Geeral Procedure for M&A Trasactios i Germay
cotets The life of a M&A trasactio at a glace 4 Curret treds of the Germa M&A market 5 Maagig risks i M&A trasactios 6 Types of acquisitios 7 M&A trasactio at a glace 8 The life of a M&A trasactio: Preparatory phase 9 The life of a M&A trasactio: Pre due diligece phase 10 Deep dive: Cofidetiality / o-disclosure agreemet 11 Deep dive: Release ad reliace letters 12 The life of a M&A trasactio: Due diligece phase 13 Deep dive: Due diligece 14 Deep dive: Letter of itet 15 The life of a M&A trasactio: Negotiatio & sigig phase 16 Deep dive: SPA deal structure, MAC ad purchase price 17 Purchase price i SPAs 18 Deep dive: SPA represetatios ad warraties 20 Deep dive: SPA remedies / limitatio of liabilities 22 Deep dive: SPA idemities ad closig coditios 23 Deep dive: SPA coveats ad other provisios 24 The life of a M&A trasactio: Closig ad post-closig 25 Deep dive: Post-closig 26
The life of a M&A trasactio at a glace The M&A process is ot a oe size fits all process ad the amout of work ad the time required for the idividual steps may vary substatially. Also the level of ivolvemet of differet advisors (legal, fiacial, strategic etc) depeds o the phase of the trasactio ad o the particular deal. Furthermore, the steps to be take by the compaies ivolved deped o whether oe is actig as a buyer or as a seller ad whether there is a structured auctio process or a oe-to-oe sale. The preparatory phase of a M&A Trasactio ivolves, iter alia, the selectio of a potetial target or a potetial buyer, the evaluatio of differet optios ad strategies, the aalysis of possible syergies, the selectio of teams of advisors, iformal talks with potetial couterparts (ofte facilitated by the ivestmet baks ivolved). The preparatory phase also ecompasses a pre-due diligece phase, with prelimiary structurig cosideratios, ad, o the seller side, ofte also the preparatio of a iformatio memoradum, the setup of a data room ad potetially also a review of the target through a vedor due diligece exercise. I this phase, there may also be some prelimiary egotiatios betwee the parties, which usually lead to the coclusio of a cofidetiality agreemet. The ext step is the due diligece phase, durig which the potetial purchaser may coduct a ivestigatio of the target busiess so that a decisio ca be made whether (ad uder which coditios) or ot to proceed with the acquisitio. The fidigs are geerally summarised i a due diligece report. Although the seller sometimes may have udertake a vedor due diligece ad it may release its report to the buyer, usually withi the parameters set forth by release ad reliace letters, most due diligece processes are coducted from a buyer s perspective. The due diligece phase also ecompasses a Q&A process ad maagemet ad expert meetigs ad it geerally eds with the submissio of a fial bid. After the submissio of the fial bid, the seller ad the prospective buyer eter ito a egotiatio phase, which may ivolve two or more bidders for a certai time. The egotiatio phase eds with the sigig of the sale ad purchase agreemets (SPA). After the sigig, the preparatio for closig begis, which geerally icludes collectig the ecessary statutory ad trasactio-specific approvals. Upo closig, there is ofte some restructurig work to do, which fially leads to the itegratio of buyer ad target. 4
Curret treds of the Germa M&A market New challeges Valuatio Fiacig Deliverability Risk maagemet Material Adverse Chage (MAC) Clauses / Break-up fees Sellers cotiue to reject MAC Clauses i favour of deal certaity Break-up fees are still a exceptio Joit vetures / miority stakes Icreased iterest i joit vetures Icreased iterest i takig a miority stake Family-cotrolled compaies are willig to take o miority ivestors Auctio processes are less rigorously executed Greater opportuities for preemptive bids Late etrats to a sale process are possible Bidders that act quickly ad deliver certaity have a clear advatage Bridgig the gap i valuatio Cherry-pickig assets, leavig behid difficult-to-value / oerous assets thereby elimiatig valuatio challeges Asset carve-out light : Acquisitio of specific itellectual property, R&D, distributio ad customers, leavig behid assets, such as the productio site; seller egages i iterim maufacturig util the buyer s productio is fully operatioal Regulatory challeges Sellers have become more wary of executio risks Strategic buyers voluteer to be resposible for the atitrust aalysis ad offer to provide udertakigs to make ecessary divestitures early i the process Bidders that are believed to brig material atitrust risks are excluded Ear-out clauses to bridge the valuatio gap, however may buyers ad sellers are wary of the challeges of such clauses 5
