Transcript Document

CROSS-BORDER INVESTMENTS
- ELECTIVE COURSE Rainer Kulms
Max Planck Institute for Comparative and International Private
Law – Hamburg
[email protected]
1.
2.
3.
4.
5.
6.
Cross-Border Investments – Statistics – Definitions
Investment and Risk Patterns – Choice of Form
Joint Ventures – Inbound Investment Controls
Negotiating an M & A Deal – Company Law Aspects
EU Takeover and Competition Laws
Acquisition Finance
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Introduction – The Statistics (Worldwide)
Source: European Chamber of Commerce in China (2013)
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2011 Sectorial China ODI Stock
Source: TÜSIAD/2011 Statistical Bulletin of China’s ODI
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Introduction – The Statistics (EU Questionnaire)
Source: European Chamber of Commerce in China (2013)
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DISTRIBUTION OF CHINESE M & A IN THE EU OF 27
- 2000 – 2010 -
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Source: Thompson Reuters (2011)
Investment Patterns I (NEUSOFT/Philips) (HYPO 1)
NEUSOFT/PHILIPS (Cooperation Phase 1)
Neusoft (China)
Philips
Philips and Neusoft Medical Systems Co. Ltd.
51%
49%
Joint Venture Agreement and ‘Best Practices’:
Technological Innovations, Patents
Use Distributions Chains of Both, Philips and Neusoft
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Investment Patterns II (NEUSOFT/Philips ctd.)
NEUSOFT/PHILIPS (Cooperation Phase 2)
Neusoft (China)
Philips
Philips and Neusoft Medical Systems Co. Ltd.
0%
100%
Philips and Neusoft will share access to intellectual property
(shared ownership/licences) and will continue partnership
for supply of components.
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Investment Patterns III (Shenyang Machine Tool Group/Schiess)
HYPO 2
Phase I (prior to 2004)
Schiess privatised, but
heavily undercapitalised
Shenyang Machine Tool Group
owns 40 %
Close to insolvency
Phase II (after 2004)
Schiess
Shenyang Machine Tool Group
owns 100%
►Shenyang’s Undertakings
Invest 40m € to make Schiess competitive
Keep German workforce and expand if profitable
Envisage Joint Venture with suppliers.
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Investment Patterns IV (Putzmeister) (HYPO 3)
Private Shareholders
(Family) Foundations
Putzmeister (high-tec
pumps) (medium-sized)
Sany Heavy Ind., 90%
Share
deal !
360 m €, 3000
employees, 6m € profits
on sales of pumps
Citic PE Advisors, 10%
US $ 12
bn in
2013
►German industrial companies
►CIC (?) buying minority stakes in UK infrastructure co’s.
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Investment Patterns V (Sanhua/Aweco) (HYPO 4)
Sanhua China
Aweco Germany
Insolvent
German patents
Banks
Sanhua Europe
European Subsidiaries
►Share – Asset Deal
▪Sanhua Europe buys Aweco’s European subsidiaries
▪Sanhua Europe buys Aweco’s customer contracts
▪Sanhua buys Aweco’s technology and intellectual property
rights (including patents)
▪Sanhua buys Aweco’s production plants and assumes all debts
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Regulatory Challenges – The Statistics I
Source: European Chamber of Commerce in China (2013)
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Regulatory Challenges – The Statistics II
Source: European Chamber of Commerce in China (2013)
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RISK ASSESSMENT CONSIDERATIONS I
►CHINESE ACADEMY OF SOCIAL SCIENCES (2013):
Country Risk Ratings for Chinese Overseas Investment
Germany
AAA ▪Yield rate for Chinese FDI
Australia
AA ▪Safety and security of investment
Canada
AA ▪Key factors
France
AA Economic foundations, debt paying
Italy
AA ability, resilient society, political risk,
Korea (Rep. of)
AA relations with China
USA
AA ▪Consider cultural differences
UK
AA
High Risk Countries: Vietnam, Mongolia, Angola, Sudan
Source: China Daily online (21 November 2013)
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RISK ASSESSMENT CONSIDERATIONS II
►Investment Target – Form of Cooperation
▪Consider establish of a European subsidiary
▪Long-term contract without establishing a corporate
body (consider research cooperation/exploring future
joint activities)
▪Consider Framework Contract as a prelude to a closer
form of cooperation
▪Joint Venture defines cooperation and lays down rules
for activities usually in a body of corporate law
▪Partnerships
▪Limited Liability Companies
▪Listed or non-listed corporations
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RISK ASSESSMENT CONSIDERATIONS III
►Chinese Regulatory Approvals for Outbound Investments
