Case Study: Divestiture in Europe

Divesting a business unit or subsidiary in Europe is a structured legal process that requires careful sequencing of corporate, regulatory, and contractual steps. Done correctly, a divestiture unlocks capital, reduces operational complexity, and repositions a group for growth. Done incorrectly, it triggers regulatory sanctions, tax exposure, and post-closing litigation that can erode the entire deal value. This article walks through the legal mechanics of a European divestiture - from deal structuring and carve-out preparation through regulatory clearance, closing, and post-closing risk management - drawing on the legal frameworks of Germany, the Netherlands, France, and EU-level rules that govern most significant transactions on the continent.

A divestiture is a transaction in which a corporate group separates and transfers a business unit, subsidiary, or asset portfolio to a third party or to the market. The term covers several distinct legal structures, and choosing the wrong one is one of the most expensive mistakes an international seller can make.

The three principal structures used in European divestitures are:

• Share deal - the seller transfers equity in a legal entity holding the target business
• Asset deal - the seller transfers specific assets, contracts, and liabilities directly
• Carve-out followed by a share deal - the seller first restructures the business into a standalone entity, then sells the equity

Each structure carries a different legal, tax, and operational profile. A share deal transfers the entire legal entity, including hidden liabilities, historical tax exposure, and pending litigation. An asset deal allows the seller to define precisely what transfers and what stays, but it requires individual assignment of contracts, licences, and employment relationships - a process that is operationally heavy and, in some jurisdictions, requires third-party consents.

In Germany, the transfer of assets as part of a business (Unternehmenskauf im Wege des Asset Deals) is governed by the German Civil Code (Bürgerliches Gesetzbuch, BGB), particularly the provisions on assignment of claims under Section 398 BGB and the transfer of obligations under Section 414 BGB. The automatic transfer of employment relationships when a business or business unit is transferred is mandated by Section 613a BGB, which gives employees the right to object to the transfer within one month - a provision that frequently surprises foreign sellers unfamiliar with German labour law.

In the Netherlands, a share deal is executed by notarial deed before a Dutch civil-law notary (notaris), as required by Article 2:196 of the Dutch Civil Code (Burgerlijk Wetboek). The notarial requirement is non-negotiable and adds a procedural step that must be planned into the transaction timeline. Asset deals in the Netherlands follow general contract law principles but require specific formalities for the transfer of registered assets such as real property and intellectual property rights.

In France, the cession de fonds de commerce (transfer of a business as a going concern) is a distinct legal concept governed by Articles L141-1 et seq. of the French Commercial Code (Code de commerce). It requires mandatory disclosure of specific information to the buyer and triggers a 10-day opposition period for creditors. French employment law, particularly the provisions of Article L1224-1 of the French Labour Code (Code du travail), mandates the automatic transfer of employment contracts when a business unit transfers - mirroring the German Section 613a BGB but with its own procedural requirements.

A carve-out is the preparatory phase in which the seller isolates the target business from the broader group before transferring it to a buyer. It is the most legally intensive phase of a divestiture and the one most frequently underestimated by sellers.

A carve-out typically involves:

• Transferring assets, contracts, and employees from the parent or sibling entities into a newly created or existing legal vehicle
• Establishing standalone operational infrastructure - IT systems, treasury, HR, and compliance functions
• Negotiating transitional service agreements (TSAs) under which the seller continues to provide services to the carved-out entity for a defined period post-closing

The legal risk in a carve-out is concentrated in three areas. First, intercompany agreements that were never formally documented must be reconstructed or terminated. Many European subsidiaries operate on the basis of informal group arrangements - shared cash pools, undocumented IP licences, and verbal service arrangements - that have no legal standing once the entity is separated. Second, third-party contracts often contain change-of-control clauses or assignment restrictions that require counterparty consent before the carve-out or sale can proceed. Failing to identify these provisions in advance can result in the automatic termination of key customer or supplier agreements at closing. Third, regulatory licences and permits are frequently non-transferable. In regulated industries - financial services, pharmaceuticals, energy - the carved-out entity may need to apply for new licences, a process that can take months and must be sequenced before the transaction closes.