Maagig risks i M&A trasactios As the requiremets o corporate goverace ad compliace grow, the risks associated with o-compliace issues icrease. I particular, buyers have to be aware that M&A ca be risky ad they must egage i all ecessary measures ad steps to reduce ad maage potetial risks. Mappig & Assessig Quality of Iformatio Related Party Trasactios Complex Owership Structures Coverig & Prevetig Crimial behaviour Legal / IP / Regulatory Tax Exposures Addressig & Remedyig Weak Iteral Cotrols / Systems Local Market / Culture Corporate Goverace Coduct a appropriate level of due diligece i coectio with trasactios Icorporate a risk-based level of compliace due diligece (risk profile, key persoel iterviews, review) Idetify, address ad resolve red flags Adjust trasactio structure if ecessary Obtai robust represetatio, warraties, idemities ad coveats; esure appropriate remedies i case of breaches ad provide for adequate substace (e.g. escrow) Esure ay prior miscoduct shall be remedied post-trasactio Implemet ay required policies, procedures ad iteral cotrols to esure strog corporate goverace ad compliace 6
Types of acquisitios Friedly Takeovers Hostile Oe potetial buyer Classical acquisitio Auctio Private Equity Fiacial Buy-Outs Idustrial Fiacial Veture Capital Idustrial Busiess Agels 7
M&A trasactio at a glace Preparatory phase Decisio ad defiitio of scope Lookig for targets / buyers ad approachig parties Pre-due diligece phase Draft teaser ad iformatio memoradum; set up data room; vedor DD Cofidetiality agreemets Release iformatio memoradum Release vedor DD reports o the basis of release (ad reliace) letter Due diligece phase 1st phase due diligece Letter of itet Q&As / maagemet meetigs / cofirmatory DD Bidig offer / fial bid Negotiatio & sigig SPA, i particular reps & warraties idemities, purchase price Parallel agreemets may be eeded (eg. shareholders agreemet, etc.) Sigig: Notarial recordig may be ecessary for sigig Post-sigig: prepare filigs / prepare trasfers / obtai fuds Pre-closig, closig & post-closig Fulfilmet of closig coditios Closig: Trasfer of shares / assets Post-closig restructurig Post-closig coveats 8
The life of a M&A trasactio: Preparatory phase Preparatory phase Decisio ad defiitio of scope Lookig for targets / buyers ad approachig parties M&A processes are geerally steered by the M&A or Busiess Developmet departmet Ivolvemet of ivestmet bak / strategic advisors / cosultats Legal advisors are geerally ot ivolved (at least ot i-depth) i the preparatory phase Seller side Decisio to sell ad preparatio of the trasactio Buyer side Evaluatig the busiess objectives decisio to buy Choosig advisors ad decidig which type of deal is evisaged (asset or share deal) Idetifyig ad approachig potetial buyers to be ivited for the process (if trasactio is ot buyer-drive) Choosig advisors Idetifyig ad approachig potetial targets (if trasactio is ot seller-drive) 9
The life of a M&A trasactio: Pre-due diligece phase Pre-due diligece phase Draft teaser ad iformatio memoradum; set up data room; vedor DD Cofidetiality agreemets Release iformatio memoradum Release / reliace letter for vedor due diligece report Latest poit i time to ivolve legal advisors The steps take i the pre due diligece phase deped to a great extet o whether the process is seller-drive or buyer-drive ad whether the M&A trasactio takes place as a oe-to-oe trasactio or is carried out i the form of a structured auctio Seller-drive processes require more preparatio ad demad a higher degree of legal advice as of the start Seller side Prepare teaser ad iformatio memoradum, geerally with the assistace of a ivestmet bak; assistace of legal advisors advisable to avoid legal risks Set up data room (ad idex) process is usually legthy; legal ad fiacial advisors are usually ivolved Decide o the form of data room; tred: electroic data room coordiated either by ivestmet bak or law firm If appropriate, set up due diligece team ad carry out vedor due diligece Decide which documets are goig to be released to buyer(s) i which form (blackeig of cofidetial issues) ad i which due diligece phase; establish red data room Prepare cofidetiality agreemets Prepare process letter ad data room rules for due diligece Release iformatio memoradum ad data room idex If appropriate, release vedor due diligece report o the basis of a release (ad potetially also reliace) letter Buyer side Sig cofidetiality agreemets Review teaser ad iformatio memoradum as a first basis to decide whether to proceed with the trasactio Set up due diligece team Determie material thresholds for upcomig due diligece exercise Buyer may submit to seller a due diligece check list (or request list), listig the documets which it would ideally like to review i the due diligece phase. The submissio of such request lists prior to the due diligece exercise is however becomig more rare 10