▪National Development Commission (NDRC)
Filing requirements (provincial branch) < 300m US $
File with NDRC direct ≥ 300m US $
Approval for investments ≥ 1 bn US $ or sensitive
countries or industries
Approval by State Council ≥ 2 bn US $ or sensitive
countries or industries
▪MOFCOM: inter alia investment agreement/contract
▪State Administration of Foreign Exchange (SAFE)
▪Rules for State-owned Enterprises
▪Shanghai Exchange/Natural Persons/Industry-specific
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NON-LEGAL ASPECTS: Culture
Guanxi
▪Chinese Negotiation Team:
State-owned Enterprises and Privately-owned Enterprises
▪European Negotiating Team (German/non-German):
Hierarchical Structure of Enterprises
- Subordinate units and middle-management level have
more discretion to decide issues independently
- Negotiating team will prepare strategy for realising
project and will have power to decide with some
flexibility– law department or attorney will involved at
an early stage
- Negotiations to be realised within a certain timeframe
and final contract will be prepared
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OUTBOUND INVESTMENT – CHOICE OF FORM I
Source: European Chamber of Commerce in China (2013)
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OUTBOUND INVESTMENT – CHOICE OF FORM II
▪Branch of a Chinese Company (head office located in PRC):
Immediate Focus is not in entrepreneurial activities.
Liability concerns are not controlling.
Representative Office (legal status?)
- cost considerations
- some jurisdictions notification duties under trade law
- branch of a Chinese corporation (EU law terminology):
File documentation with Commercial Registry or
equivalent (incl. corporate charter of Chinese
corporation): Legal representatives ( board of directors)
must have good standing (no breach of law)
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Investment Patterns Revisited (Sanhua/Aweco)
Sanhua China
Aweco Germany
Insolvent
German patents
Banks
Sanhua Europe
European Subsidiaries
►Share – Asset Deal
▪Sanhua Europe buys Aweco’s European subsidiaries
▪Sanhua Europe buys Aweco’s customer contracts
▪Sanhua buys Aweco’s technology and intellectual property
rights (including patents)
▪Sanhua buys Aweco’s production plants and assumes all debts
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Investment Patterns Revisited (NEUSOFT/Philips)
NEUSOFT/PHILIPS (Cooperation Phase 1)
Neusoft (China)
Philips
Philips and Neusoft Medical Systems Co. Ltd.
51%
49%
Joint Venture Agreement and ‘Best Practices’:
Technological Innovations, Patents
Use Distributions Chains of Both, Philips and Neusoft
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OUTBOUND INVESTMENT – CHOICE OF FORM III
Partnerships and Creditors
▪(Commercial) Partnerships
- a matter of dispute: (quasi-) legal personality
- Freedom of contract – very few statutory requirements
- Partners: Masters of their business
- No legal capital
▪ordinary partnerships under
French and German laws
- Beneficial tax regime
▪commercial partnerships
- No disclosure regime
(société en nom collectif)
- No co-determination
Governance structure?! ▪UK Partnership Act 1890 (for
making profits)
Consider Hedge and
Partnerships and Funds
Private Equity Funds
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OUTBOUND INVESTMENT – CHOICE OF FORM IV
▪(Commercial) Partnerships ctd.:
DISADVANTAGES FROM A BUSINESS PERSPECTIVE
- Unlimited liability (Germany/UK): partners jointly and
severally liable; France: unlimited liability in proportion to
members’ participation (General Partnerships) (Fra: prüfen)
►Limited Partnerships (Kommanditgesellschaft/société en
commandite simple)
- Limited Partners: member’s participation maximum amount
- General Partner unlimited liability
Hybrids
►Problem zones: Decision-making process
Lack of comprehensive legal personality
Insolvency scenario
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OUTBOUND INVESTMENT – CHOICE OF FORM V
▪Establishment of a Corporate Entity (as a Greenfield
Investment or as an Entity jointly owned by the Chinese and
European Partners)
ADVANTAGES FROM A BUSINESS PERSPECTIVE
▪Separate Legal Personality (
Protection from Creditors)
▪Limited Liability (
Assessment of Maximum Losses)
▪Centralised Management under a Board Structure
▪Free Transferability of Shares (Investor Ownership by
Contributors of Capital)
Limitation on number of
►Consider: Best Corporate Form
shareholders
Listed Corporations/Non-listed corporations/private (closed
corporations)
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OUTBOUND INVESTMENT – CHOICE OF FORM VI
►Consider: Best Corporate Form ctd.
