General Procedure for M&A Transactions in Germany contents The life of an M&A transaction at a glance 4 Current trends of the German M&A market 5 Managing risks in M&A transactions 6 Types of acquisitions 7 M&A transaction at a glance 8 The life of an M&A transaction: Preparatory phase 9 The life of an M&A transaction: Pre due diligence phase 10 Deep dive: Confidentiality / non-disclosure agreement 11 Deep dive: Release and reliance letters 12 The life of an M&A transaction: Due diligence phase 13 Deep dive: Due diligence 14 Deep dive: Letter of intent 15 The life of an M&A transaction: Negotiation & signing phase 16 Deep dive: SPA – deal structure, MAC and purchase price 17 Purchase price in SPAs 18 Deep dive: SPA – representations and warranties 20 Deep dive: SPA – remedies / limitation of liabilities 22 Deep dive: SPA – indemnities and closing conditions 23 Deep dive: SPA – covenants and other provisions 24 The life of an M&A transaction: Closing and post-closing Deep dive: Post-closing 25 26 The life of an M&A transaction at a glance The M&A process is not a “one size fits all” process and the amount of work and the time required for the individual steps may vary substantially. Also the level of involvement of different advisors (legal, financial, strategic etc) depends on the phase of the transaction and on the particular deal. Furthermore, the steps to be taken by the companies involved depend on whether one is acting as a buyer or as a seller and whether there is a structured auction process or a one-to-one sale. The preparatory phase of an M&A Transaction involves, inter alia, the selection of a potential target or a potential buyer, the evaluation of different options and strategies, the analysis of possible synergies, the selection of teams of advisors, informal talks with potential counterparts (often facilitated by the investment banks involved). The preparatory phase also encompasses a pre-due diligence phase, with preliminary structuring considerations, and, on the seller side, often also the preparation of an information memorandum, the setup of a data room and potentially also a review of the target through a vendor due diligence exercise. In this phase, there may also be some preliminary negotiations between the parties, which usually lead to the conclusion of a confidentiality agreement. The next step is the due diligence phase, during which the potential purchaser may conduct an investigation of the target business so that a decision can be made whether (and under which conditions) or not to proceed with the acquisition. The findings are generally summarised in a due diligence report. Although the seller sometimes may have undertaken a vendor due diligence and it may release its report to the buyer, usually within the parameters set forth by release and reliance letters, most due diligence processes are conducted from a buyer’s perspective. The due diligence phase also encompasses a Q&A process and management and expert meetings and it generally ends with the submission of a final bid. After the submission of the final bid, the seller and the prospective buyer enter into a negotiation phase, which may involve two or more bidders for a certain time. The negotiation phase ends with the signing of the sale and purchase agreements (SPA). After the signing, the preparation for closing begins, which generally includes collecting the necessary statutory and transaction-specific approvals. Upon closing, there is often some restructuring work to do, which finally leads to the “integration” of buyer and target. 4 Current trends of the German M&A market New challenges n Valuation n Financing n Deliverability Material Adverse Change (MAC) Clauses / Break-up fees n Sellers continue to reject MAC Clauses in favour of deal certainty n Risk management n Break-up fees are still an exception Auction processes are less rigorously executed n Greater opportunities for preemptive bids Bridging the gap in valuation n “Cherry-picking” assets, leaving behind difficult-to-value / onerous assets thereby eliminating valuation challenges n Late entrants to a sale process are possible n Bidders that act quickly and deliver certainty have a clear advantage n “Asset carve-out light”: Acquisition of specific intellectual property, R&D, distribution and customers, leaving behind assets, such as the production site; seller engages in interim manufacturing until the buyer’s production is fully operational Joint ventures / minority stakes n Increased interest in joint ventures n Increased interest in taking a minority stake n Family-controlled companies are willing to take on minority investors Regulatory challenges n Sellers have become more wary of execution risks n Strategic buyers volunteer to be responsible for the antitrust analysis and offer to provide undertakings to make necessary divestitures early in the process n Bidders that are believed to bring material antitrust risks are excluded n Earn-out clauses to bridge the valuation gap, however many buyers and sellers are wary of the challenges of such clauses 5 Managing risks in M&A transactions As the requirements on corporate governance and compliance grow, the risks associated with non-compliance issues increase. In particular, buyers have to be aware that M&A can be risky and they must engage in all necessary measures and steps to reduce and manage potential risks. Mapping & Assessing Covering & Preventing Addressing & Remedying Quality of Information Related Party Transactions Complex Ownership Structures Criminal behaviour Legal / IP / Regulatory Tax Exposures Weak Internal Controls / Systems Local Market / Culture Corporate Governance n Conduct an appropriate level of due diligence in connection with transactions n Incorporate a risk-based level of compliance due diligence (risk profile, key personnel interviews, review) n Identify, address and resolve “red flags” n Adjust transaction structure if necessary n Obtain robust representation, warranties, indemnities and covenants; ensure appropriate remedies in case of breaches and provide for adequate substance (e.g. escrow) n Ensure any prior misconduct shall be remedied post-transaction n Implement any required policies, procedures and internal controls to ensure strong corporate governance and compliance 6 Types of acquisitions Friendly Takeovers Hostile One potential buyer Classical acquisition Auction Private Equity Financial Buy-Outs Industrial Financial Venture Capital Industrial Business Angels 7 M&A transaction at a glance 8 Preparatory phase Decision and definition of scope Looking for targets / buyers and approaching parties Pre-due diligence phase Draft teaser and information memorandum; set up data room; vendor DD Confidentiality agreements Release information memorandum Release vendor DD reports on the basis of release (and reliance) letter Due diligence phase 1st phase due diligence Letter of intent Q&As / management meetings / confirmatory DD Binding offer / final bid Negotiation & signing SPA, in particular reps & warranties indemnities, purchase price Parallel agreements may be needed (eg. shareholders agreement, etc.) Signing: Notarial recording may be necessary for signing Pre-closing, closing & post-closing Fulfilment of closing conditions Closing: Transfer of shares / assets Post-closing restructuring Post-signing: prepare filings / prepare transfers / obtain funds Post-closing convenants The life of an M&A transaction: Preparatory phase Preparatory phase Decision and definition of scope Looking for targets / buyers and approaching parties n M&A processes are generally steered by the M&A or Business Development department n Involvement of investment bank / strategic advisors / consultants n Legal advisors are generally not involved (at least not in-depth) in the preparatory phase Seller side Buyer side n Decision to sell and preparation of the transaction n Evaluating the business objectives – decision to buy n Choosing advisors and deciding which type of deal is envisaged (asset or share deal) n Choosing advisors n Identifying and approaching potential buyers to be invited for the process (if transaction is not buyer-driven) n Identifying and approaching potential targets (if transaction is not seller-driven) 9 The life of an M&A transaction: Pre-due diligence phase Pre-due diligence phase Draft teaser and information memorandum; set up data room; vendor DD Confidentiality agreements Release information memorandum Release / reliance letter for vendor due diligence report n Latest point in time to involve legal advisors n The steps taken in the pre due diligence phase depend to a great extent on whether the process is seller-driven or buyer-driven and whether the M&A transaction takes place as a one-to-one transaction or is carried out in the form of a structured auction n Seller-driven processes require more preparation and demand a higher degree of legal advice as of the start Seller side n Prepare teaser and information memorandum, generally with the assistance of an investment bank; assistance of legal advisors advisable to avoid legal risks n Set up data room (and index) – process is usually lengthy; legal and financial advisors are usually involved n Decide on the form of data room; trend: electronic data room coordinated either by investment bank or law firm n If appropriate, set up due diligence team and carry out vendor due diligence n Decide which documents are going to be released to buyer(s) – in which form (blackening of confidential issues) and in which due diligence phase; establish ‘red’ data room n Prepare confidentiality agreements n Prepare process letter and data room rules for due diligence n Release information memorandum and data room index n If appropriate, release vendor due diligence report on the basis of a release (and potentially also reliance) letter Buyer side n Sign confidentiality agreements n Review teaser and information memorandum as a first basis to decide whether to proceed with the transaction n Set up due diligence team n Determine material thresholds for upcoming due diligence exercise n Buyer may submit to seller a due diligence check list (or request list), listing the documents which it would ideally like to review in the due diligence phase. The submission of such request lists prior to the due diligence exercise is however becoming more rare 10 Deep dive: Confidentiality / non-disclosure agreement (NDA) Purpose n Secure seller’s / target’s interest in business secrets / confidential information n Avoid publication of intention to sell target n Listed companies: Avoid disclosure requirements under capital markets laws Typical Content n Obligation to maintain confidentiality of disclosed information n Limit use of confidential information to a specific purpose (evaluation of the target) n Specify terms of permitted disclosure to third parties and responsibility – Co-investors, banks and other finance providers – Advisors and boards (also of parent companies) – Regulators, courts and other disclosure required by law or stock exchange rules n Listed companies: Stand-still arrangements n Non-solicitation of seller’s / target’s directors and employees (not enforceable) Trends Penalty / damage clauses n