Deep dive: Cofidetiality / o-disclosure agreemet (NDA) Purpose Secure seller s / target s iterest i busiess secrets / cofidetial iformatio Avoid publicatio of itetio to sell target Listed compaies: Avoid disclosure requiremets uder capital markets laws Typical Cotet Obligatio to maitai cofidetiality of disclosed iformatio Limit use of cofidetial iformatio to a specific purpose (evaluatio of the target) Specify terms of permitted disclosure to third parties ad resposibility Co-ivestors, baks ad other fiace providers Advisors ad boards (also of paret compaies) Regulators, courts ad other disclosure required by law or stock exchage rules Listed compaies: Stad-still arragemets No-solicitatio of seller s / target s directors ad employees (ot eforceable) Treds Pealty / damage clauses Uusual Good market practice to avoid Stadstill arragemets for listed compaies Usual No-solicitatio of seller s / target s directors ad employees Usually icluded i NDAs but ot eforceable uder Germa law Back-to-back with baks / advisors / other third parties Usually required Certai professios beig obliged to maitai cofidetiality (e.g. lawyers) were formerly excluded but are owadays geerally required to couter-sig Pitfalls Uclear or very broad defiitio of Cofidetial Iformatio (scope of cofidetiality agreemet) Loopholes through permitted disclosure without defied resposibility Oerous back-to-back requiremets with baks, advisors ad other third parties Stad-still arragemets (i particular for baks ad larger groups) Exclusivity / commissio obligatios towards brokers 11
Deep dive: Release ad reliace letters Advisors prepare due diligece reports for the beeficiaries oly. Geerally, the beeficiaries are the cliets. It is also ot ucommo to address the reports to a third party, such as the fiacig bak, so that this third party is treated as beeficiary of the report ad may rely o it. I all other cases, if the beeficiary wats to pass the report o to a third party, a release letter will have to be issued. By sigig a release letter, the recipiet commits to ot disclose ay iformatio cotaied i the report to third parties ad to use the report solely for the purpose of assessig the relevat trasactio. Release Letters Permit oe party (usually the cliet of the report provider) to disclose the report to aother party, e.g. a seller to disclose the vedor due diligece report to a bidder ad at the same time impose cofidetiality ad o disclosure obligatios to further third parties Exclude ay liability of the report provider to the other party (o-reliace basis) Reliace Letters I additio, the advisors of the party passig the report o to a third party may also issue a reliace letter coferrig the ew recipiet the right to rely o the facts preseted i the report (uder certai coditios). Permit a third party (a beeficiary) to rely o the due diligece report Create liability of the report provider towards the third party for the cotet of the report Scope of due diligece: Remais as agreed betwee the cliet ad the report provider Oblige the other party to ot further disclose the report to third parties Usually cotai a limitatio of the report provider s aggregate liability to the cliet ad to all beeficiaries Exclude obligatio of report provider to update the report report may be outdated Treds Need to carefully assess the actual value of relyig o a report prepared for a third party Release letters Typically with exclusio of liability of report provider towards third party Reliace letters Market practice is divided betwee providig ad ot providig reliace letters (Clifford Chace provides reliace letters) Usually oly for successful bidders Limited aggregate liability of report provider towards cliet ad all further beeficiaries 12
The life of a M&A trasactio: Due diligece phase Due diligece phase 1st phase due diligece / Q&As Letter of itet Q&As / maagemet meetigs / cofirmatory DD Bidig offer / fial bid The due diligece phase geerally demads cosiderable advisory efforts ad is rather itesive i terms of time Geerally, the seller seds the potetial buyer(s) a first draft of a SPA i the course of this phase, ofte shortly before the submissio of a fial bid by the potetial buyer(s) the request to iclude a first buyer mark-up i the fial bid documetatio has became commo Seller side Ope data room for buyer(s) with first set of documets (more cofidetial documets are ofte released i a secod phase) Review questios geerally the process is coordiated by the ivestmet bak ad provide aswers to the extet possible ad decide o whether to provide further documetatio prior to the submissio of a letter of itet ivolvig legal advisors i the Q&A process may avoid pitfalls Review letters of itet submitted ad, as the case may be, short-list bidders Release secod roud of documets ad, if appropriate, red data room Orgaize maagemet meetigs Circulate draft SPA Review fial bids Decide which bidder(s) stays i the process Cosider ay employee iformatio issues Buyer side Review first set of documets Discuss fidigs ad ascertai which iformatio is required for submittig a letter of itet; potetially also request for clarificatio of ope issues (ask questios ad request documets) Advisors to prepare a prelimiary report with fidigs Submissio of a letter of itet Cofirmatory due diligece Discuss fidigs ad ascertai which iformatio is required goig forward; if ecessary, request for clarificatio of ope issues (ask questios ad request documets) Participate i maagemet meetigs Advisors ofte review report with fidigs Decisio o whether to submit a fial bid ad as the case may be, submissio of fial bid, potetially also icludig a first mark-up of the SPA ad i certai cases askig for exclusivity Cosider ay employee iformatio issues 13