Listed Corporations
▪big enterprises
▪larger number of shareholders (but consider
blockholdings v. dispersed ownership)
▪subject to statutory corporate governance requirements
and non-binding corporate governance codes
▪capital markets are tapped
▪freedom of contracts is severely restricted by statutory
law in order to protect creditors and minority
shareholders
Shareholders’ Agreements
Note: Close corporations and commercial partnerships
outnumber listed corporations (Germany/family businesses)
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OUTBOUND INVESTMENT – CHOICE OF FORM VII
►Consider: Best Corporate Form ctd.
Private Corporations & Limited Liability Companies (GmbH’s)
▪smaller and mid-sized (family) businesses (consider Germany)
▪limited number of shareholders
▪de facto limitation on transferability of shares (pre-emptive
rights of remaining shareholders) by articles of association or
shareholder agreement signed by all shareholders
▪Members control management of the company more directly
▪Access to capital markets is problematic
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OUTBOUND INVESTMENT – CHOICE OF FORM VIII
►Legal Materials of the European Union
Second Company Law Directive (Minimum Capital for
(Non-) Listed Corporations (Public Limited Companies)
Regulation on the Societas Europaea (EC 2157/2001)
►National Legal Materials
▪UK Companies Act 2006: public limited companies (plc) and
private limited company (ltd.)
▪Germany:
Aktiengesellschaft
(Aktiengesetz
–
Stock
Corporation Act)/Limited Liability Companies (GmbH’s)
(GmbH-Gesetz – Act on Limited Liability Companies)
▪France Code de Commerce: Société anonyme (SA)/Société à
reponsabilité limitée (sarl)
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Capital Structure (Legal Capital -Europe)
►EU 2nd Company Law Directive minimum capital 25,000 €
►Rules relating to the raising of capital
through the issuance of shares, the maintenance of share
capital and the returning of value to the shareholders not
infringing the maintenance of capital requirements (Ferran).
▪Pay up shares in cash (including a release of a liability for a
liquidated sum or a credit equivalent to payment in cash)
▪No issue at a discount (know-how, patents, non-cash
consideration)
▪No undertakings for future activity as consideration
US: No ‘stated capital’, no legal capital
►Balance sheet
►Net assets test
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France:€ 37000/225000
Germany: € 50000
UK: £ 50000
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Shenyang Machine Tool Group/Schiess - MODIFIED
Phase I
Schiess privatised, but
heavily undercapitalised
Close to insolvency
Phase II
Schiess
Shenyang Machine Tool Group
owns 40 %
Restructuring Plan
▪Decrease legal capital (1st step)
▪Increase legal capital (2nd step)
▪Shenyang Machine Tool Corp.
owns 75%, ‘old’ shareholders
stay out
►Shenyang’s Undertakings
Invest 40m € to make Schiess competitive
Keep German workforce and expand if profitable
Envisage Joint Venture with suppliers.
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Legal Capital – Decrease and Subsequent Increase as
Elements of a Restructuring Plan
►Consider
Statutory prohibition of paying out legal capital.
Corporate need to adjust capital after heavy losses
After insolvency: priority rights of secured creditors would
have to be respected
►Decrease as consequence of corporate restructuring process
▪Vote of the shareholders’ meeting (duty to accept?)
▪Proportionate reduction may result in a loss.
Increase (new shares) to be offered proportionately, but
statute allows for derogation in favour of new investor.
Consider Joint Venture and Shareholder Agreements
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Touching Down on the Host Country – Founding a Limited
Liability Company or a Corporation - Basics
►Limited Liability Companies (GmbH’s)
If Chinese investor is not a private person, legal capital and
financing are not a problem.
Limited Liability and statutory regime on shareholders’
right are decisive.
►(Non-)Listed Corporation (Aktiengesellschaft)
Prestige
Raising Capital at the Stock Exchange (cf. IPO’s)
One-person stock corporation is permitted.
Non-European/European shareholders need not establish a
formal joint venture.
Corporate charter/shareholder agreement must address
potential blocking situations and coordination of wills.
