Manufacturing and the Mittelstand

The Mittelstand and its legal agenda in 2026

The Mittelstand, Germany's owner-managed and family-owned medium-sized companies, forms the backbone of mechanical and plant engineering, components, tools, electrical equipment and many other manufacturing industries. Many of these companies are world market leaders in narrow niches, export a large share of their output and depend on technology and know-how built over decades.

Their legal agenda in 2026 is broad: robust supply and sales contracts in volatile markets, export control and sanctions compliance, protection of technology, works councils and collective agreements, financing, product compliance under new EU rules, and, for many, succession or the sale of the company. Unlike large groups, such companies usually handle these issues with small in-house teams and need advice that is practical and proportionate.

This page sets out the main legal topics for manufacturing companies and the Mittelstand and links to our detailed practice pages and insights. It is part of our sectors coverage and complements our page on automotive and mobility, where many Mittelstand suppliers operate.

Contracts for Mittelstand manufacturers

Mittelstand manufacturers sell machines, plants and components to industrial customers worldwide and buy materials, parts and services from a broad supplier base. Their standard terms of sale and purchase must withstand the strict review of standard business terms under §§ 305 to 310 of the Civil Code, which applies even between businesses: clauses excluding liability for gross negligence, capping liability below foreseeable typical damage or limiting warranty rights too far are void and replaced by the statutory rules. Plant engineering contracts add acceptance procedures, performance guarantees, liquidated damages, retention of title and security for payments, and often combine sales and work contract elements.

Long-term supply relationships have been tested by energy price shocks, raw material shortages and tariffs. Price adjustment clauses linked to transparent cost elements, force majeure and hardship clauses and clear allocation of customs and tariff costs are now standard requirements. International sales often fall under the UN Convention on Contracts for the International Sale of Goods unless excluded, and choice of law and dispute resolution clauses determine whether a claim against a foreign customer can be enforced. Our pages on commercial contracts and standard terms and distribution, agency and franchise explain the details.

After-sales, service and digital business models

Spare parts, maintenance and digital services are a growing share of revenue for many machine builders. Service level agreements, remote access to customer machines, software licences and data use rights need careful drafting. Under the EU Data Act, users of connected machines can access the data their machines generate, and connected products placed on the market after 12 September 2026 must make data accessible by design. For machine builders, this means revisiting business models built on exclusive access to machine data. See our page on the EU Data Act.

Joint ventures and international expansion

Expansion abroad often takes the form of sales subsidiaries, production joint ventures or acquisitions of foreign competitors. Joint ventures with local partners in Asia or the Americas require careful drafting of technology contribution, licence terms, management rights, deadlock and exit provisions, and must respect export control rules for technology transfer. Group structures with foreign subsidiaries raise transfer pricing and permanent establishment questions, and managing directors remain responsible for compliance across the group. A periodic review of group structures, intercompany agreements and powers of attorney prevents gaps that become visible only in a crisis or a sale.

Export control and sanctions for the Mittelstand

Export control is a core compliance topic for German engineering companies. Machine tools, sensors, lasers, pumps, valves, electronics and software are frequently listed as dual-use items in Annex I to the Dual-Use Regulation (Regulation (EU) 2021/821), and exporting them outside the EU requires a licence from the Federal Office for Economic Affairs and Export Control (BAFA). Catch-all clauses can require a licence even for unlisted items if the exporter knows or is informed that they are intended for weapons of mass destruction or military end use in embargoed countries. Unlicensed exports of listed goods are criminal offences under the Foreign Trade and Payments Act (§ 18 AWG).

Sanctions against Russia and Belarus add prohibitions on selling, supplying and transferring a wide range of industrial goods, technical assistance and services, and require contractual "no re-export to Russia" clauses for certain goods sold to third countries. Circumvention through intermediaries in third countries is a focus of enforcement. An internal compliance programme with screening of customers and end users, classification of products, licence management and training is the best protection. See our pages on export control and sanctions and our insight on dual-use export controls.

Protecting technology and know-how

Technology and know-how are the most valuable assets of many family-owned manufacturers. Under the Trade Secrets Act (Gesetz zum Schutz von Geschäftsgeheimnissen, GeschGehG), information is protected as a trade secret only if it has commercial value because it is secret and the holder has taken reasonable confidentiality measures (§ 2 no. 1 GeschGehG). Measures include access restrictions, confidentiality agreements with employees, suppliers and customers, marking, IT security and documentation. Reverse engineering of lawfully obtained products is permitted unless excluded by contract, so supply and licence agreements should address it expressly.

Patents and utility models protect technical inventions; the utility model is a fast and inexpensive German right without substantive examination that is popular with medium-sized companies. Inventions by employees are governed by the Employee Inventions Act, which requires notification, claiming and remuneration. With the Unified Patent Court operating since 2023, companies must decide whether to keep their European patents in the new system or opt them out. See our pages on IP and patents and our insight on trade secrets protection.

Employment, works councils and co-determination

Most medium-sized manufacturers have a works council, which can be elected in establishments with at least five permanent employees entitled to vote (§ 1 BetrVG). The works council has co-determination rights on working time, overtime, remuneration principles, technical monitoring devices and health protection, and must be consulted on operational changes such as relocations or closures in undertakings with more than 20 employees entitled to vote. Many companies are bound by collective agreements of the metal and electrical industry, either through membership of an employers' association or by reference in employment contracts.