Deep dive: Due diligece Aims Assessig the value of the target ad idetifyig risks Developig a custom-tailored catalogue of represetatios ad warraties to mitigate potetial risks that result from defects of the target Backgroud Developed from the rule of caveat emptor uder US law, uder which the buyer could ot recover from the seller for defects i the property that redered the property ufit for ordiary purposes Scope Separate due diligece for differet areas (legal, tax / fiacial, evirometal, commercial, isurace) Legal due diligece geerally referred to as legal review excludes o-legal matters such as evirometal, accoutig, fiacial, isurace, etc. Process Examiig the documets i the data room Questios ad aswers Preparig the due diligece report (legal review report) Discussig the results of the due diligece Depth of review Spot check Exhaustive due diligece of all documets (rather rare) Treds Electroic data rooms Curretly stadard Most documets ot pritable Documets with sesitive data Usually disclosed i data rooms with sesitive data blacked out Particular sesitive documets (red data rooms) Later disclosure i the secod due diligece phase, geerally to a limited group of people oly Highly cofidetial matters (state affairs, documets subject to bak secrecy, etc.) may eed to be held i trust Material threshold for review Material threshold of usually 0,1% to 0,5% of compay value Limitatio of liability of law firm Stadard i reports Limitatio to the value of the trasactio (max. EUR 100,000,000) Format for reports Red flag / by exceptio reports are owadays the most commo although some cliets still prefer full summaries of certai or all of the documets reviewed Table format with actio poits ad recommedatios is commo 14
Deep dive: Letter of itet (LoI) Purpose Documetatio of a basic uderstadig or itet to express ad cofirm oe s iterest to the other party reduce the risk of misuderstadigs avoid either party steppig back o key elemets later o defie a process for the trasactio ad allocate resposibilities (sometimes) grat exclusivity, preferred bidder status or cost coverage Legal effect Usually o-bidig declaratios of itet or documetatio of prelimiary agreemet but legal effect depeds o the wordig o rule of law Draftig eeds to be careful ad precise Should expressly ad clearly specify legal effect of idividual elemets Treds LoI i a structured auctio process Structured auctio processes ofte without letter of itet LoI i a traditioal sale process I traditioal sales processes LoIs are more commo Bidig effect Depeds o wordig ad form Exclusivity Exclusivity clause ofte drafted as a bidig provisio Form requiremets to be observed, if bidig, prelimiary agreemet is iteded Specific provisios may be drafted so that they are bidig, e.g. cofidetiality, exclusivity / preferred bidder status for a certai period or cost coverage Break Fees Very uusual i Germay Legal cosequeces Bidig obligatios ca be eforced by the other party Breach of bidig provisios ca result i liability for damages Uclear or wrogful statemets may result i liability for damages 15
The life of a M&A trasactio: Negotiatios & sigig phase Negotiatio & sigig SPA, i particular reps & warraties idemities, purchase price Parallel agreemets may be eeded (e.g. shareholders agreemet, etc.) Sigig: Notarial recordig may be ecessary for sigig Post-sigig: Prepare filigs / prepare trasfers / obtai fuds The egotiatio / sigig phase also icludes certai measures which take place immediately after sigig ad which geerally start beig prepared log prior to sigig. These iclude ot oly efforts to obtai sufficiet fuds for paymet of the purchase price (which geerally occurs at closig) but also the ecessary steps for the actual trasfer i rem as well as the preparatio of statutory / regulatory filigs (see also pre-closig phase) The trasfer of shares i Germa limited liability compaies as well as the trasfer of certai assets, such as real estate, eed to be recorded by a otary otary fees are usually bore by the buyer. The use of cheaper Swiss otaries is o loger recommeded due to curret jurisprudece Seller side Seller geerally provides the first draft of the SPA with very limited represetatios ad warraties Seller typically wishes to prepare geeral disclosure schedules (e.g. the full cotet of the data room) agaist precise represetatios ad warraties i the SPA Employee otificatio duties Buyer side Buyer geerally starts workig o the basis of the draft SPA provided by seller Extesio of draft represetatios ad warraties to provide sufficiet comfort takig ito accout the fidigs of the due diligece exercise Buyer geerally prefers to work with vast set of represetatios & warraties ad geerally wishes to accept oly specific iformatio cotaied i specific disclosure schedules agaist the represetatios ad warraties Key issues i the egotiatio phase Deal structure: Asset deal vs. share deal vs. merger (cosider also particular employmet law issues i coectio with asset deals) Defiig ad structurig acquisitio vehicle Pre-sigig restructurig measures, such as carve-outs ad pre-sigig cosets Negotiatio of represetatios ad warraties, idemities, purchase price, closig coditios, etc. Duty to remedy defects prior to / after closig 16