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Touching Down on the Host Country – Founding a Limited
Liability Company or a Corporation (FORMATION I)
►Limited Liability Companies (GmbH’s)
Identity and number of founders, scope of business activities
and amount of legal capital
Shareholders’ Agreement?!
articles of association
Must be notarised and filed with commercial register
(including a list of shareholders)
Acting manager (equivalent to CEO) must be appointed who
duly represents the limited liability company.
Composition
Appointment of Supervisory Board
(for companies not subject to codetermination laws?)
Appointment of an Advisory Committee as a mechanism to
balance interests of shareholder groups?
Composition
Contributions in cash or in kind?
50%:50%?
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Touching Down on the Host Country – Founding a Limited
Liability Company or a Corporation (FORMATION II)
►(Non-)Listed Stock Corporation
Agreement on statutes and bylaws by founding members
Name of company, scope of business activities
Place of business
Shareholders’ Agreement?!
Amount of legal capital/members contributions
Mode of distribution of profits/financial year
Appointment of Board of Directors and Supervisory Board
Contributions in cash or kind?
Check requirements under capital market laws
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Corporate Governance Structures and the Capital Market
One-tier Corporations
Board of Directors
Shareholders
Two-tier Corporations
Cf. Updated Action Plan on
European Company Law
Accounting/Internal Control
Mechanisms/Audit and
Remuneration Committees
Shareholders – Bondholders
Other Creditors
Board of Directors
Supervisory Board
THE CAPITAL MARKET
Shareholders
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Corporate Governance Structures - Labour
One-tier Corporations
Board of Directors
Participation of Labour in the
Decision-Making Process
▪German codetermination
models (≥500 from 1/3 to 50%)
(cf. Austria and Denmark)
Shareholders
Two-tier Corporations
Board of Directors
Supervisory Board
▪Representative Bodies at the
local plant level
Works Councils,
No participation in decisionmaking, but organisation of
work (e.g. overtime)
Shareholders
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Corporate Governance Structures – Directors’ Duties
►Duty of care owed by each member of the Board of Directors
in the light of the business judgment rule
-Fleshed out by employment contract, corporate
governance codes and specific compliance schemes
-Does the business judgment rule counterbalance
litigious shareholders and judicial activism?
-Does the business judgment rule qualify as a safe
harbour provision?
Director’s liability and expert advice
Director’s liability and conflict of loyalties
Should the Joint Venture or Framework Agreement lay
down a catalogue of directors’ duties?
Who polices a breach of duties in a Joint Venture setting?
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NEUSOFT/Philips Revisited: The Joint Venture Perspective I
NEUSOFT/PHILIPS (Cooperation Phase 1)
Neusoft (China)
Philips
Philips and Neusoft Medical Systems Co. Ltd.
51%
49%
Joint Venture Agreement and ‘Best Practices’:
Technological Innovations, Patents
Use Distributions Chains of Both, Philips and Neusoft
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NEUSOFT/Philips Revisited: The Joint Venture Perspective II
NEUSOFT/PHILIPS (Cooperation Phase 2)
Neusoft (China)
Philips
Philips and Neusoft Medical Systems Co. Ltd.
0%
100%
Philips and Neusoft will share access to intellectual property
(shared ownership/licences) and will continue partnership
for supply of components.
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Joint Ventures - Basics
►Why a Joint Venture?
▪Reduction of cost by sharing resources and network.
▪Cost-effective route for expansion and access to wider market
or an increased customer base.
▪Access to technology
Joint Ventures v. M & A
▪Empirical evidence: joint ventures may be more
profitable.
▪A joint venture may lead to an acquisition.
“Equity” and “non-equity” alliances
Equity: each of the parties contributes capital to a jointlyowned, separate business (high degree of integration)
Non-equity: Cooperation without direct profit-sharing
(e.g. R&D collaborations, joint production arrangements).
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Joint Ventures – Due Diligence (Survey)
►Focus on key assets required to achieve the business objectives
▪Commercial: products, market, distribution, suppliers, risk
management, IT etc.
▪Financial: incl. review of current management accounts,
profitability of major contracts, cost allocations, material
differences in accounting policies
▪Legal: incl. investigation of titles to key assets and properties,
material contracts, litigation or claims, regulatory licences,
anti-bribery procedures
▪Technology: evaluation of technological assets, know-how
patents
▪Land/buildings/facilities
▪Environmental/health and safety
▪Employees/personnel benefits
▪Tax
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Joint Ventures – Information Exchange Agreement
►In spite of Confidentiality Agreement information may be so
sensitive that additional protection against misuse is necessary.