Unusual n Good market practice to avoid Standstill arrangements for listed companies n Usual Non-solicitation of seller’s / target’s directors and employees n Usually included in NDAs but not enforceable under German law Back-to-back with banks / advisors / other third parties n Usually required n Certain professions being obliged to maintain confidentiality (e.g. lawyers) were formerly excluded but are nowadays generally required to counter-sign Pitfalls n Unclear or very broad definition of “Confidential Information” (scope of confidentiality agreement) n Loopholes through permitted disclosure without defined responsibility n Onerous back-to-back requirements with banks, advisors and other third parties n Stand-still arrangements (in particular for banks and larger groups) n Exclusivity / commission obligations towards brokers 11 Deep dive: Release and reliance letters Advisors prepare due diligence reports for the beneficiaries only. Generally, the beneficiaries are the clients. It is also not uncommon to address the reports to a third party, such as the financing bank, so that this third party is treated as beneficiary of the report and may rely on it. In all other cases, if the beneficiary wants to pass the report on to a third party, a release letter will have to be issued. By signing a release letter, the recipient commits to not disclose any information contained in the report to third parties and to use the report solely for the purpose of assessing the relevant transaction. Release Letters n Permit one party (usually the client of the report provider) to disclose the report to another party, e.g. a seller to disclose the vendor due diligence report to a bidder and at the same time impose confidentiality and non disclosure obligations to further third parties n Exclude any liability of the report provider to the other party (non-reliance basis) Reliance Letters In addition, the advisors of the party passing the report on to a third party may also issue a reliance letter conferring the new recipient the right to rely on the facts presented in the report (under certain conditions). n Permit a third party (a beneficiary) to rely on the due diligence report Trends Release letters n Typically with exclusion of liability of report provider towards third party Reliance letters n Market practice is divided between providing and not providing reliance letters (Clifford Chance provides reliance letters) n Usually only for successful bidders n Limited aggregate liability of report provider towards client and all further beneficiaries n Create liability of the report provider towards the third party for the content of the report n Scope of due diligence: Remains as agreed between the client and the report provider n Oblige the other party to not further disclose the report to third parties n Usually contain a limitation of the report provider’s aggregate liability to the client and to all beneficiaries n Exclude obligation of report provider to update the report report may be outdated n Need to carefully assess the actual value of relying on a report prepared for a third party 12 The life of an M&A transaction: Due diligence phase Due diligence phase 1st phase due diligence / Q&As Letter of intent Q&As / management meetings / confirmatory DD Binding offer / final bid n The due diligence phase generally demands considerable advisory efforts and is rather intensive in terms of time n Generally, the seller sends the potential buyer(s) a first draft of an SPA in the course of this phase, often shortly before the submission of a final bid by the potential buyer(s) the request to include a first buyer mark-up in the final bid documentation has became common Seller side Buyer side n Open data room for buyer(s) with first set of documents (more confidential documents are often released in a second phase) n Review first set of documents n Review questions – generally the process is coordinated by the investment bank – and provide answers to the extent possible and decide on whether to provide further documentation prior to the submission of a letter of intent involving legal advisors in the Q&A process may avoid pitfalls n Review letters of intent submitted and, as the case may be, short-list bidders n Release second round of documents and, if appropriate, red data room n Discuss findings and ascertain which information is required for submitting a letter of intent; potentially also request for clarification of open issues (ask questions and request documents) n Advisors to prepare a preliminary report with findings n Submission of a letter of intent n Confirmatory due diligence n Discuss findings and ascertain which information is required going forward; if necessary, request for clarification of open issues (ask questions and request documents) n Participate in management meetings n Organize management meetings n Advisors often review report with findings n Circulate draft SPA n Decide which bidder(s) stays in the process n Decision on whether to submit a final bid and as the case may be, submission of final bid, potentially also including a first mark-up of the SPA and in certain cases asking for exclusivity n Consider any employee information issues n Consider any employee information issues n Review final bids 13 Deep dive: Due diligence Aims n Assessing the value of the target and identifying risks Trends n Developing a custom-tailored catalogue of representations and warranties to mitigate potential risks that result from defects of the target Electronic data rooms n Currently standard n Most documents not printable Background n Developed