Carve-out transactions remain very popular in Germany despite their high complexity. Over the last years, their number has increased significantly. One of the main reasons for this increase is the trend towards focusing on the core business that has emerged in recent years, as large listed industrial conglomerates are usually “punished” with a conglomerate discount on their share price. This trend is encouraged by activist investors who buy into listed companies to demand changes to the business model or company structure (often in the form of spin-offs or demergers) to boost the share price. Moreover, despite the economic fallout from the Covid-19 crisis, the war in Ukraine and the current stock market turmoil, valuations remain high, creating a good environment for a proposed sale. In addition, private equity investors are sitting on an all-time high of committed equity (“dry powder”) and have long since shed their reservations about carve-out transactions. A similar development has taken place in the area of W&I insurance, the conclusion of which was the absolute exception in carve-out transactions just a few years ago. This development as well as the special features of W&I insurance in private carve-out transactions will be examined in more detail below from a legal perspective.
2. Carve-out transactions
A “carve-out” is the separation of legally dependent business divisions or parts of a company which are to be continued as an independent entity after completion of the carve-out. As a rule, a carve-out is followed by a capital market transaction (demerger and booking in the securities accounts of the parent company’s shareholders or classic IPO), or the carve-out is combined with a private transaction (sale or contribution into a joint venture) being the norm today. A carve-out transaction should be differentiated from the sale of a business unit that is already operated in separate legal entities within a group with certain centralised overhead functions, the latter also requiring certain disentanglement measures for a successful completion.
Carve-out transactions are usually highly complex processes that can extend over a period of several years, not infrequently between three and five years. Milestones in the process are (i) the implementation decision as starting point, (ii) the development of the target operating model, carve-out plan as well as the draft purchase agreement including the transitional services agreement and other ancillary agreements, (iii) the conclusion of the purchase agreement with the acquirer, which usually marks the beginning of the implementation of the carve-out, and the (simultaneous) conclusion of the W&I Insurance, (iv) the achievement of the closing date under the purchase agreement as the starting point of the standalone operation of the carved-out business, and (v) the achievement of full independence of the business and thus the end of the transitional services provided by the parent. The W&I insurance work stream should be initiated by the seller in parallel with the preparation of the purchase agreement and be flipped over to the bidders as early as possible in the course of the sales process.