Agree on:
▪restricted access to: people who need to know, senior
employees (individual confidentiality undertakings)
▪restrictions on: copying information and removing
documentation
▪use of electronic or ‘virtual’ data room by: access
controlled by protected passwords
▪’staggering release of information’: sensitive information
will not be released until disclosing party is reasonably
certain that JV will go through
▪making certain information only available to third parties
(e.g. accountants, lawyers, financial advisers or other
specialists)
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Joint Ventures – Risks and Challenges I
►Risks of Collaborative Relationships
Duration/Jurisdiction
▪Loss of intellectual property
▪Reputational risk arising from association with another
company
▪Undue reliance on other firms in core areas
▪Leaking of information on corporate strategy
▪Distraction of personnel from focus on core corporate activity
►Key Challenges During Negotiations
▪Partner’s contributions (cash/know-how/in kind (incl. assets))
▪Valuation of intangibles
▪Management control
▪Processes to carry out subsequent changes
▪Ownership structure
▪Governance bodies
▪Performance valuation ▪Clear agreement on objectives
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Joint Ventures – Risks and Challenges II
►Key Challenges During Negotiations ctd.
▪Expected benefits (Dividends/Royalties/Retained Earnings)
▪Cooperation v. Competition
▪Protection of remaining business
▪Legal and management mechanisms to separate existing
businesses from newly established joint entity
▪Dispute settlement mechanisms instead of litigation before
courts?
▪Exit-strategies and walk-out mechanisms
For Framework Agreement and/or Shareholder
Agreements see next slides
For structure and legal instruments for the negotiation
process see M & A section of class
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Joint Venture Structure and Ancillary Contracts I
Technology Joint Venture
A
Technology
Licence Agreement
Supply & Purchase
Contract
B
Shareholders’ Agreement
Technology
Licence Agreement
Construction and
O & M contracts
JVC
Production Plant
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Supply & Purchase
Contract
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Joint Venture Structure and Ancillary Contracts II
- TECHNOLOGY JOINT VENTURE ►JVC is established to pool and develop the technologies in a
particular area and develop a production plant utilising that
technology
▪undertake joint R&D to share capital cost through JVC in
building plant which B is to operate and maintain
▪Technology licence agreements
Provision of technology and technical assistance: Substantial
remuneration (lump sum and/or royalties payments) or value
to be taken in account in the capitalisation of JVC
▪Supply/purchase contracts: Take input of production.
Pricing and profitability of the JVC
▪Construction contract
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Joint Venture Structure and Ancillary Contracts III
“Foreign” Production Joint Venture
A
Shareholders’ Agreement
B
Site lease
Component Supply
Technology transfer and
assistance agreement
JVC
Distributorship with a subsidiary
of A
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Asset transfer/services
agreement
domestic customers
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Joint Venture Structure and Ancillary Contracts IV
- “FOREIGN” PRODUCTION JOINT VENTURE ►A joint venture is established in a “foreign” country to build a
production plant which will be supplying markets.
▪Technology licence agreements
Jurisdictional issues
between A and JVC for the licence of A’s technology,
technological assistance to the JVC, and remuneration and
cost reimbursement
▪Distributorship agreement for the distribution export and
domestic sales
▪Land transfer or lease between B and JVC for the availability
of the site
Plant construction contract
▪Asset transfer agreement for the transfer of specific assets
(incl. workforce and ancillary services/components))
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Joint Ventures – SHAREHOLDERS’ AGREEMENTS I
►Key Issues
Transfer situations!
▪Parties to the JVC? Parent company guarantees?
▪Purpose of the JVC? Should a Business Plan be attached?
▪Formation and Capital
Choice of law
▪Additional financing (inter alia emergency funding)/guarantees
▪Governance and board structure (removal of directors, supermajority, deadlock resolution procedures)
▪Financial matters: dividend policy/preparation of budget and
business plans
▪Reporting and Information (procedures for shareholder info)
▪Inter-party relationship issues: non-compete, secondment,
cooperation on tax matters/confidentiality
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Joint Ventures – SHAREHOLDERS’ AGREEMENTS II
▪Contractual protection v. articles of association
▪Stipulation for strategic minority investments
▪Deadlock and breakdown situations
►Deadlock notices and internal dispute settlement mechanisms
►However, if matter cannot be settled amicably, mediation OR
►Russian Roulette: offer to buy or to sell and recipient of
notice must accept, if not: dissolution (OR: mediation)
►Texas Shoot-out: each shareholder may submit sealed bid for
purchase of shares, highest bid shall prevail, if not dissolution
(OR: mediation)
►Tag-along: third party offer to purchase shares from one
shareholder. Selling shareholder may only sell if purchaser
buys out the remaining shareholders.