Deep dive: SPA deal structure, MAC ad purchase price Scope of the trasfer Decisio whether to structure a trasactio as a share deal, asset deal or as a merger depeds o a umber of differet factors, such as orgaisatio ad size of target ad buyer, tax implicatios, employees structure of the target, etc. Structure: sigig ad closig Usually staggered i betwee parties fulfil closig coditios (statutory / regulatory ad other trasactio-specific coditios) I rem trasfer occurs at closig Treds Asset vs. share deal Most trasactios structured as share deals Material adverse chage (MAC) clauses MAC refers basically to a evet that may cause a sigificat dimiutio i the value of a busiess There is a very broad rage of MAC defiitios ad substatial attetio must be paid to the draftig, i particular also to carve-outs from the defiitio MACs are buyer-friedly ad strogly rejected by sellers as they i effect ofte give the buyer a opportuity to reegotiate the purchase price Purchase price The purchase price i SPAs may be structured as a fixed price based o the fiacial accouts at a certai poit i time (locked box mechaism) or it ca be subject to adjustmets o the basis of the closig date balace sheet There are several mechaisms to adjust the purchase price, such as cash free / debt free models ad workig capital adjustmets While the seller typically used to prefer the locked box model ad the buyer a mechaism providig for subsequet adjustmet, locked box models are owadays regarded to be advatageous also to buyers due to the certaity they offer ad due to the reduced post-closig efforts The curret tred is towards a icrease of the locked box approach Asset deals demad detailed descriptio of assets i the SPA ad give more room for cherry pickig MAC clauses I approx. 1/5 of SPAs 17
Purchase price i SPAs Fixed price vs. price adjustmets Locked box Purchase price calculated o the basis of the last audited aual accouts or of iterim accouts locked box date Risks as well as opportuities resultig from potetial positive or egative developmets are trasferred to buyer as of the locked box date MAC clauses ad coveats ca mitigate such risks Maximum certaity due to fixed purchase price Accrual of iterest o the purchase price util closig may be agreed, if a positive cash flow is expected Debt / cash ad workig capital adjustmets have already bee icluded i the calculatio of the purchase price o the basis of the accouts ad as of the accouts date; o subsequet adjustmet efforts, o closig date balace sheet Risk of adverse developmets ad chaces ecoomically trasfers to buyer o sigig Extesive due diligece required from a buyer s perspective Requires tight pre-closig coveats to avoid leakage of cash or other value to the seller (o leakage coveat box eeds to be securely locked) 18
Adjustmet based o closig date balace sheet Purchase price calculated geerally o the basis of the last audited aual accouts, whereby potetial adjustmets pursuat to certai referece values / milestoes are take ito accout. I case of subsequet deviatios, the purchase price is adjusted Risks as well as opportuities resultig from potetial positive or egative developmets remai with the seller util closig Debt free / cash free Debt free / cash free cocept: Purchase price = equity value: Applyig a debt free / cash free mechaism meas that the et fiacial liabilities are to be deducted from the purchase price Major difficulty is the defiitio of debt as it is ot defied by law ad eeds to be precisely specified i the SPA. Particular attetio is to be paid to debt-like items Debt free / cash free mechaism does ot provide full protectio from chages i balace sheet positios. Therefore, workig capital adjustmets are ofte combied with the debt free / cash free mechaism Workig capital Workig capital adjustmet models are based o a agreed target workig capital amout as of closig. Upo closig, the buyer determies withi a certai period of time the actual workig capital, which may lead to a purchase price reductio or icrease (deviatio must exceed a certai agreed percetage) Workig capital adjustmet is used to compesate the respective party for growth or declie i workig capital as measured at closig relative to a agreed balace ad serves as a protectio agaist maipulatio of cash items by the seller Although there is a usual defiitio of workig capital, it is always subject to agreemet i the SPA. Whe defiig workig capital, ay payables ad receivables towards affiliated compaies with workig capital character should be take ito accout 19