from the rule of “caveat emptor” under US law, under which the buyer could not recover from the seller for defects in the property that rendered the property unfit for ordinary purposes Scope n Separate due diligence for different areas (legal, tax / financial, environmental, commercial, insurance) n Legal due diligence generally referred to as legal review excludes non-legal matters such as environmental, accounting, financial, insurance, etc. Process n Examining the documents in the data room n Questions and answers n Preparing the due diligence report (legal review report) n Discussing the results of the due diligence Depth of review n Spot check n Exhaustive due diligence of all documents (rather rare) Documents with sensitive data n Usually disclosed in data rooms with sensitive data blacked out Particular sensitive documents (red data rooms) n Later disclosure in the second due diligence phase, generally to a limited group of people only n Highly confidential matters (state affairs, documents subject to bank secrecy, etc.) may need to be held in trust Material threshold for review n Material threshold of usually 0,1% to 0,5% of company value Limitation of liability of law firm n Standard in reports n Limitation to the value of the transaction (max. EUR 100,000,000) Format for reports n Red flag / by exception reports are nowadays the most common although some clients still prefer full summaries of certain or all of the documents reviewed n Table format with action points and recommendations is common 14 Deep dive: Letter of intent (LoI) Purpose n Documentation of a basic understanding or intent to – express and confirm one’s interest to the other party – reduce the risk of misunderstandings – avoid either party stepping back on key elements later on – define a process for the transaction and allocate responsibilities – (sometimes) grant exclusivity, preferred bidder status or cost coverage Legal effect n Usually non-binding declarations of “intent” or documentation of preliminary agreement but legal effect depends on the wording – no rule of law Trends LoI in a structured auction process n Structured auction processes often without letter of intent LoI in a traditional sale process n In traditional sales processes LoIs are more common Binding effect n Depends on wording and form n Should expressly and clearly specify legal effect of individual elements Exclusivity n Exclusivity clause often drafted as a binding provision n Form requirements to be observed, if binding, preliminary agreement is intended Break Fees n Very unusual in Germany n Drafting needs to be careful and precise n Specific provisions may be drafted so that they are binding, e.g. confidentiality, exclusivity / preferred bidder status for a certain period or cost coverage Legal consequences n Binding obligations can be enforced by the other party n Breach of binding provisions can result in liability for damages n Unclear or “wrongful” statements may result in liability for damages 15 The life of an M&A transaction: Negotiations & signing phase Negotiation & signing SPA, in particular reps & warranties indemnities, purchase price Parallel agreements may be needed (e.g. shareholders agreement, etc.) Signing: Notarial recording may be necessary for signing Post-signing: Prepare filings / prepare transfers / obtain funds n The negotiation / signing phase also includes certain measures which take place immediately after signing and which generally start being prepared long prior to signing. These include not only efforts to obtain sufficient funds for payment of the purchase price (which generally occurs at closing) but also the necessary steps for the actual transfer in rem as well as the preparation of statutory / regulatory filings (see also pre-closing phase) n The transfer of shares in German limited liability companies as well as the transfer of certain assets, such as real estate, need to be recorded by a notary notary fees are usually borne by the buyer. The use of cheaper Swiss notaries is no longer recommended due to current jurisprudence Seller side Buyer side n Seller generally provides the first draft of the SPA with very limited representations and warranties n Buyer generally starts working on the basis of the draft SPA provided by seller n Seller typically wishes to prepare general disclosure schedules (e.g. the full content of the data room) against precise representations and warranties in the SPA n Extension of draft representations and warranties to provide sufficient comfort taking into account the findings of the due diligence exercise n Employee notification duties n Buyer generally prefers to work with vast set of representations & warranties and generally wishes to accept only specific information contained in specific disclosure schedules against the representations and warranties Key issues in the negotiation phase n Deal structure: Asset deal vs. share deal vs. merger (consider also particular employment law issues in connection with asset deals) n Defining and structuring acquisition vehicle n Pre-signing restructuring measures, such as carve-outs and pre-signing consents n Negotiation of representations and warranties, indemnities, purchase price, closing conditions, etc. n Duty to remedy defects prior to / after closing 16 Deep dive: SPA – deal structure, MAC and purchase price Scope of the transfer n Decision whether to structure a transaction as a share deal, asset deal or as a merger depends on a number of different factors, such as organisation and size of target and buyer, tax implications, employees’ structure of the target, etc. Structure: signing and closing n Usually staggered in between parties fulfil closing conditions (statutory / regulatory and other transaction-specific conditions) n In rem transfer occurs at closing Trends Asset vs. share deal n Most transactions structured as share deals n Asset deals demand detailed description of assets in the SPA and give more room for “cherry picking” MAC clauses n In approx. 