Explain the German merger-by-absorption (Verschmelzung) process under the UmwG.
A core M&A Advisory interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
A Verschmelzung durch Aufnahme under the Umwandlungsgesetz (UmwG) is a statutory merger where one entity (the transferring entity) is dissolved without liquidation and its entire assets and liabilities pass to the absorbing entity by universal succession (Gesamtrechtsnachfolge) — everything transfers automatically by operation of law, no need to transfer assets individually. The shareholders of the dissolved entity receive shares in the absorbing entity per an agreed exchange ratio. The process: a merger agreement (Verschmelzungsvertrag) is drawn up (notarized); the management boards prepare a merger report explaining it; an independent merger auditor (Verschmelzungsprüfer) reviews the exchange ratio for fairness (protecting minorities); both companies' shareholder meetings approve, generally requiring a 75% capital supermajority; and the merger becomes effective on registration in the commercial register (Handelsregister). Creditors get protection (a right to security for their claims). It's used for genuine legal combinations/intra-group reorganizations (vs an asset or share deal), and the exchange-ratio fairness can be challenged in a Spruchverfahren. Tax neutrality is available if conditions are met.
WHAT INTERVIEWERS LISTEN FOR
- ✓Statutory merger: transferring entity dissolved, assets pass by universal succession
- ✓Shareholders get absorbing-entity shares per an exchange ratio
- ✓Steps: notarized merger agreement, merger report, independent auditor on the ratio, 75% shareholder approval, Handelsregister registration
- ✓Creditor protection; exchange ratio challengeable in a Spruchverfahren; tax-neutral if conditions met
COMMON MISTAKES
- ✗Not knowing universal succession (no individual asset transfer)
- ✗Omitting the auditor/exchange-ratio fairness or 75% approval
- ✗Confusing it with an asset or share deal
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