In Germany, the spin-off of a business unit into a new entity is governed by the German Transformation Act (Umwandlungsgesetz, UmwG). A spin-off (Abspaltung) under Section 123 UmwG requires a notarised spin-off agreement, shareholder approval, and registration with the commercial register (Handelsregister). The process typically takes three to four months from initiation to registration, and creditors have a six-month window after registration to demand security for their claims under Section 22 UmwG.

In the Netherlands, a legal demerger (juridische splitsing) is governed by Articles 2:334a et seq. of the Dutch Civil Code. A partial demerger (afsplitsing) allows a company to transfer a defined portion of its assets and liabilities to a new or existing entity while the original company continues to exist. The process requires a notarial deed, a demerger proposal published in a national newspaper or the Dutch State Gazette (Staatscourant), and a one-month creditor opposition period.

A common mistake made by international sellers is to underestimate the time required for a carve-out. Sellers frequently assume the carve-out can be completed in parallel with the sale process. In practice, regulatory registrations, creditor opposition periods, and third-party consent processes mean the carve-out must often begin six to twelve months before the anticipated closing date.

To receive a checklist for carve-out preparation in a European divestiture, send a request to info@vlolawfirm.com

Most significant European divestitures require regulatory clearance before closing. The two primary regulatory frameworks are EU merger control and national competition law, but sector-specific approvals can be equally important and are frequently overlooked.

EU merger control is governed by Council Regulation (EC) No 139/2004 (the EU Merger Regulation). A transaction has an EU dimension - and must be notified to the European Commission rather than national authorities - if the combined worldwide turnover of the parties exceeds EUR 5 billion and the EU-wide turnover of each of at least two parties exceeds EUR 250 million, subject to the two-thirds rule. Below these thresholds, national merger control regimes apply. Germany, France, the Netherlands, Austria, and most other EU member states have their own merger control regimes with separate thresholds and procedures.

In Germany, merger control is administered by the Bundeskartellamt (Federal Cartel Office). Under Section 35 of the Act Against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen, GWB), a transaction must be notified if the combined worldwide turnover of all parties exceeds EUR 500 million and the German turnover of each of at least two parties exceeds EUR 25 million. The Bundeskartellamt has a Phase I review period of one month and a Phase II period of four months from notification. Closing before clearance is prohibited and can result in fines of up to 10% of the group';s annual worldwide turnover.

In France, merger control is administered by the Autorité de la concurrence. The thresholds under Article L430-2 of the French Commercial Code are a combined worldwide turnover exceeding EUR 150 million and a French turnover of each of at least two parties exceeding EUR 50 million. Phase I takes 25 working days and Phase II takes 65 working days, with possible extensions.

Beyond competition law, sector-specific approvals are required in regulated industries. In financial services, the acquisition of a qualifying holding in a credit institution or investment firm requires prior approval from the relevant national competent authority - in Germany, the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); in France, the Autorité de contrôle prudentiel et de résolution (ACPR); in the Netherlands, De Nederlandsche Bank (DNB). The approval process under the EU Capital Requirements Directive (Directive 2013/36/EU) can take up to 60 working days and requires the buyer to demonstrate fitness and propriety.

A non-obvious risk in European divestitures is the foreign direct investment (FDI) screening regime. Most EU member states now operate FDI screening mechanisms under the framework of EU Regulation 2019/452. In Germany, the Foreign Trade and Payments Act (Außenwirtschaftsgesetz, AWG) and the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung, AWV) empower the Federal Ministry for Economic Affairs and Climate Action to review and potentially prohibit acquisitions of German companies by non-EU investors in sensitive sectors. The review period can extend to several months, and the seller bears the risk of deal uncertainty during this period.

In a European divestiture, the seller';s legal exposure is shaped primarily by the representations and warranties given in the sale and purchase agreement (SPA) and by the due diligence process that precedes it.

