State Aid for Start-Ups
The German government plans to launch a special package of measures for start-ups with a volume of EUR 2 billion. Venture capital financing is to be expanded so that, despite COVID-19, there will still be sufficient financing rounds for promising innovative start-ups from Germany. The Federal Government is thus supplementing the existing support programs with a package of measures that is specially tailored to the needs of start-ups.
The package of measures should include the following elements in particular:
- Public venture capital investors at fund of funds and fund level (e.g. KfW Capital, European Investment Fund, High-Tech Gründerfonds, coparion) will be provided with additional public resources in the short term to be used for co-investment together with private investors for financing rounds of start-ups.
- The fund of funds investors KfW Capital and the European Investment Fund (EIF) will in future be able to take over shares from defaulting fund investors with additional public resources.
- For young start-ups without venture capitalists among the shareholders and for small and medium-sized enterprises, the financing with venture capital and equity replacing forms of financing shall be facilitated.
Further details and the more detailed structure of the above-mentioned support measures are to be announced in due course. Parallel to the implementation of the package of measures, the Federal Government is continuing to coordinate the structure of the Future Fund for start-ups. In addition, start-ups will also have access to all other support measures of the COVID-19 aid package.
KfW Express Loan
On the basis of the adjusted temporary framework published by the EU Commission on 3 April 2020, the German Federal Government introduced the KfW Express Loan for medium sized companies.
The KfW Express Loan complements the KfW Special Program 2020 and essentially contains the following key points:
- Companies with more than ten employees that have been active in the market since at least 1 January 2019 can apply for the KfW Express Loan. However, the company must not have been in difficulty on 31 December 2019 and must have been in an orderly financial situation at that date.
- The loan volume per company is up to three months’ turnover in 2019, limited to EUR 500,000 (for companies with up to 50 employees) or EUR 800,000 (for companies with more than 50 employees).
- The house bank receives a 100% indemnity against liability from KfW, secured by a guarantee of the Federal Government. This should significantly increase the chances of a loan commitment.
- The aim is to ensure that the loan is granted quickly, i.e. that the KfW Express Loan is approved without a credit risk assessment by the house bank or KfW.
- The loan can be used to finance working capital or investments.
The German Federal Government expects more than two million employees to be on short-time work this year. Federal Minister of Labor and Social Affairs Hubertus Heil has announced that he will discuss with employers and trade unions about a further increase of the short-time compensation. In addition, he said that consideration should be given to how the complete relief of employers from social security contributions can be passed on to employees. The German model of short-time work should also be established in other European countries. Therefore, the EU Commission plans to draw loans of EUR 100 billion for this purpose as part of the “SURE” program and to make it available to the member states.
The National Association of Statutory Health Insurance Funds has recommended to all statutory health insurance funds that they should make it easier for companies adversely affected by the COVID-19 pandemic and therefore distressed to defer and pay the social security contributions later. This simplified deferral should initially be limited to the months of March and April and should in principle only be possible once all other measures from the various packages and support measures of the German Federal Government have been exhausted. The Federal Ministry of Labor and Social Affairs supports this recommendation. Further information is provided here.
Export Restrictions for Medical Protection Equipment
On 16 March 2020 the implementing regulation (EU) 2020/402 came into force, which applies in all of Europe restrictions on exports of medical protective equipment to third countries. Medical protective equipment within the meaning of the regulation includes protective goggles and visors, face shields, mouth and nose protection, protective clothing such as overalls and suits, and gloves. The national order of 12 March 2020 on restrictions in foreign trade with certain goods, which also applied to deliveries within the EU, was suspended by the Federal Ministry of Economics and Energy on 19 March 2020 in response to the EU-wide uniform approach (BAnz AT 19.03.2020 B11). With the suspension of the national regulation, deliveries in the EU internal market are now again possible without an export approval.
The export of medical protective equipment to third countries under the directly applicable European Implementing Regulation is subject to authorization in written or electronic form by the competent authorities of the Member State where the exporter has its seat. In Germany, the application for the export approval can be submitted via the ELAN-K2 export portal of the Federal Office of Economics and Export Control.