1/5 of SPAs Material adverse change (MAC) clauses n MAC refers basically to an event that may cause a significant diminution in the value of a business n There is a very broad range of MAC definitions and substantial attention must be paid to the drafting, in particular also to carve-outs from the definition n MACs are buyer-friendly and strongly rejected by sellers as they in effect often give the buyer an opportunity to renegotiate the purchase price Purchase price n The purchase price in SPAs may be structured as a fixed price based on the financial accounts at a certain point in time (locked box mechanism) or it can be subject to adjustments on the basis of the closing date balance sheet n There are several mechanisms to adjust the purchase price, such as cash free / debt free models and working capital adjustments n While the seller typically used to prefer the locked box model and the buyer a mechanism providing for subsequent adjustment, locked box models are nowadays regarded to be advantageous also to buyers due to the certainty they offer and due to the reduced post-closing efforts The current trend is towards an increase of the locked box approach 17 Purchase price in SPAs Fixed price vs. price adjustments Locked box n Purchase price calculated on the basis of the last audited annual accounts or of interim accounts locked box date n Risks as well as opportunities resulting from potential positive or negative developments are transferred to buyer as of the locked box date MAC clauses and covenants can mitigate such risks n Maximum certainty due to fixed purchase price n Accrual of interest on the purchase price until closing may be agreed, if a positive cash flow is expected n Debt / cash and working capital adjustments have already been included in the calculation of the purchase price on the basis of the accounts and as of the accounts date; no subsequent adjustment efforts, no closing date balance sheet n Risk of adverse developments and chances economically transfers to buyer on signing n Extensive due diligence required from a buyer’s perspective n Requires tight pre-closing covenants to avoid “leakage” of cash or other value to the seller (no leakage covenant to be securely locked) 18 box needs Adjustment based on closing date balance sheet n Purchase price calculated generally on the basis of the last audited annual accounts, whereby potential adjustments pursuant to certain reference values / milestones are taken into account. In case of subsequent deviations, the purchase price is adjusted Working capital Debt free / cash free n Risks as well as opportunities resulting from potential positive or negative developments remain with the seller until closing n Debt free / cash free concept: Purchase price = equity value: Applying a debt free / cash free mechanism means that the net financial liabilities are to be deducted from the purchase price n Major difficulty is the definition of debt as it is not defined by law and needs to be precisely specified in the SPA. Particular attention is to be paid to “debt-like items” n Debt free / cash free mechanism does not provide full protection from changes in balance sheet positions. Therefore, working capital adjustments are often combined with the debt free / cash free mechanism n Working capital adjustment models are based on an agreed target working capital amount as of closing. Upon closing, the buyer determines within a certain period of time the actual working capital, which may lead to a purchase price reduction or increase (deviation must exceed a certain agreed percentage) n Working capital adjustment is used to compensate the respective party for growth or decline in working capital as measured at closing relative to an agreed balance and serves as a protection against manipulation of cash items by the seller n Although there is an usual definition of working capital, it is always subject to agreement in the SPA. When defining working capital, any payables and receivables towards affiliated companies with working capital character should be taken into account 19 Deep dive: SPA – representations & warranties Representations & warranties n Under German civil law, sellers are obliged to provide the sold “object” without “defects” (Sach- und Rechtsmängel) This German statutory regime of “defects” is not suitable for M&A transactions – Thus SPAs provide for representations and warranties in substitution of the general statutory regime n Representations and warranties typically depend on the scope of the due diligence, which may be unreliable and generally cannot cover each aspect of the business relevant for the buyer Trends Reference date for reps & warranties n Bring-down to closing in 60% to 70% of the cases De minimis for reps & warranties n In approx. 50% of SPAs; number is increasing – Ownership of shares and IP cannot be verified Baskets for reps & warranties n In approx. 