Deep dive: SPA represetatios & warraties Represetatios & warraties Uder Germa civil law, sellers are obliged to provide the sold object without defects (Sach- ud Rechtsmägel) This Germa statutory regime of defects is ot suitable for M&A trasactios Thus SPAs provide for represetatios ad warraties i substitutio of the geeral statutory regime Represetatios ad warraties typically deped o the scope of the due diligece, which may be ureliable ad geerally caot cover each aspect of the busiess relevat for the buyer Owership of shares ad IP caot be verified Compliace issues such as data protectio, ati-corruptio or moey lauderig Seller usually wats to disclose as much as possible agaist represetatios ad warraties, i.e. ot give warraties i relatio to all aspects disclosed to buyer i the biddig process may have adverse effect o overall bid valuatio Reps ad warraties are typically subject to a time limit which geerally varies betwee 6 ad 24 moths. Title, tax ad evirometal matters are ofte excluded from the limitatio period or have a loger limitatio period Qualificatios Kowledge qualifier: To the seller s best kowledge / positive kowledge / o qualifier Disclosure: Except as stated i Schedule XX Treds Referece date for reps & warraties Brig-dow to closig i 60% to 70% of the cases De miimis for reps & warraties I approx. 50% of SPAs; umber is icreasig Baskets for reps & warraties I approx. 50% of SPAs Basket amouts i 50% of the cases to > 1% of the purchase price Whe basket is agreed, recovery is o a first Euro basis i approx. two thirds of the cases Cap o reps & warraties Most SPAs with reps & warraties cotai liability caps I approx. half of the SPAs with caps o reps & warraties, the liability cap amouts to > 50% of the purchase price Carve-outs from liability caps Ofte exclusio of title, tax ad less ofte, evirometal issues Isurace of reps & warraties Is gettig more commo 20
Deep dive: SPA remedies / limitatio of liabilities Remedies for breach of warraties Primary remedy: Seller has to establish such coditio of the sold busiess as described i the relevat represetatio or warraty Secodary remedy: Compesatio i moey usually cosidered as a reductio of the purchase price Kowledge Buyer s kowledge usually excludes seller s liability. Thus seller s best defese is proper disclosure prior to sigig. Whether deemed kowledge due to disclosure i the course of due diligece excludes liability depeds o the agreemet reached. I ay case, buyer s kowledge is usually limited to the kowledge of certai idividuals No double coutig Double coutig is to be avoided, i particular from a seller s perspective. Thus, liks betwee liability for breach of represetatios ad warraties ad purchase price adjustmet (debt, workig capital), idemities ad other SPA provisios, risks already icluded i the purchase price calculatio (kow risks) ad recovery from third parties, e.g. isurace or cotractors, should be take ito accout De miimis, thresholds, caps De miimis: Idividual claim eeds to exceed a certai value before beig eligible for compesatio Thresholds: Aggregate claims eed to exceed a certai threshold before buyer ca raise claims agaist the seller. May be i the form of a deductible (seller oly has to compesate amouts exceedig threshold) or o a first Euro basis (seller has to compesate full damage icludig threshold amout) Cap: Overall limitatio of seller s liability. Typically ot structured i the same way for all warraties / uder the SPA Buyer is obliged to mitigate damages Obligatio to mitigate is a geeral duty uder Germa law Specific duties i respect of certai liabilities ca be addressed i the SPA Process for claims Buyer is usually required to otify seller of claims i writig without udue delay The parties are obliged to adhere to the formalities ad processes agreed i the SPA; the legal cosequeces of a breach of such formalities are usually extesively discussed by the parties Seller usually retais cotrol over defese agaist third party claims 22
Deep dive: SPA idemities ad closig coditios Idemities Idemities are more buyer friedly tha warraties: Whereas a warraty is a cotractual declaratio of the existece of a particular state of affairs, a idemity is a cotractual promise to reimburse the other party for a particular type of liability, i case such liability arises Idemities protect agaist risks ad cotiget liabilities which have ot bee take ito accout i the calculatio of the purchase price but which have yet bee idetified as potetial risks Treds Typical idemities Taxes relatig to pre-closig periods (but resultig from tax assessmets post-closig) Pedig litigatio Cotiuig liability from cotracts with third parties with limited or o beefit to the buyer Evirometal liability De miimis ad thresholds i idemity clauses Ofte ot subject to thresholds or de miimis amouts Cap o idemity clauses Ofte ucapped Mostly tailor made, o market stadards except for tax idemities Specific ad clear defiitio of scope (particular evets, liabilities, claims) Specifically address buyer s cooperatio ad mitigatio duties Seller usually retais right to defed agaist third party claims Closig Coditios Closig is typically subject to certai closig coditios, which may be trasactio-specific ad / or such as required by law Statutory / regulatory coditios are i particular merger cotrol approvals, regulatory approvals i particular i the fiacial sector etc. Furthermore, the acquisitio of at least 25% of the shares i Germa compaies by o-eu / EFTA buyers is also subject to clearace by the Germa Miistry of Ecoomics ad Techology Trasactio-specific coditios may be third party waivers of rights to termiate material cotracts for chage of cotrol (share deal), third party cosets to the trasfer of material cotracts or assets (asset deal), completio of material preparatio actios by the seller etc. 23