However, the Federal Government reserves its right to evaluate the situation on a regular basis, both with regard to further developments in the internal market and with regard to the necessary EU-wide uniform approach to the approval of exports to third countries on the basis of the European Implementing Regulation (EU) 2020/402.
The Federal Office of Economics and Export Control has established a telephone hotline (06196 908-1444) in connection with the supply of protective equipment. Written questions can be sent to the e-mail address: schutzausruestung(Replace this parenthesis with the @ sign)bafa.bund.de. Further information on the ELAN-K2 export portal is provided here.
General Law of Obligations in Case of COVID-19 Pandemic Cases
The law to mitigate the consequences of the COVID-19 pandemic dated 27 March 2020 (“COVID-19 Law”) provides for some regulations in contract law. While the first draft was considerably more detailed, the new regulations focus primarily on the protection of consumers and micro-enterprises. In addition, the right to refuse performance and the possibilities of deferral only apply in the case of substantial continuing obligations. For details see the previous COVID-19 Wire here.
Otherwise, the general rules of commercial and civil law and the United Nations Convention on Contracts for the International Sale of Goods (CISG) shall continue to apply. It is therefore questionable whether and when debtors can refuse performance due to the COVID-19 pandemic.
M&A Specific Agreements
In the area of M&A transactions, questions regarding the applicable regulations arise at several levels: For example, the general right to disruption of performance is usually expressly excluded in every sale purchase agreement and for this purpose the SPA contains separate regulations for disruptions of performance between the parties to the contract. Particularly in times of crisis, it is likely that so-called MAC-Clauses (Material Adverse Change) will be increasingly negotiated again (with increasing power influence of the buyer side).
Agreements of Portfolio Companies
In the case of existing contracts of portfolio companies, (individual) contractual provisions take precedence over the statutory provisions. Therefore, it must first be examined whether the contract possibly contains a so-called force majeure clause. According to these clauses, the parties are usually released from their performance obligations and liability if and to the extent that a case of force majeure exists. Depending on the contractually agreed definition, this typically means an unavoidable and unforeseeable event that occurs after the conclusion of the contract and is not the fault of the debtor. Cases of force majeure, for example epidemics, war and diseases, are explicitly included in the contractual regulation.
Whether the COVID-19 pandemic constitutes a case of force majeure has already been discussed extensively and, depending on the contractual arrangements, can be affirmed in principle. For example, the SARS epidemic in 2003 was regarded in travel law as a case of force majeure according to section 651j German Civil Code old version (see Local Court of Augsburg, judgement of 9 November 2004 – 14 C 4608/03; on an outbreak of cholera as force majeure, see Local Court of Homburg, judgement of 2 September 1992 – 2 C 1451/92-18). In addition, since the end of January 2020, Chinese companies have been able to apply for a force majeure certificate from the China Council for Promotion of International Trade (CCPIT). Although it cannot be deduced from this that a case of force majeure exists, the circumstantial evidence suggests that it does. Official measures and recommendations of the WHO also have an indicative effect.
If the respective contract does not provide for a force majeure clause, the existing statutory regulations shall apply in addition to the provisions of the COVID-19 Law:
- The COVID-19 pandemic may make it impossible to fulfil the obligations. Impossibility exists if performance is impossible for the debtor (subjectively) or for anyone (objectively). The impossibility is determined by the type of performance obligation and can also only occur temporarily. In particular, it depends on whether the debtor is unable to procure the service elsewhere on the market. If there is a form of impossibility, the obligation of the contractual partner to provide the counter-performance also lapses (section 326 par. 1 German Civil Code).
- In the context of the COVID-19 pandemic, non-performance due to the loss of employees or closure of the production site is possible. According to case law, an import obstacle can also cause the impossibility of performance.
If there is no impossibility, the debtor’s obligation to perform shall in principle remain in force, unless he can assert a right to refuse performance in accordance with section 275 par. 2 German Civil Code. For this purpose, the performance must require an effort which, taking into account the content of the debt relationship and the precepts of good faith, is grossly disproportionate to the creditor’s interest in performance. In this context, possible fault of the debtor must also be taken into account. If the creditor has no use for the object owed, for example because of the COVID-19 pandemic, the creditor’s interest in performance is to be assessed as lower. This could lead to questions of delimitation to the disruption of the business basis.