50% of SPAs – Compliance issues such as data protection, anti-corruption or money laundering n Basket amounts in 50% of the cases to > 1% of the purchase price n Seller usually wants to disclose as much as possible against representations and warranties, i.e. not give warranties in relation to all aspects disclosed to buyer in the bidding process may have adverse effect on overall bid valuation n Reps and warranties are typically subject to a time limit which generally varies between 6 and 24 months. Title, tax and environmental matters are often excluded from the limitation period or have a longer limitation period n Qualifications – Knowledge qualifier: To the seller’s best knowledge / positive knowledge / no qualifier – Disclosure: “Except as stated in Schedule XX” n When basket is agreed, recovery is on a first Euro basis in approx. two thirds of the cases Cap on reps & warranties n Most SPAs with reps & warranties contain liability caps n In approx. half of the SPAs with caps on reps & warranties, the liability cap amounts to > 50% of the purchase price Carve-outs from liability caps n Often exclusion of title, tax and less often, environmental issues Insurance of reps & warranties n Is getting more common 20 Deep dive: SPA – remedies / limitation of liabilities Remedies for breach of warranties n Primary remedy: Seller has to establish such condition of the sold business as described in the relevant representation or warranty n Secondary remedy: Compensation in money usually considered as a reduction of the purchase price Knowledge n Buyer’s knowledge usually excludes seller’s liability. Thus seller’s best defense is proper disclosure prior to signing. Whether “deemed knowledge” due to disclosure in the course of due diligence excludes liability depends on the agreement reached. In any case, buyer’s knowledge is usually limited to the knowledge of certain individuals No double counting n Double counting is to be avoided, in particular from a seller’s perspective. Thus, links between liability for breach of representations and warranties and purchase price adjustment (debt, working capital), indemnities and other SPA provisions, risks already included in the purchase price calculation (known risks) and recovery from third parties, e.g. insurance or contractors, should be taken into account De minimis, thresholds, caps n De minimis: Individual claim needs to exceed a certain value before being eligible for compensation n Thresholds: Aggregate claims need to exceed a certain threshold before buyer can raise claims against the seller. May be in the form of a deductible (seller only has to compensate amounts exceeding threshold) or on a “first Euro” basis (seller has to compensate full damage including threshold amount) n Cap: Overall limitation of seller’s liability. Typically not structured in the same way for all warranties / under the SPA Buyer is obliged to mitigate damages n Obligation to mitigate is a general duty under German law n Specific duties in respect of certain liabilities can be addressed in the SPA Process for claims n Buyer is usually required to notify seller of claims in writing without undue delay n The parties are obliged to adhere to the formalities and processes agreed in the SPA; the legal consequences of a breach of such formalities are usually extensively discussed by the parties n Seller usually retains control over defense against third party claims 22 Deep dive: SPA – indemnities and closing conditions Indemnities n Indemnities are more buyer friendly than warranties: Whereas a warranty is a contractual declaration of the existence of a particular state of affairs, an indemnity is a contractual promise to reimburse the other party for a particular type of liability, in case such liability arises n Indemnities protect against risks and contingent liabilities which have not been taken into account in the calculation of the purchase price but which have yet been identified as potential risks n Typical indemnities Trends De minimis and thresholds in indemnity clauses n Often not subject to thresholds or de minimis amounts Cap on indemnity clauses n Often uncapped – Taxes relating to pre-closing periods (but resulting from tax assessments post-closing) – Pending litigation – Continuing liability from contracts with third parties with limited or no benefit to the buyer – Environmental liability n Mostly tailor made, no market standards except for tax indemnities – Specific and clear definition of scope (particular events, liabilities, claims) – Specifically address buyer’s cooperation and mitigation duties – Seller usually retains right to defend against third party claims Closing Conditions n Closing is typically subject to certain closing conditions, which may be transaction-specific and / or such as required by law n Statutory / regulatory conditions are in particular merger control approvals, regulatory approvals in particular in the financial sector etc. Furthermore, the acquisition of at least 25% of the shares in German companies by non-EU / EFTA buyers is also subject to clearance by the German Ministry of Economics and Technology n Transaction-specific conditions may be third party waivers of rights to terminate material contracts for change of control (share deal), third party consents to the transfer of material contracts or assets (asset deal), completion of material preparation actions by the seller etc. 23 Deep dive: SPA – covenants and other provisions Covenants n A covenant is an undertaking of a party to perform or refrain from performing an action during the period between signing and closing (pre-closing covenants) or for a certain time after closing (post-closing covenants) n Pre-closing covenants: After signing, the buyer is obliged to acquire the business at closing. The buyer therefore has an interest in protecting the sold business against material changes. Thus, the seller often