Deep dive: SPA coveats ad other provisios Coveats A coveat is a udertakig of a party to perform or refrai from performig a actio durig the period betwee sigig ad closig (pre-closig coveats) or for a certai time after closig (post-closig coveats) Pre-closig coveats: After sigig, the buyer is obliged to acquire the busiess at closig. The buyer therefore has a iterest i protectig the sold busiess agaist material chages. Thus, the seller ofte udertakes to ru the sold busiess i the ordiary course ad i accordace with past practice. Typical measures requirig buyer s prior coset Chage of articles of associatio Coclusio of compay agreemets Reorgaisatio or liquidatio of compaies Sale or purchase of material assets Capital expeditures above a certai threshold Coclusio of high-volume or log-term agreemets Eterig ito ew fiacial debt positios Chages to the practice of collectig trade receivables or payig trade payables Treds Chages to employmet terms ad coditios, shop agreemets, pesio arragemets Chages to accoutig practice Further coveats required for locked-box cocept (o leakage) Post-closig coveats Relatively commo No-compete coveat I approx. half of the SPAs No-solicitatio coveat Commo but ot eforceable uder Germa law Too tight coveats should be avoided as they could violate atitrust laws Typical post-closig coveats are the o-compete ad o-solicitatio clauses Seller udertakes to refrai from egagig i a similar busiess for a specified period of time Seller udertakes to refrai from solicitig seller s / target s directors ad employees for a specific period of time; such coveat is commo but ot eforceable uder Germa law Resposibilities, log stop date, break fees Right to withdraw if coditios are ot fulfiled o a defied log stop date Break-up fee / compesatio i case of withdrawal depedig o resposibility still a exceptio Goverig law Litigatio or Alterative Dispute Resolutio 24
The life of a M&A trasactio: Closig ad post-closig Pre-closig, closig & post-closig Fulfilmet of closig coditios Closig: Trasfer of shares / assets Post-closig restructurig Post-closig coveats I the period betwee sigig ad closig the parties procure the fulfilmet of the closig coditios ecessary for the trasfer of the busiess to become effective Upo closig, the ewly acquired compay will eed to be itegrated ito the corporate structure of the buyer group. Thus, the corporate restructurig will almost always be ievitable Seller side Compliace with ay post-sigig coveats previously agreed with the buyer; seller usually has to ru the busiess i accordace with past practice ad is geerally depedet o buyer s coset for certai trasactios Whereas buyer is typically resposible for statutory ad regulatory filigs ecessary for clearace, both, seller ad buyer, may be resposible for the fulfillmet of ay trasactio-related coditios Receipt of purchase price ad deliverig cofirmatio Effect trasfer agreemets (otarisatio may be ecessary) Compliace with ay post-closig coveats Follow up o potetial purchase price adjustmets Buyer side Cooperatio with seller regardig compliace with postsigig coveats (e.g. coset for trasactios should ot be ureasoably withheld) Statutory ad regulatory filigs required for closig Procure fulfillmet of trasactio related closig coditios (joitly with seller) (Fialisig) establishig acquisitio vehicle Paymet of purchase price Effect trasfer agreemets (otarisatio may be ecessary) Tackle ay restructurig ad itegratio measures that may be ecessary the ed is also the begiig Draftig balace sheets as of the effective date if applicable ad follow up o potetial purchase price adjustmets Be aware of limitatio periods for represetatios ad warraties ad idemities 25
Deep dive: Post-closig What eeds to be doe Strategic itegratio: The ewly acquired compay will eed to be itegrated ito the corporate structure of the buyer group. Hece, corporate restructurig will almost always be ievitable. Corporate restructurig is frequetly drive by tax cosideratios ad will usually be required to achieve the syergy effects targeted by the acquisitio. The goal may, for example, be to optimise the fiacig structure or to reorgaise group compaies to simplify the overall group structure. Typical post closig measures may be a merger, a chage of the corporate form, a delistig, a squeeze-out or the sale of a part of the target. Operatioal: I the operatioal area, this is likely to exted beyod the reorgaisatio of sales systems ad logistic processes to iclude relatios with customers ad suppliers. Due diligece fidigs: The period immediately after closig will also be the obvious time to remedy ay weakesses that may have come to light i the legal review process - such as stadard agreemets or terms ad coditios of the busiess that are ivalid or iappropriate. Best practices Restructurig ad itegratio Provide for sufficiet resources Esure that itegratio