A claim for damages due to impossibility (sections 280 par. 1, 283 s. 1 German Civil Code) or due to delayed performance (sections 280 par. 1 s. 2, 286 par. 4 German Civil Code) presupposes that the debtor is at fault. The debtor must demonstrate and prove that he has taken all reasonable steps to prevent the default or delay. Thus, for example, fault is to be denied in principle if the loss of production is due to an official order. However, the employer’s duty of care towards his employees can also justify closing the business on his own responsibility and, in exceptional cases, exclude fault. In this case, the care required in the course of business (section 276 s. 2 German Civil Code) must be observed within the framework of an appropriate risk assessment.
If compensation for damages is excluded, the question arises whether insurance companies compensate for any loss of income of COVID-19 affected companies. The decisive factor here should be whether business interruption or business failure insurance is involved. The latter usually take effect in the event of an interruption of the service and production processes due to the intervention of state authorities in the form of ordered closures of operations, so that any loss of earnings damages must be compensated by the insurance companies.
The COVID-19 pandemic has led to far-reaching disruptions in the implementation of contracts that could not be foreseen until the beginning of the year. Before examining the disturbance of the business basis, a preventive right to refuse performance and the right of withdrawal according to section 321 par. 1, 2 German Civil Code and section 323 par. 4 German Civil Code should be examined.
A disturbance of the basis of the business and a related adjustment of the contract is possible if the circumstances which have become the basis of the contract have changed seriously after the conclusion of the contract and the parties would not have concluded the contract or would have concluded it with a different content if they had foreseen this change. An adjustment of the contract can only be demanded by law if, taking into account all circumstances of the individual case, in particular the contractual or statutory distribution of risk, it is unreasonable to expect a part to adhere to the unchanged contract.
For this purpose, adherence to the contract must lead to an unacceptable result that is simply incompatible with law and justice. This requires a comprehensive balancing of interests taking into account the distribution of risks among the parties.
In the context of the current crisis, it will be more difficult to allocate risks because often both parties are affected by the consequences.
According to case law, section 313 German Civil Code also recognizes constellations in which both parties are equally affected and neither party should (fully) bear the risk. For example, the application of the disruption of the basis of business was affirmed when an event could not be held due to an official prohibition due to the Gulf War (see Higher Regional Court of Karlsruhe, judgement of 15 May 1992 – 15 U 297/9, NJW 1992, 3176, 3177 f.). The court denied any claims for remuneration, compensation and damages due to the loss of the basis of the transaction. The risk affecting both parties could not be imposed on one party.
Furthermore, the threat of the destruction of existence by external circumstances not attributable to the own risk atmosphere should also be a recognized case group. An imposition of risks on both parties equally is also discussed in the case of war damages and under the terms of “major business basis” and “shock of social existence”. This is understood to mean the shock of basic confidence in the existence of economic and social conditions.
If an adjustment of the contract is not successful, section 313 par. 3 German Civil Code provides for the possibility of termination in the case of continuing obligations. However, the adaptation of the contract remains the primary objective.
The provisions of the CISG may apply to current contracts. The CISG is generally applicable to cross-border sales of goods. Article 79 CISG provides that a party shall not be liable for the non-performance of one of its obligations if it proves that the non-performance is due to an impediment beyond its control and that it could not reasonably be expected to consider the impediment at the time of conclusion of the contract or to avoid or overcome the impediment or its consequences.
Typical examples of such circumstances are natural disasters, epidemics and government intervention. However, Article 79 CISG only regulates the lack of fault of the contracting party. The CISG does not provide any regulation on the continuation of the contract. According to the case law of the German Federal Court of Justice, the claims for performance remain valid. Article 79 CISG thus only excludes secondary claims, in particular those for damages.
It should be noted that each contract must be examined in detail. Premature terminations or the assertion of rights to refuse performance should be avoided. Rather, a dialogue between the contracting parties should be sought in order to ensure an agreed and joint solution and management of the COVID-19 pandemic.
COVID-19 Global Overview
Thompson Hine, the US-American partner firm of P+P Pöllath + Partners, has consolidated COVID-19 measures for a large number of countries. You can find the overview here.