undertakes to run the sold business in the ordinary course and in accordance with past practice. Typical measures requiring buyer’s prior consent – Change of articles of association Trends Post-closing covenants n Relatively common Non-compete covenant n In approx. half of the SPAs Non-solicitation covenant n Common but not enforceable under German law – Conclusion of company agreements – Reorganisation or liquidation of companies – Sale or purchase of material assets – Capital expenditures above a certain threshold – Conclusion of high-volume or long-term agreements – Entering into new financial debt positions – Changes to the practice of collecting trade receivables or paying trade payables – Changes to employment terms and conditions, shop agreements, pension arrangements – Changes to accounting practice – Further covenants required for locked-box concept (no leakage) n Too tight covenants should be avoided as they could violate antitrust laws n Typical post-closing covenants are the non-compete and non-solicitation clauses – Seller undertakes to refrain from engaging in a similar business for a specified period of time – Seller undertakes to refrain from soliciting seller’s / target’s directors and employees for a specific period of time; such covenant is common but not enforceable under German law Responsibilities, long stop date, break fees n Right to withdraw if conditions are not fulfiled on a defined long stop date n Break-up fee / compensation in case of withdrawal depending on responsibility still an exception Governing law n Litigation or Alternative Dispute Resolution 24 The life of an M&A transaction: Closing and post-closing Pre-closing, closing & post-closing Fulfilment of closing conditions Closing: Transfer of shares / assets Post-closing restructuring Post-closing convenants n In the period between signing and closing the parties procure the fulfilment of the closing conditions necessary for the transfer of the business to become effective n Upon closing, the newly acquired company will need to be integrated into the corporate structure of the buyer group. Thus, the corporate restructuring will almost always be inevitable Seller side Buyer side n Compliance with any post-signing covenants previously agreed with the buyer; seller usually has to run the business in accordance with past practice and is generally dependent on buyer’s consent for certain transactions n Cooperation with seller regarding compliance with postsigning covenants (e.g. consent for transactions should not be unreasonably withheld) n Whereas buyer is typically responsible for statutory and regulatory filings necessary for clearance, both, seller and buyer, may be responsible for the fulfillment of any transaction-related conditions n Procure fulfillment of transaction related closing conditions (jointly with seller) n Receipt of purchase price and delivering confirmation n Effect transfer agreements (notarisation may be necessary) n Compliance with any post-closing covenants n Follow up on potential purchase price adjustments n Statutory and regulatory filings required for closing n (Finalising) establishing acquisition vehicle n Payment of purchase price n Effect transfer agreements (notarisation may be necessary) n Tackle any restructuring and integration measures that may be necessary – the end is also the beginning n Drafting balance sheets as of the effective date if applicable and follow up on potential purchase price adjustments n Be aware of limitation periods for representations and warranties and indemnities 25 Deep dive: Post-closing What needs to be done n Strategic integration: The newly acquired company will need to be integrated into the corporate structure of the buyer group. Hence, corporate restructuring will almost always be inevitable. Corporate restructuring is frequently driven by tax considerations and will usually be required to achieve the synergy effects targeted by the acquisition. The goal may, for example, be to optimise the financing structure or to reorganise group companies to simplify the overall group structure. Typical post closing measures may be a merger, a change of the corporate form, a delisting, a squeeze-out or the sale of a part of the target. n Operational: In the operational area, this is likely to extend beyond the reorganisation of sales systems and logistic processes to include relations with customers and suppliers. Best practices Restructuring and integration n Provide for sufficient resources n Ensure that integration team also comprises members of the transaction team n Ensure sufficient flow of information from deal team to integration team n Involve integration team during due diligence exercise and contract negotiations n Address and resolve any due diligence issues during integration n Due diligence findings: The period immediately after closing will also be the obvious time to remedy any weaknesses that may have come to light in the legal review process - such as standard agreements or terms and conditions of the business that are invalid or inappropriate. n IT: The integration of IT systems will also call for a comprehensive review of all the relevant licenses, maintenance and service agreements. n Human resources: As regards human resources, the appointment of new managers, a realignment of organisational and remuneration structures as well as a restructuring of the company’s pension scheme may be required. n Regulatory issues: The period just after closing is also the right time to rectify any defects or gaps in regulatory permits and to minimise any risk of existing pollution by actively engaging in environmental management. 