team also comprises members of the trasactio team Esure sufficiet flow of iformatio from deal team to itegratio team Ivolve itegratio team durig due diligece exercise ad cotract egotiatios Address ad resolve ay due diligece issues durig itegratio IT: The itegratio of IT systems will also call for a comprehesive review of all the relevat liceses, maiteace ad service agreemets. Huma resources: As regards huma resources, the appoitmet of ew maagers, a realigmet of orgaisatioal ad remueratio structures as well as a restructurig of the compay s pesio scheme may be required. Regulatory issues: The period just after closig is also the right time to rectify ay defects or gaps i regulatory permits ad to miimise ay risk of existig pollutio by actively egagig i evirometal maagemet. 26
Worldwide cotact iformatio 35* offices i 25 coutries Abu Dhabi Clifford Chace 9th Floor, Al Sila Tower Sowwah Square PO Box 26492 Abu Dhabi T +971 2 613 2300 F +971 2 613 2400 Amsterdam Clifford Chace Droogbak 1A 1013 GE Amsterdam PO Box 251 1000 AG Amsterdam T +31 20 7119 000 F +31 20 7119 999 Bagkok Clifford Chace Sidhor Buildig Tower 3 21st Floor 130-132 Wireless Road Pathumwa Bagkok 10330 T +66 2 401 8800 F +66 2 401 8801 Barceloa Clifford Chace Av. Diagoal 682 08034 Barceloa T +34 93 344 22 00 F +34 93 344 22 22 Beijig Clifford Chace 33/F, Chia World Office Buildig 1 No. 1 Jiaguomewai Dajie Beijig 100004 T +86 10 6505 9018 F +86 10 6505 9028 Brussels Clifford Chace Aveue Louise 65 Box 2, 1050 Brussels T +32 2 533 5911 F +32 2 533 5959 Bucharest Clifford Chace Badea Excelsior Ceter 28-30 Academiei Street 12th Floor, Sector 1, Bucharest, 010016 T +40 21 66 66 100 F +40 21 66 66 111 Casablaca Clifford Chace 169 boulevard Hassa 1er 20000 Casablaca T +212 520 132 080 F +212 520 132 079 Doha Clifford Chace Suite B 30th floor Torado Tower Al Fuduq Street West Bay PO Box 32110 Doha T +974 4 491 7040 F +974 4 491 7050 Dubai Clifford Chace Buildig 6, Level 2 The Gate Precict Dubai Iteratioal Fiacial Cetre PO Box 9380 Dubai T +971 4 362 0444 F +971 4 362 0445 Düsseldorf Clifford Chace Köigsallee 59 40215 Düsseldorf T +49 211 43 55-0 F +49 211 43 55-5600 Frakfurt Clifford Chace Maizer Ladstraße 46 60325 Frakfurt am Mai T +49 69 71 99-01 F +49 69 71 99-4000 Hog Kog Clifford Chace 28th Floor Jardie House Oe Coaught Place Hog Kog T +852 2825 8888 F +852 2825 8800 Istabul Clifford Chace Kayo Ofis Biasi Kat. 10 Büyükdere Cad. No. 185 34394 Levet, Istabul T +90 212 339 0000 F +90 212 339 0099 Kyiv Clifford Chace 75 Zhylyaska Street 01032 Kyiv T +38 (044) 390 5885 F +38 (044) 390 5886 Lodo Clifford Chace 10 Upper Bak Street Lodo E14 5JJ T +44 20 7006 1000 F +44 20 7006 5555 Luxembourg Clifford Chace 2-4, Place de Paris B.P. 1147 L-1011 Luxembourg Grad-Duché de Luxembourg T +352 48 50 50 1 F +352 48 13 85 Madrid Clifford Chace Paseo de la Castellaa 110 28046 Madrid T +34 91 590 75 00 F +34 91 590 75 75 Mila Clifford Chace Piazzetta M. Bossi, 3 20121 Mila T +39 02 806 341 F +39 02 806 34200 Moscow Clifford Chace Ul. Gasheka 6 125047 Moscow T +7 495 258 5050 F +7 495 258 5051 Muich Clifford Chace Theresiestraße 4-6 80333 Muich T +49 89 216 32-0 F +49 89 216 32-8600 New York Clifford Chace 31 West 52d Street New York NY 10019-6131 T +1 212 878 8000 F +1 212 878 8375 Paris Clifford Chace 9 Place Vedôme CS 50018 75038 Paris Cedex 01 T +33 1 44 05 52 52 F +33 1 44 05 52 00 Perth Clifford Chace Level 7 190 St Georges Terrace Perth WA 6000 Australia T +618 9262 5555 F +618 9262 5522 Prague Clifford Chace Jugamaova Plaza Jugamaova 24 110 00 Prague 1 T +420 222 555 222 F +420 222 555 000 Riyadh (Co-operatio agreemet) Al-Jadaa & Parters Law Firm Buildig 15, The Busiess Gate Kig Khalid Iteratioal Airport Road Cordoba District, Riyadh, KSA. P.O.Box: 3515, Riyadh 11481, Kigdom of Saudi Arabia T +966 11 250 6500 F +966 11 400 4201 Rome Clifford Chace Via Di Villa Sacchetti, 11 00197 Rome T +39 06 422 911 F +39 06 422 91200 São Paulo Clifford Chace Rua Fuchal 418 15º- adar 04551-060 São Paulo-SP T +55 11 3019 6000 F +55 11 3019 6001 Seoul Clifford Chace 21st Floor, Ferrum Tower 66 Sooha-dog, Jug-gu Seoul 100-210 Korea T +82 2 6353 8100 F +82 2 6353 8101 Shaghai Clifford Chace 40th Floor, Bud Cetre 222 Ya A East Road Shaghai 200002 T +86 21 2320 7288 F +86 21 2320 7256 Sigapore Clifford Chace Maria Bay Fiacial Cetre 25th Floor, Tower 3 12 Maria Boulevard Sigapore 018982 T +65 6410 2200 F +65 6410 2288 Sydey Clifford Chace Level 16 No. 1 O Coell Street Sydey NSW 2000 T +612 8922 8000 F +612 8922 8088 Tokyo Clifford Chace Akasaka Tameike Tower 7th Floor 2-17-7, Akasaka Miato-ku Tokyo 107-0052 T +81 3 5561 6600 F +81 3 5561 6699 Warsaw Clifford Chace Norway House ul.lwowska 19 00-660 Warsaw T +48 22 627 11 77 F +48 22 627 14 66 Washigto, D.C. Clifford Chace 2001 K Street NW Washigto, DC 20006-1001 T +1 202 912 5000 F +1 202 912 6000 *Clifford Chace s offices iclude a secod office i Lodo at 4 Colema Street, Lodo EC2R 5JJ. The Firm also has a co-operatio agreemet with Al-Jadaa & Parters Law Firm i Riyadh.
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