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Stefan Brunnschweiler, partner for CMS von Erlach Henrici (Zurich), and Hendrik Hirsch, partner for CMS Hasche Sigle (Frankfurt), discussed their most recent study of transactions in Europe and the differences between the U.S. on issues such as purchase-price adjustment and cash-pooling during their presentation at the 2014 Chief Legal Officer Leadership Forum in Chicago on Sept. 17. In the presentation, the duo pointed out there are many differences between the U.S. and Europe when it comes to M&A transactions. According to Brunnschweiler, purchase-price adjustment varies greatly between the U.S. and Europe. In the U.S., Brunnschweiler said, more than 85 percent of the deals have a classical purchase-price adjustment, but in Europe, more than half of the transactions don’t have such an adjustment mechanism. In addition, Hirsch noted the lockbox mechanism is viewed differently in the U.S. and Europe, and cash-pooling varies across these regions too: “You need to look at whether you’re cash-pooling arrangement is in compliance with applicable laws, because there are various differences within Europe. If you have European entities that are participating, this is extremely important because depending on where you look, [as] cash-pooling might require certain specific indemnifications from the seller’s side and probably from the buyer’s side as well.” There are risks with cash-pooling arrangements, Hirsch said. However, an organization that understands how to minimize these risks, Hirsch noted, can avoid problems down the line: “So how can you reduce these liability risks? Sometimes it is necessary to adjust the articles of association of the participating entity, clearly stating that it is allowed to enter into intragroup arrangements. Sometimes it is necessary to come up with a shareholder resolution proving the entering into the cash-pooling arrangement for the participating entity. But in particular, that is true throughout Europe.” - See more at: http://www.argylejournal.com/general-counsel/2014-chief-legal-officer-leadership-forum-stefan-brunnschweiler-partner-cms-von-erlach-henrici-zurich-and-hendrik-hirsch-partner-cms-hasche-sigle-frankfurt/#sthash.w276c2ou.dpuf
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Across the Pond – Doing Deals in Europe
CLO Conference, Chicago, 17 September 2014
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Key Differences
- Purchase Price Adjustment vs. Locked Box
- Cash Pooling in Europe – Implications on M&A Transactions
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- Sixth edition
- More than 2,100 deals
- Seven-year period (2007 – 2013)
- Insight into M&A agreements
- Sector Focus
- Comparison of Europe / US
CMS European M&A Study 2014
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43%
57%
Purchase Price Adjustment Europe/US
Europe 2013 US*
100% = all evaluated transactions
Yes
No
* US data derived from “2013 Private Target Mergers & Acquisitions Deal Points
Study” by the American Bar Association (ABA), Business Law Section
85%15%
12
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Purchase Price Adjustment 2007–2013
100% = transactions with no purchase price adjustment mechanism
47%
53%
Yes
No
41%
59%
Europe 2007–2012
43%
57%
Europe 2013
40%
60%
“Locked-box”2007–2012
“Locked-box”2013
Yes
No
100% = all evaluated transactions
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Locked Box - What is it?
The locked box is a mechanism under which the parties agree a price payable for the target company based on an agreed historical balance sheet in advance of the SPA signing.
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Pricing/Completion Mechanism in the SPA
- Buyer takes over economic ownership of the target before it legally owns the business
- No Leakage in the "Gap Period" (other than "Permitted Leakage") so buyer gets expected level of working capital / net debt at closing
Locked Box Date (balance sheet used for valuation)
SPA signing date Closing date (no closing accounts prepared)
Payment of final purchase price
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How does the box lock?