26 Worldwide contact information 35* offices in 25 countries Abu Dhabi Clifford Chance 9th Floor, Al Sila Tower Sowwah Square PO Box 26492 Abu Dhabi T +971 2 613 2300 F +971 2 613 2400 Amsterdam Clifford Chance Droogbak 1A 1013 GE Amsterdam PO Box 251 1000 AG Amsterdam T +31 20 7119 000 F +31 20 7119 999 Bangkok Clifford Chance Sindhorn Building Tower 3 21st Floor 130-132 Wireless Road Pathumwan Bangkok 10330 T +66 2 401 8800 F +66 2 401 8801 Barcelona Clifford Chance Av. Diagonal 682 08034 Barcelona T +34 93 344 22 00 F +34 93 344 22 22 Beijing Clifford Chance 33/F, China World Office Building 1 No. 1 Jianguomenwai Dajie Beijing 100004 T +86 10 6505 9018 F +86 10 6505 9028 Brussels Clifford Chance Avenue Louise 65 Box 2, 1050 Brussels T +32 2 533 5911 F +32 2 533 5959 Bucharest Clifford Chance Badea Excelsior Center 28-30 Academiei Street 12th Floor, Sector 1, Bucharest, 010016 T +40 21 66 66 100 F +40 21 66 66 111 Casablanca Clifford Chance 169 boulevard Hassan 1er 20000 Casablanca T +212 520 132 080 F +212 520 132 079 Kyiv Clifford Chance 75 Zhylyanska Street 01032 Kyiv T +38 (044) 390 5885 F +38 (044) 390 5886 Doha Clifford Chance Suite B 30th floor Tornado Tower Al Funduq Street West Bay PO Box 32110 Doha T +974 4 491 7040 F +974 4 491 7050 London Clifford Chance 10 Upper Bank Street London E14 5JJ T +44 20 7006 1000 F +44 20 7006 5555 Dubai Clifford Chance Building 6, Level 2 The Gate Precinct Dubai International Financial Centre PO Box 9380 Dubai T +971 4 362 0444 F +971 4 362 0445 Düsseldorf Clifford Chance Königsallee 59 40215 Düsseldorf T +49 211 43 55-0 F +49 211 43 55-5600 Frankfurt Clifford Chance Mainzer Landstraße 46 60325 Frankfurt am Main T +49 69 71 99-01 F +49 69 71 99-4000 Hong Kong Clifford Chance 28th Floor Jardine House One Connaught Place Hong Kong T +852 2825 8888 F +852 2825 8800 Istanbul Clifford Chance Kanyon Ofis Binasi Kat. 10 Büyükdere Cad. No. 185 34394 Levent, Istanbul T +90 212 339 0000 F +90 212 339 0099 Luxembourg Clifford Chance 2-4, Place de Paris B.P. 1147 L-1011 Luxembourg Grand-Duché de Luxembourg T +352 48 50 50 1 F +352 48 13 85 Madrid Clifford Chance Paseo de la Castellana 110 28046 Madrid T +34 91 590 75 00 F +34 91 590 75 75 Milan Clifford Chance Piazzetta M. Bossi, 3 20121 Milan T +39 02 806 341 F +39 02 806 34200 Moscow Clifford Chance Ul. Gasheka 6 125047 Moscow T +7 495 258 5050 F +7 495 258 5051 Munich Clifford Chance Theresienstraße 4-6 80333 Munich T +49 89 216 32-0 F +49 89 216 32-8600 New York Clifford Chance 31 West 52nd Street New York NY 10019-6131 T +1 212 878 8000 F +1 212 878 8375 Paris Clifford Chance 9 Place Vendôme CS 50018 75038 Paris Cedex 01 T +33 1 44 05 52 52 F +33 1 44 05 52 00 Shanghai Clifford Chance 40th Floor, Bund Centre 222 Yan An East Road Shanghai 200002 T +86 21 2320 7288 F +86 21 2320 7256 Perth Clifford Chance Level 7 190 St Georges Terrace Perth WA 6000 Australia T +618 9262 5555 F +618 9262 5522 Singapore Clifford Chance Marina Bay Financial Centre 25th Floor, Tower 3 12 Marina Boulevard Singapore 018982 T +65 6410 2200 F +65 6410 2288 Prague Clifford Chance Jungamannova Plaza Jungamannova 24 110 00 Prague 1 T +420 222 555 222 F +420 222 555 000 Sydney Clifford Chance Level 16 No. 1 O’Connell Street Sydney NSW 2000 T +612 8922 8000 F +612 8922 8088 Riyadh (Co-operation agreement) Al-Jadaan & Partners Law Firm Building 15, The Business Gate King Khalid International Airport Road Cordoba District, Riyadh, KSA. P.O.Box: 3515, Riyadh 11481, Kingdom of Saudi Arabia T +966 11 250 6500 F +966 11 400 4201 Tokyo Clifford Chance Akasaka Tameike Tower 7th Floor 2-17-7, Akasaka Minato-ku Tokyo 107-0052 T +81 3 5561 6600 F +81 3 5561 6699 Rome Clifford Chance Via Di Villa Sacchetti, 11 00197 Rome T +39 06 422 911 F +39 06 422 91200 São Paulo Clifford Chance Rua Funchal 418 15º- andar 04551-060 São Paulo-SP T +55 11 3019 6000 F +55 11 3019 6001 Seoul Clifford Chance 21st Floor, Ferrum Tower 66 Sooha-dong, Jung-gu Seoul 100-210 Korea T +82 2 6353 8100 F +82 2 6353 8101 *Clifford Chance’s offices include a second office in London at 4 Coleman Street, London EC2R 5JJ. The Firm also has a co-operation agreement with Al-Jadaan & Partners Law Firm in Riyadh. Warsaw Clifford Chance Norway House ul.Lwowska 19 00-660 Warsaw T +48 22 627 11 77 F +48 22 627 14 66 Washington, D.C. Clifford Chance 2001 K Street NW Washington, DC 20006 - 1001 T +1 202 912 5000 F +1 202 912 6000 Düsseldorf Königsallee 59 40215 Düsseldorf Tel: +49 211 4355 0 Fax: +49 211 4355 5600 © Clifford Chance Partnerschaftsgesellschaft von Rechtsanwälten, Wirtschaftsprüfern, Steuerberatern und Solicitors Frankfurt am Main, AG Frankfurt am Main PR 1000 www.cliffordchance.com Frankfurt am Main Mainzer Landstraße 46 60325 Frankfurt am Main Tel: +49 69 7199 01 Fax: +49 69 7199 4000 Munich Theresienstraße 4-6 80333 Munich Tel: +49 89 21632 0 Fax: +49 89 21632 8600 This Brochure does not necessarily deal with every important topic or cover every aspect of the topics with which it deals. It is not designed to provide legal or other advice. Regulatory information pursuant to Sec. 5 TMG and 2, 3 DL-InfoV: http://www.cliffordchance.com/german-regulatory Abu Dhabi Amsterdam Bangkok Barcelona Beijing Brussels Bucharest Casablanca Doha Dubai Düsseldorf Frankfurt Hong Kong Istanbul Kyiv London Luxembourg Madrid Milan Moscow Munich New York Paris Perth Prague Riyadh (co-operation agreement) Rome São Paulo Seoul Shanghai Singapore Sydney Tokyo Warsaw Washington, D.C. Clifford Chance has a co-operation agreement with Al-Jadaan & Partners Law Firm in Riyadh J201308130043641
© Copyright 2024