Legal

Question 1

What are the two legal pitfalls?

Answer 1

Legal issues and regulatory issues

Question 2

What are the three main legal issues?

Answer 2

General legal issues, SPA and structuring the acquisiton

Question 3

What are the four main regulatory issues?

Answer 3

Merger control, regulated sectors, public M&A and multiple jurisdictions

Question 4

What are two general legal issues?

Answer 4

Putting M&A legal docs in place, legal DD

Question 5

What legal docs need to be in place?

Answer 5

• Seller’s lawyers are expected to produce initial drafts (but pushy Buyers …)
• Certain docs not subject to negotiation (process letters) or usually minimal negotiation (NDAs)
• The doc in a transaction many M&A lawyers hate? The TSA

Question 6

What is important during legal DD (Vendors DD and regular DD)?

Answer 6

• Make sure legal DD lawyers communicate with SPA lawyers

- Make sure SPA lawyers read financial, tax and other DD

Question 7

Name eight clauses included in the SPA

SPA negotiations are the bulk of legal work

Answer 7

• Sale and purchase
• Price / Consideration
• Closing
• Interim conduct
• Post closing covenants
• Representations and warranties
• Seller’s liability package
• Boilerplate

Question 8

SPA clause: What is sales and purchase?

Answer 8

Effects the sale and purchase, clarifies object (simpler in share deals)

Practical tips: cut-off date and reconciliation procedure is essential in asset deals

Question 9

SPA clause: What is Price / Consideration?

Answer 9

Determines price and may include earn-out and locked-box / closing accounts adjustments

Practical tips: buyer’s credit risk / access to funds is essential for execution certainty

Question 10

SPA clause: What is Closing?

Answer 10

Provides for closing mechanics, incl. conditions precedent (regulatory authorisations, etc)

Practical tips: long-stop date is essential. Clarity on which party can extend long-stop date

Question 11

SPA clause: What is Interim Conduct?

Answer 11

Provides for certain rules that the seller must respect in the interim management of the business / assets

Practical tips: careful not to jump the gun

Question 12

SPA clause: What is Post Closing Covenants?

Answer 12

Contains certain covenants that the parties comply with after closing (TSA, non compete, etc.)

Practical tips: clarity on costs split is essential

Question 13

SPA clause: What is Representations and Warranties?

Answer 13

Contains declarations by each party in relation to the SPA and most importantly the seller’s declarations about the business or assets being sold

Practical tips: seller wants to reduce these to a minimum

Question 14

SPA clause: What is Seller’s liability package?

Answer 14

Provides for the terms and conditions under which the seller is liable for the breach of the declarations made the seller in the representations and warranties: period, cap, basket, de-mimis, exclusions..

Practical tips: try to keep some of these subject to confirmation to serve as a bargaining chip

Question 15

SPA clause: What is Boilerplate?

Answer 15

Confidentiality, notices, costs and tax

Question 16

Legal issues when structuring the acquisition?

Answer 16

• Helping decide on the best legal structure given the mix of intended equity and debt
• In the EU, the rules on financial assistance are an important limitation when setting up structures involving third party financing
• Under financial assistance rules a company may not lend money or otherwise extend credit or provide guarantees/security in order for a third party to subscribe or acquire shares representing its own capital
• There is a general prohibition against a company from giving financial assistance to a person, directly or indirectly, for the purpose of acquisition of the company´s shares
• This varies in scope and detail from country to country (e.g. in the UK not applicable to private limited companies)
• Refinancing of existing debt usually not included in prohibition

Question 17

What are the regulatory issues on top of legal issues?

Answer 17

• Plain vanilla: regulatory issues in private M&A transactions in non regulated sectors
• Double whammy: regulatory issues in private M&A transactions in regulated sectors
• Triple whammy: regulatory issues in public M&A transactions in regulated sectors
• Quadruple whammy: regulatory issues in regulated sectors in public M&A transactions in multiple jurisdictions

Question 18

Name three examples of regulated sectors?