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Joint Ventures – SHAREHOLDERS’ AGREEMENTS III
►Drag-along: third party offer to purchase shares from one
shareholder. Selling shareholder serves notice to other
shareholders requiring them so sell as well.
►Put options: Party A is entitled to require party B to
purchase A’s shares in the JVC (exit protection for minority
shareholders)
►Call options: Party A is entitled to require party B to sell
shares in the JVC to (buy-out mechanism for the majority
shareholder).
►Default (definition thereof and consequences)
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CASE STUDY: Putzmeister Revisited I
Private Shareholders
(Family) Foundations
Putzmeister (high-tec
pumps) (medium-sized)
Sany Heavy Ind., 90%
Share
deal !
360 m €, 3000
employees, 6m € profits
on sales of pumps
Citic PE Advisors, 10%
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CASE STUDY: Putzmeister Revisited II
►Scenario prior to Acquisition
▪Loss of sales on the Chinese market
▪Loss of traditional European and North American markets
due to the financial and economic crisis.
▪Turnover in 2007 1bn €, 2009 less than 500m €, but
financially healthy
▪Continuation of crisis will threaten existence of enterprise
Strategic Options
▪Shift from Western to new (Asian) markets, cut cost
▪Major weakness: lack of diversification (calls for new
strategic partner)
►Take-over or Merger with a business partner (initial talks
with a Swedish business partner)
Professional Bidding Process to Find the Optimal Partner
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CASE STUDY: Putzmeister Revisited III
►Transaction Process
▪Disappointing 1st round of offers from Western Hemisphere
(Morgan Stanley involvement)
▪2nd Round includes Chinese Bidders (Zoomlion/Sany)
▪End of 2011/early 2012 Invitation to Potential Buyers to
Submit Memorandum
▪Sany Offer: 525m € enterprise value, 360m € enterprise value
▪Zoomlion expresses interest, but German owner prefers
private Chinese owner
Sany does not insist on Due Diligence, but is ok with Due
Diligence Presentation by CEO and CFO.
▪Due Diligence Presentation to serve as basis for future
contractual stipulations on guarantees and warranties
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CASE STUDY: Putzmeister Revisited IV
►Negotiation Process and Conclusion of Deal
▪German owner and Chinese negotiators meet in Frankfort.
Guanxi seems to have worked. Signature of Acquisition
Contract within a week after the first meeting.
▪Regulatory Permits
Chinese Authorities
Close Cooperation with EU and National Antitrust
authorities to obtain clearance of the deal.
Ex post Assessment
▪Exemplary Speed in a cross-border deal
▪Sany has fulfilled its assurances with respect to Putzmeister
▪Putzmeister will retain premium standing on non-Chinese
markets (Sany cedes market position to Putzmeister)
▪Sany invests in Putzmeister
German management retained, former owner joins Sany board
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HOST COUNTRIES – Controls of Inbound Investments
USA I
►Section 721 of the Defense Production Act of 1950, 50
U.S.C. App. 2170Security agreement
►Foreign Investment and National Security Act of 2007
Committee on Foreign Investment in the United
States (CFIUS) Review Procedure
Presidential
“Critical Technology”
order can be
File a notice with CFIUS
challenged in
CFIUS investigates and may impose
court
binding mitigation measures
2012 Presidential Order directing divestiture of a
Chinese acquisition in the US: wind farm project in the
vicinity of restricted airspace (naval weapons training centre)
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HOST COUNTRIES – Controls of Inbound Investments
USA II (Source CFIUS February 2015)
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HOST COUNTRIES – Controls of Inbound Investments
USA III (Source CFIUS February 2015)
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HOST COUNTRIES – Controls of Inbound Investments
FRANCE
►Décret no. 2014-479 of 14 May 2014 relatif aux
investissements étrangers soumis à autorisation préalable:
Prior approval for activities with an impact on
public order, public safety and national security, and
research activities in national defence matters, and
▪supply of water, electricity, gas, hydrocarbon
and other source of energy
▪public transport
▪electronic communication network
and services
▪public health matters
Compatibility with EU law is uncertain
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HOST COUNTRIES – Controls of Inbound Investments
UNITED KINGDOM
►Merger Assessment Guidelines 2010 (Competition
Commission/Office of Fair Trading)/Enterprise Act 2002 (s. 4
et seq.) 2002
Secretary of State may intervene in public interest cases:
▪national security (including public security)
▪the interests of maintaining the stability of the UK
financial system
▪the need for: Reference to Competition Commission
- accurate presentation of news in newspapers
- free expression of opinion in newspapers
- sufficient plurality of persons with control of media
enterprises
-availability of wide range of broadcasting
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HOST COUNTRIES – Controls of Inbound Investments
GERMANY
►Foreign Trade and Payments Act of 2013 and Foreign
Trade and Payments Ordinance of 2013
►Sector-wise approach + analysis of security interests
Prohibition of an acquisition or specific instructions by the
Federal Ministry of Economics to
▪guarantee essential security interests
▪prevent a disturbance of the peaceful coexistence of
nations
Certificate of non-objection
▪guarantee public order
▪counteract a danger to the coverage of vital needs
▪sector-specific: military goods + products with IT
security functions (MUST OBTAIN CLEARANCE)
Compatibility with EU law?