- During the "Gap Period" no leakage is allowed
- Only payments in the ordinary course of business are allowed (unless "Permitted Leakage" has been pre-agreed prior to signing the SPA and buyer has priced this into its equity value already e.g. agreed dividend amount)
- Changes in working capital should be balanced by equal changes in net debt
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Relevant Contract Clauses
- Definitions: "Leakage" vs. "Permitted Leakage"
- Purchase Price / Interest
- Transfer of benefit and risk
- Conditions precedent
- Conduct-of-Business
- Warranties
• Financial Statements
• Changes since reference date
- Remedies in the event of leakage
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Cash Pooling in Europe
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Cash Pooling in Europe
- Introduction and Overview- Legal Frameworks for Cash Pooling- Liability Risks- Mitigating Liability Risks- Banking law and tax considerations
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Introduction and overview
- Cash Pooling is a standard intra-group financing feature- Importance for post-merger integration
• Up-stream securities• Pooling of liquidity
- Importance for pre-merger preparation• internal sanity check • negotiating specific indemnifications from seller's and buyer's
perspective
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Legal Frameworks in Europe
- Generally no explicit, comprehensive, specific legal framework in most jurisdictions
- Capital maintenance and liquidity protection rules• no distribution to shareholders if payment would cause adverse balance
or overindebtedness • treatment of repayment claim – fully recoverable?• liquidity protection• interest and security → arm's length test• national particularities
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Liability Risks
- Mainly: insolvency scenario- Personal liability of directors and (direct and indirect) shareholders
• directors of participating company• directors of cash pool leader• cash pool leader and ultimate parent company
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Mitigating Risks
- Articles of Association- Shareholder resolution- Information rights of participating entities- Termination rights of participating entities- Target balancing- Joint and several liability of participating entities
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Banking law and tax considerations
- Banking law- Tax law
• interest as income• hidden profit distribution• deductibility of interests – thin capitalization rules
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Contact
Stefan BrunnschweilerPartner | Corporate / M&A
Stefan Brunnschweiler is a partner and specializes in international and domestic mergers & acquisitions transactions, corporate restructurings, corporate law and general contract matters (e.g. joint ventures, partnerships and shareholders' agreements). He is experienced in a broad range of national and international transactions both sell- and buy-side (including corporate auction processes) and the assistance of clients in their ongoing corporate and commercial activities.
Stefan Brunnschweiler graduated from the University of Zurich in 1997. In 2000, after serving as a law clerk at the district court of Winterthur, he was admitted to the bar. He joined CMS von Erlach Poncet in 2001. Stefan Brunnschweiler completed a masters program (Master of Laws, LL.M.) at the University of San Diego School of Law and worked as a foreign associate with Higgs, Fletcher & Mack in San Diego (USA) before returning to CMS von Erlach Poncet by the end of 2003. He is a partner with CMS von Erlach Poncet since 2008.
T +41 44 285 11 11M +41 76 419 97 97E [email protected]
CMS von Erlach Poncet LtdDreikönigstrasse 78022 ZurichSwitzerland
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Contact
Dr. Hendrik HirschPartner | Corporate / M&A / Private Equity
Hendrik Hirsch is a Corporate/M&A partner with CMS Hasche Sigle in Frankfurt, Germany. His practice focuses on national and international corporate transactions for strategic and financial investors as well as corporate law, including corporate governance. He has more than 10 years of experience advising numerous national and international investors and group companies on their investments and other business activities in Germany.
Hendrik Hirsch is co-head of the Corporate/M&A group of CMS Hasche Sigle representing the Frankfurt office.
Hendrik Hirsch studied law in Heidelberg and Carleton University / Ottawa, Canada. Doctorate with Prof. Dr Peter Hommelhoff (1997/1998) with a Ph.D. scholarship of Arbeitskreis Wirtschaft und Recht im Stifterverband für die Deutsche Wissenschaft. From 1999 to 2001 legal traineeship in Berlin, incl. Berlin Court of Appeal. Joined CMS Hasche Sigle in 2001. He is a partner since 2007.
T +49 69 71701 226M +49 174 344 45 96E [email protected]
CMS Hasche SigleBarckhausstraße 12-1660325 Frankfurt am Main
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