Representations and warranties (R&W) are contractual statements by the seller about the condition of the target business. If a warranty proves false, the buyer has a claim for breach of warranty, typically measured as the difference between the actual value of the business and the value it would have had if the warranty had been true. In Germany, the liability regime for breach of warranty in an SPA is governed by the general provisions of the BGB on contractual liability, as modified by the parties'; agreement. German courts have consistently held that sellers cannot disclaim liability for matters disclosed in the data room unless the disclosure is sufficiently specific to put the buyer on notice of the exact risk.

In France, the seller';s liability for latent defects (vices cachés) under Articles 1641 et seq. of the French Civil Code (Code civil) applies to asset deals and can survive contractual limitation clauses in certain circumstances. For share deals, the French courts apply the principle of garantie des vices cachés less directly, but sellers remain exposed to claims based on dol (fraudulent misrepresentation) under Article 1137 of the Code civil, which cannot be contractually excluded.

Warranty and indemnity (W&I) insurance has become a standard tool in European M&A transactions, including divestitures. A W&I policy transfers the buyer';s warranty claims from the seller to an insurer, allowing the seller to achieve a clean exit. The policy is typically placed by the buyer, with premiums in the range of 1-2% of the insured limit, and the insured limit is usually set at 20-30% of the enterprise value. W&I insurance does not cover known risks, fraud, or matters specifically excluded from the policy, so the scope of coverage must be carefully negotiated.

The due diligence process in a European divestiture typically runs for four to eight weeks and covers legal, financial, tax, and operational workstreams. From the seller';s perspective, the key risk is the disclosure letter - the document in which the seller qualifies its warranties by disclosing specific facts and circumstances. A poorly drafted disclosure letter leaves the seller exposed to warranty claims on matters it believed were disclosed. A common mistake is to treat the disclosure letter as a formality and to delegate its preparation to junior team members. In practice, the disclosure letter is one of the most consequential documents in the transaction.

Practical scenario one: a German industrial group divests a non-core manufacturing subsidiary to a private equity buyer. The seller gives standard warranties on the subsidiary';s financial statements, material contracts, and environmental compliance. Post-closing, the buyer discovers an undisclosed environmental liability relating to soil contamination at the subsidiary';s main production site. The seller';s exposure depends on whether the contamination was known at signing, whether it was adequately disclosed in the disclosure letter, and whether the SPA contains a specific environmental indemnity. If the seller failed to commission a Phase II environmental survey before signing, the exposure can be substantial.

Practical scenario two: a French technology company divests its software division to a US strategic buyer. The carve-out involves transferring IP licences, customer contracts, and a team of 40 developers. The buyer discovers post-closing that several key customer contracts contained change-of-control clauses that were triggered by the transaction and that three major customers have exercised their termination rights. The seller';s liability depends on whether the warranty on material contracts covered change-of-control provisions and whether the disclosure letter adequately flagged the risk.

To receive a checklist for managing seller liability in a European divestiture, send a request to info@vlolawfirm.com

The closing of a European divestiture involves the simultaneous or sequential execution of a series of legal acts, the transfer of consideration, and the handover of operational control. The mechanics differ by jurisdiction and deal structure.

In a German share deal, closing requires the execution of a notarised share transfer agreement (notarieller Abtretungsvertrag) before a German notary. The notary verifies the identity of the parties, confirms the corporate authorisations, and certifies the transfer. The notarial requirement applies to GmbH (Gesellschaft mit beschränkter Haftung) share transfers under Section 15(3) GmbH-Gesetz (GmbHG). For AG (Aktiengesellschaft) share transfers, the shares are typically held in a securities account and transferred by book entry, without a notarial requirement.

In the Netherlands, as noted above, the transfer of shares in a BV (Besloten Vennootschap) requires a notarial deed of transfer before a Dutch notaris. The notaris also verifies that no statutory or contractual pre-emption rights or transfer restrictions apply. The deed is executed in Dutch, and foreign-language versions are typically provided alongside for the parties'; reference.

