within two months from becoming aware of such discrimination
• Direct and indirect discrimination can potentially be justified
7. German Tax Law
The most important Taxes when doing Business in Germany• Corporate Tax
corporations
tax rate 25 %
• Income Tax
individuals
tax rate up to 42 % (progressive system)
The most important Taxes when doing Business in Germany• Trade Tax
tax rate fixed by local municipalities, based on the profit
• Solidarity Surcharge5.5 % of Corporate Tax or Income Tax
• Value Added Tax (VAT)
tax rate 19 % (7 % for some goods, in particular foods, books and newspapers)
The Tax Regime of a German Subsidiary• Separate legal entity
• German entity, subject to taxation in Germanyunless otherwise provided in tax treaty
• Corporations
corporate tax
solidarity surcharge
trade tax
• Partnerships
tax transparent
taxation on shareholders' level
trade tax (if trading activity)
The Tax Regime of a German Branch• Permanent establishment
• Profits attributable to the German branch will be taxed in Germany
The VAT System
• Harmonized within EU
• Importation VAT when importing goods into EU
• Supply of goods and services by an entrepreneur
• Several exemptions
• Input VAT
reclaim of VAT paid to another entrepreneur
• Tax rate 19 % (reduced rate 7 %)
Formal Requirements
• Bookkeeping
• Tax returnscorporate Tax, Income Tax, Trade Tax, VAT: yearly
• Preliminary returnsVAT: monthly
• Tax prepayments
• Wage Tax
• Social security contributions
• Tax advisor
8. German Court System
The Court System –Federal Constitutional CourtFederal Labour Court
Higher Labour Court
Labour Court
Labour Law
Patent/Trademark Law
Federal Patents Court
Federal Court of Justice
Higher Regional Court
Regional Court
Local Court
Civil Law
Criminal Law
Administrative Law
Administrative Court
Higher Administrative
Court
Federal Administrative
Court
Tax Law
Finance Court
Federal Finance Court
Social Security Law
Social Court
Higher Social Court
Federal Social Court
Civil and Criminal Court
Local Courts: 663
Regional Courts: 116
Higher Regional Courts: 24
Total Number of Courts(not restricted to civil and criminal courts)
1131
Duration of Civil Matters
• Local court: 4,6 month
• Regional court (1st instance): 6,7 month
• Regional court (2nd instance): 5,4 month
• Higher Regional Court (2nd instance): 8,5 month
Questions?
Contacts
Ulrich Bäumer
Partner
IT / Commercial - Germany
t +49 (221) 5108 4168
f +49 (221) 5108 4169