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/recognition
Banking 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
Recognized by 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, Studio Legale Associato
Padua, Rome
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 • Commercial law
• Financial services/Banking • Intellectual property
• Technology & • Competition law
Telecommunications
• Construction and real estate
• IT outsourcing
• Life Sciences
• Taxation
• Litigation/Arbitration
• Employment
• Visa, staff benefits &
related services

Examples of Advice Provided to
Indian Companies
• Infosys Technologies • MindTree
• TCS • Reliance Industries Ltd.
• Mahindra Satyam Services • Patni
• Wipro • MPHASIS
• HCL • Hinduja Group
• Tata Motors • ITC Infotech
• Aricent • Larsen & Toubro

Recent Quotes
Information Technology
Particular strengths: Strong India expertise.
Often recommended solicitors: Ulrich Bäumer,
JUVE, November 2009
Another extraordinary success is based on the Indian
Group led by IT partner 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 Directives
Horizontal and direct effect
• National Law
• The European Courts and National Courts
• Dispute Resolution
Commonly used venues, choice of law
Arbitration - pros & cons

4. Law of Associations
Branch 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 GbR -> BGB company
(Gesellschaft mit beschränkter Haftung) (Gesellschaft bürgerlichen Rechts)
OHG -> general commercial
AG -> stock corporation
partnership
(Aktiengesellschaft)
(Ordentliche Handelsgesellschaft)
e.V. -> registered association KG -> limited partnership
(eingetragener Verein) (Kommanditgesellschaft)

Differences in the Law of
Associations
Capital Company Partnership
• Limited liability • Mainly unlimited liability
• Not dependent on members • Depended on members
• One man association possible • No one-man association
• Legal capacity • 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 shareholder
Unlimited 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 issued
par 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. KG
The 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
60
25
20
10 11 14
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
2 Do not know
27 No activities planned in next 12 month
26
Activities planned in next 12 months
in % Started pilot projects
Smaller projects live
18 17 Larger projects live
10
• 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

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. Warranty governed by
2. Liability 1. statute
2. EVB-IT (in
3. Acceptance
Germany)
4. Delay 3. industry standards
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 agree
contractually to less than 24 months of warranty
Industry standard in Germany: 12 to 18 months

1. Warranty
Warranty is … Maintenance is …
… free of charge … billable

1. Warranty
Warranty is … Guaranty
"Gewährleistung" "Garantie"

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 December
without 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
Consequential damage caused by a defect &
Simple negligence Gross negligence Intent Indirect damage
û û û û
Unlimited
û
Liability
û
Limited Liability
Excluded
Liability
û û
û = Contract rsp. industry ? standard Limit: 1 to 3 times contract value
û = 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
Germany
Working 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
Social
% paid by contribution Employers'
Insurance % total
Employer assessment max. costs
ceiling
Pension 19,9 % 9,95 % EUR 537,30 p.m.
EUR 64,800 p.a.
Unemployment 2,8 % 1,4 % (EUR 5,400 EUR 75,60 p.m.
p.m.)
Health Insurance 15,5 % 7,3 % EUR 268,28 p.m.
EUR 44,100
p.a.
Nursing Care 1,95 % 0,975 % (EUR 3,675 EUR 35,83 p.m.
(plus 0,25 %
p.m.)
for
childless
employees)

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 Surcharge
5.5 % 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 Germany
unless 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 returns
corporate Tax, Income Tax, Trade Tax, VAT: yearly
• Preliminary returns
VAT: monthly
• Tax prepayments
• Wage Tax
• Social security contributions
• Tax advisor

8. German Court System

The Court System –
Federal Constitutional Court
Federal Federal Federal Federal Federal
Labour Court of Social Administrative Finance Court
Court Justice Federal Court Court
Patents
Court
Higher Higher Regional Higher Higher
Labour Court Social Court Administrative
Court Court
Regional Court
Social
Court Administrative Court
Labour Local Court
Finance
Court
Court
Civil Criminal
Law Law
Labour Patent/Trademark Social Administrative Tax
Law Law Security Law Law Law

Civil and Criminal Court
Local Courts: 663
Regional Courts: 116
Higher Regional Courts: 24
Total Number of Courts 1131
(not restricted to civil and criminal courts)

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
Ulrich.Baeumer@osborneclarke.com