Post-closing price adjustments are a standard feature of European divestitures. The two principal mechanisms are:

• Completion accounts - the purchase price is adjusted after closing based on the actual net working capital, net debt, and cash position of the target at the closing date, as determined by post-closing accounts
• Locked-box - the purchase price is fixed by reference to a historical balance sheet (the locked-box date), and the seller gives undertakings that no value has leaked from the business between the locked-box date and closing

The locked-box mechanism is increasingly preferred in European seller-friendly markets because it provides price certainty and eliminates post-closing accounting disputes. However, it requires the seller to give robust leakage undertakings and the buyer to conduct thorough financial due diligence on the locked-box accounts.

Transitional service agreements (TSAs) are almost always required in carve-out divestitures. A TSA is a contract under which the seller continues to provide defined services - IT, finance, HR, logistics - to the divested business for a period of typically six to twenty-four months after closing, while the buyer builds or acquires standalone capabilities. TSAs are frequently underestimated as a source of post-closing disputes. The services must be defined with precision; vague descriptions of "IT support" or "finance services" invariably lead to disagreements about scope, service levels, and pricing. A well-drafted TSA includes detailed service schedules, service level agreements, escalation procedures, and clear termination mechanics.

Practical scenario three: a Dutch holding company divests a logistics subsidiary to a pan-European infrastructure fund. The parties agree on a locked-box mechanism with a locked-box date six weeks before signing. Between the locked-box date and closing, the subsidiary';s management team approves a bonus payment to senior employees. The buyer argues this constitutes leakage under the SPA. The outcome depends on whether the bonus was within the ordinary course of business carve-out in the leakage definition and whether the seller disclosed the bonus in the disclosure letter. Disputes of this kind are common and can be avoided by precise drafting of the leakage definition and careful monitoring of the target';s activities in the locked-box period.

Post-closing disputes in European divestitures arise most frequently from three sources: warranty claims, price adjustment disputes, and TSA disagreements. Each has a different legal character and a different dispute resolution pathway.

Warranty claims under a European SPA are typically subject to a limitation period of twelve to twenty-four months for general warranties and three to seven years for fundamental warranties (title, capacity, and tax). The SPA will usually specify a minimum claim threshold (de minimis), an aggregate threshold below which no claim can be brought (basket or deductible), and a maximum liability cap. In Germany, the general limitation period for contractual claims under Section 195 BGB is three years, running from the end of the year in which the claim arose and the claimant became aware of the circumstances giving rise to it. Parties regularly contract out of this default period in the SPA.

Completion accounts disputes - where the parties disagree on the post-closing calculation of net working capital or net debt - are typically referred to an independent expert (an accounting firm) rather than to a court or arbitral tribunal. The independent expert';s determination is usually expressed to be final and binding, subject only to manifest error. The process typically takes two to four months and costs in the range of low to mid six figures in professional fees.

International arbitration is the preferred dispute resolution mechanism for cross-border European divestitures. The ICC International Court of Arbitration, the London Court of International Arbitration (LCIA), and the Netherlands Arbitration Institute (NAI) are the most commonly chosen institutions. Arbitration offers confidentiality, enforceability under the New York Convention, and the ability to appoint arbitrators with specialist M&A expertise. The cost of ICC arbitration in a mid-market divestiture dispute typically starts from the low six figures in arbitrator fees and administrative costs, with legal fees adding significantly to the total.

Many underappreciate the risk of inaction in post-closing disputes. Warranty claims are subject to strict notice requirements under most European SPAs - typically requiring written notice within a defined period of becoming aware of the potential claim, often 20 to 30 business days. Missing the notice deadline extinguishes the claim entirely, regardless of its merits. International buyers unfamiliar with European SPA conventions frequently miss these deadlines because they route the notice through internal legal teams that are not familiar with the contractual requirements.