Board-level participation depends on size: companies with more than 500 employees must have a supervisory board with one third employee representatives under the One-Third Participation Act, and those with more than 2,000 employees a parity co-determined board under the Co-determination Act. Family companies often use the GmbH & Co. KG, in which the limited partnership itself is not subject to the One-Third Participation Act; whether the Co-determination Act attributes employees to the general partner depends on the structure.

Skilled labour shortages make immigration of skilled workers an important topic: the EU Blue Card and the skilled immigration rules allow recruitment from outside the EU, but visa procedures take time and should be planned together with the employment contract, recognition of qualifications and relocation support. See our pages on works councils and board-level co-determination.

Succession and the sale of Mittelstand companies

Many owner-managed companies face a generational transition. Owners can pass the company to the next generation, appoint external management while the family remains shareholder, sell to a strategic buyer or financial investor, or combine these options. Each route requires planning years ahead.

For transfers within the family, the inheritance and gift tax relief for business assets in §§ 13a and 13b of the Inheritance and Gift Tax Act can exempt 85% or, under stricter conditions, 100% of qualifying business assets, provided wage sum and retention requirements are met; administrative assets such as let property and excess cash are not relieved. Family constitutions, shareholder agreements and articles of association should regulate entry, exit, voting and dispute resolution.

For a sale, preparation makes the company transferable: clean corporate records, documented IP and contracts, a vendor due diligence and a clear story for buyers. The transfer of GmbH shares requires notarisation (§ 15 GmbHG). Sellers aged 55 or older may claim a one-off allowance and a reduced tax rate on business sale gains under §§ 16 and 34 of the Income Tax Act.

Buyers from outside the EU must consider investment screening, which can apply to engineering targets active in critical technologies. Earn-outs, vendor loans and reinvestment by the seller are common in Mittelstand deals and need careful drafting to avoid later disputes. See our pages on succession planning and mergers and acquisitions and our insight on selling a Mittelstand company.

Governance in family companies

Family companies need governance that works across generations. Advisory boards with external members can provide expertise and mediate between family branches; shareholder agreements and articles should regulate transfer restrictions, pre-emption rights, valuation clauses for leaving shareholders and the qualifications required for family members in management. Disputes between family shareholders are among the most damaging events for a company, so arbitration clauses and clear exclusion and withdrawal rules are worth negotiating while relations are good. See our insight on family business governance.

Financing, restructuring and product compliance

Financing of family companies traditionally relies on house banks, promotional loans from KfW and the state development banks, and increasingly on Schuldschein loans, private debt funds and leasing and factoring. Lenders take security over assets and receivables and impose financial covenants, which need monitoring in a downturn. Where a company comes under pressure, management must observe early-warning and crisis duties under the StaRUG and the insolvency filing deadlines in § 15a InsO; the StaRUG framework and self-administration allow restructuring while preserving the family's influence in suitable cases. See our page on restructuring and insolvency.

Energy costs have become a strategic issue for energy-intensive production. Relief schemes, special network charges, self-generation through rooftop solar or combined heat and power, and long-term power purchase agreements can reduce costs, but each has legal conditions. Investment in decarbonisation can be supported by federal funding programmes, whose conditions and repayment obligations must be checked before applying.

On the product side, the Machinery Regulation applies from 20 January 2027 and replaces the Machinery Directive, with new requirements for machine-learning safety functions, cybersecurity and digital instructions, and the Cyber Resilience Act applies to products with digital elements, with reporting duties since 11 September 2026. The new product liability regime for products placed on the market after 9 December 2026 includes software and cybersecurity defects. See our page on product liability and product compliance.

Compliance with proportionate effort

Medium-sized companies are increasingly reached by rules designed for large groups: supply chain due diligence passed on by customers, sustainability data requests from banks and customers, whistleblowing channels for employers with at least 50 employees, cybersecurity obligations under the NIS2-based Federal Office for Information Security Act for companies in covered sectors above the size thresholds, and anti-corruption and competition law compliance. A compliance management system does not need to be complex, but it should identify the relevant risks, assign responsibilities, document decisions and be reviewed regularly. Managing directors who neglect organisation and supervision risk personal liability and corporate fines. See our page on compliance management systems.

Disputes

Commercial disputes with customers and suppliers, often abroad, are a regular part of business for exporting manufacturers. Arbitration is common in international plant contracts because awards are easier to enforce than court judgments in many countries under the New York Convention. In Germany, the new Commercial Courts at Higher Regional Courts and English-language proceedings offer an alternative for larger disputes from EUR 500,000.

How TRW & Co helps

We advise Mittelstand manufacturers, family shareholders and investors on the legal issues of their business. We draft standard terms and supply, plant engineering and distribution contracts, set up export control and sanctions compliance, protect technology and know-how, and advise on works council matters, collective agreements and co-determination. We support succession planning, family governance and company sales and acquisitions, financing and restructurings, and product compliance under the Machinery Regulation and the Cyber Resilience Act. We represent clients in commercial disputes in Germany and internationally. To discuss your matter, please contact us. This page provides general information, not legal advice.