Answer 18

Financial sector, energy sector, and aviation sector

Question 19

Financial sector regulations

Answer 19

• Authorisation for the acquisition of qualifying shareholdings
  
  • EU: harmonized across sectors (banks, insurance companies and investment firms)
  • Indirect acquisitions (includes not only direct acquisitions but also indirect acquisitions)
    Calculation criteria: if Buyer is acquiring 32% of a HoldCo that owns 32% of a bank, EU guidelines provide that a 10,24% qualifying shareholding is being acquired
• Fit and proper requirements
• Substantial information requirements
• Concepts are getting fuzzier

Question 20

Energy sector regulations

Answer 20

• Directive (EU) 2019/944 of the European Parliament and of the Council of 5 June 2019 on common rules for the internal market for electricity
• Unbundling of the transmission system operators: persons exercising the activities of generation or supply, and undertakings which control them, are prevented from directly or indirectly exercising control or any rights (including voting rights) over the transmission system operator

Question 21

Aviation regulations

Answer 21

• Regulation (EC)1008/2008, Rules on Ownership and Control of EU air carriers
• Ownership: member states and/or nationals of member states must own more than 50% of the undertaking
• Control: member states and/or nationals of member states must effectively control the undertaking

Question 22

Name one regulatory issue in non-regulated sectors

Answer 22

Merger control
- No jumping the gun (rule: concentrations subject to notification shall not be implemented prior to being notified and prior to a non-opposition decision by the European Commission or national authorities)
- EU: requirement to notify at EU level if thresholds are met (excludes National requirements); requirement to notify at national level if thresholds are met
- Merger review: market definition; market concentration (Herfindahl-Hirschman Index); remedies
- Allocation of antitrust risk:
hell or high water, no go if remedies cause MAE, no go if remedies exceed certain thresholds, buyer retains right to no go if there are any antitrust remedies

Question 23

Name to regulations for public M&A

Answer 23

Takeovers regulation and market abuse regulation

Question 24

What is takeovers regulation?

M&A involving listed companies is basically an entire new specialism for M&A legal practitioners

These can include deals designed to acquire control and keep the company listed or take privates in which the listed company is taken out of the market (Public to Privates or P2P)

Answer 24

o Delisting can be carried out by using squeeze-out and sell out mechanisms after 90% of the voting rights are acquired following a takeover

• Takeover bids can be either voluntary or mandatory. Voluntary bids are subject to less stringent rules than mandatory bids, as they are not subject to minimum consideration rules and can be directed at only some of the shareholders
• In most jurisdictions, the acquisition of control of a listed company need not be effected through a takeover and can be carried out through a private over-the-counter transaction with pre-identified shareholders, but will however as a rule trigger a mandatory takeover in order to allow an exit to minority shareholders and a sharing of the control premium
• Mandatory takeover
• Passivity rule

Question 25

What is a mandatory take over?

Answer 25

Requirement to launch a mandatory takeover in case certain thresholds are crossed (30%/33,3% or 50%) As a result of direct holding of shares but also in certain other numerous situations (shares held by board members, investors acting in concert and additional computation criteria) Minimum consideration requirements Merger control exception for public bids (provided notification has occurred it may be implemented before a decision is issued, provided the acquiring party does not exercise the voting rights or exercises them merely with a view to protecting the full value of its investment on the basis of a derogation previously granted)

Question 26

What is the passivity rule?

Answer 26

Applies to board members. From the moment the management of the target becomes aware of a takeover it may not carry out any acts that materially affect the target’s assets and may significantly affect the success of the offer, unless those acts fall within the ordinary course of business * It is generally accepted that this limitation also applies to subsidiaries of the target * This limitation does not apply to takeovers launched by companies which are not subject to the same rules or are controlled by a company which is not subject to those rules (reciprocity principle) Examples of acts that are not allowed include: • issuing shares and other securities that grant the right to their subscription or acquisition • entering into agreements on the disposal of material portions of the company’s assets • In certain circumstances the following acts are not included in the limitation: - acts resulting from the fulfilment of obligations that were assumed before the target was aware of the takeover - acts authorised by a shareholders’ meeting that has been called exclusively for such purpose - acts aimed at seeking competing bids

Question 27

What is Market Abuse Regulation?

Answer 27

- Limitations arising from insider trading rules - Inside information: information of a precise nature which (i) is not generally available; (ii) relates, directly or indirectly to one or more issuers or securities, and (iii) would, if generally available, be likely to have a significant effect on the price of such securities - Dealing on the basis of inside information and disclosing inside information is a punishable offence - Scope for DD in listed companies should be more limited (any material non public information should have been disclosed on requirement to disclose ad-hoc) - Buyer risks becoming restricted when it becomes aware of MNPI - It is essential for the buyer to negotiate a cleansing announcement within a determined time frame

Question 28

Is SPA needed in public takeovers?

Answer 28

No

Question 29

Regulatory restrictions in M&A transactions in multiple jurisdictions

Answer 29

* Map out detailed regulatory requirements per jurisdiction * Make sure that you have advisers in all jurisdictions * Jurisdiction of Target holdco likely to lead except if located in Lux and off-shore