Strategic alternatives to a full divestiture deserve consideration before a transaction is launched. A partial divestiture - selling a minority stake while retaining control - can achieve liquidity objectives without the operational disruption of a full separation. A joint venture structure can allow the seller to retain upside participation while transferring day-to-day management. A management buyout (MBO) can be faster to execute than a third-party sale because the buyer has existing knowledge of the business, reducing due diligence time and warranty exposure. Each alternative has its own legal and tax profile, and the choice between them should be driven by the seller';s objectives, the target';s operational dependencies, and the regulatory environment.

The business economics of a European divestiture are significant. Legal fees for a mid-market transaction (enterprise value of EUR 50-200 million) typically start from the low six figures and can reach the mid six figures for complex carve-outs with multi-jurisdictional regulatory filings. Investment banking fees, if applicable, add a further layer of cost. Against these costs, the seller must weigh the strategic value of the divestiture - capital release, operational simplification, and management focus - and the cost of delay or inaction, which can include continued operational losses in a non-core business and opportunity cost of management attention.

A non-obvious risk is the impact of the divestiture on the seller';s remaining business. Intercompany arrangements that were previously invisible - shared IT infrastructure, group insurance policies, consolidated banking facilities - become visible and costly when the divested entity is separated. Sellers who fail to map these dependencies before launching the process frequently face unexpected costs and operational disruptions post-closing.

What is the most significant legal risk for a seller in a European divestiture?

The most significant legal risk is undisclosed liability in the target business that surfaces post-closing as a warranty claim. This risk is managed through thorough pre-sale due diligence, a carefully drafted disclosure letter, and W&I insurance where appropriate. Sellers who conduct a vendor due diligence exercise - commissioning their own legal, financial, and tax reports on the target before launching the sale process - are better positioned to identify and manage this risk. The disclosure letter must be treated as a primary legal document, not an administrative formality. Inadequate disclosure is the single most common cause of post-closing warranty disputes in European M&A.

How long does a European divestiture typically take, and what drives the timeline?

A straightforward share deal with no regulatory filings and no carve-out requirement can close in two to three months from signing of the letter of intent to closing. A complex carve-out with multi-jurisdictional merger control filings and sector-specific regulatory approvals can take twelve to eighteen months or longer. The principal drivers of timeline are the complexity of the carve-out, the number and complexity of regulatory filings, the availability of management to support the due diligence process, and the speed of negotiation of the SPA and ancillary documents. Sellers who underestimate the timeline frequently face pressure to close on unfavourable terms or to grant price reductions in exchange for expedited closing.

When should a seller consider alternatives to a full divestiture?

A seller should consider alternatives when the target business has significant operational dependencies on the seller';s remaining group that cannot be resolved within a reasonable TSA period, when the regulatory environment makes a full transfer difficult or time-consuming, or when the seller wishes to retain upside participation in the target';s future performance. A partial sale, joint venture, or MBO may achieve the seller';s core objectives - capital release, management focus, risk reduction - with less operational disruption and lower transaction costs. The choice between a full divestiture and an alternative structure should be made at the outset of the process, not after the sale process has been launched, because changing structure mid-process is costly and damages credibility with potential buyers.

A European divestiture is a multi-layered legal process that spans corporate restructuring, regulatory compliance, contractual negotiation, and post-closing risk management. The legal frameworks of Germany, the Netherlands, and France each impose specific procedural requirements - notarial formalities, creditor opposition periods, employment transfer rules - that must be integrated into the transaction timeline from the outset. Regulatory clearance, particularly merger control and FDI screening, adds further complexity and timeline risk. Sellers who invest in thorough preparation - carve-out planning, vendor due diligence, and precise SPA drafting - consistently achieve better outcomes than those who treat the legal process as a secondary concern.

To receive a checklist for structuring and executing a divestiture in Europe, send a request to info@vlolawfirm.com

Our law firm VLO Law Firms has experience supporting clients across European jurisdictions on divestiture and M&A matters. We can assist with carve-out structuring, regulatory filings, SPA negotiation, disclosure letter preparation, and post-closing dispute management. To receive a consultation, contact: info@vlolawfirm.com