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59
M & A Statistics (EU) – 2013 Value – US $ bn)
•
•
•
•
•
•
•
•
•
•
•
Business Services
29
Consumer
59.5
Energy, Mining, Utilities 117.5
Financial Services
89.9
Industrials & Chemicals 69.9
Leisure
13.8
Pharma/Medical, Biotech 50.9
Reals Estate
23.8
TMT
132.2
Transport
23.4
Other
21.7
2013 – Activity picks up
in UK and Germany
 Vodafone deal
 Dutch telecom sells
German mobile
subsidiary
 PR merger deal in
Amsterdam OmnicomPublicis
 Germany Real Estate
 Hannover Rück
 UK – IPO market
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CHOOSING THE M&A DEAL STRUCTURE
- Basics Shareholders
Board
Shareholders
Board
Target Co
Assets and
Liabilities
Assets and Liabilities
Bidder Co
Assets and
Liabilities
Consider Takeover law !
Old B Shareholders
FINANCE !?
T shareholders hold
Cash, no stock
Risk
Analysis!
Post-Merger: Bidder Co. holds its
assets and liabilities + the old T ones
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61
TYPOLOGY OF M & A CASES I
►STOCK FOR CASH MERGER: Pfizer, Inc., and Pharmacia
plan to merger into a single firm with Pfizer designated
as the surviving corporation.
Merger plans calls for Pharmacia shareholders to
receive Pfizer common stock amounting to 27 percent of
Pfizer’s outstanding stock after the merger is completed.
►ACQUISITION OF CLOSELY HELD COMPANY BY
ANOTHER
Founder of Business is the sole shareholder of a thriving
business with a medium-size number of employees
Sale of business through a broker
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TYPOLOGY OF M & A CASES II
►DISTRESSED MERGER: Acquisition of a company in
financial trouble, with liquidity concerns or during
bankruptcy proceedings or as part of a court-approved
reorganisation.
Examine asset sale
Due Diligence (Liability Issues)
Shift of Directors’ Fiduciary Duties
Fraudulent Conveyance – Creditors
Acquisitions in a Reorganisation Context
Enforceability of Inter-Creditor Agreements
Controlled bids – Negotiated M & A – Takeover bid
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Shenyang Machine Tool Group/Schiess - MODIFIED
Phase I
Schiess privatised, but
heavily undercapitalised
Close to insolvency
Phase II
Schiess
Shenyang Machine Tool Group
owns 40 %
Restructuring Plan
▪Decrease legal capital (1st step)
▪Increase legal capital (2nd step)
▪Shenyang Machine Tool Corp.
owns 75%, ‘old’ shareholders
stay out
►Shenyang’s Undertakings
Invest 40m € to make Schiess competitive
Keep German workforce and expand if profitable
Envisage Joint Venture with suppliers.
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TYPOLOGY OF M & A CASES IV
►ASSET DEAL
30 shareholders from an extended and disjointed family
Target company manufactures equipment at a leased factory
Deal: Purchase the equipment, contain environmental losses
Specify the objects covered by the agreement
Seek consent for transferring contracts
Consider: Distressed M & A/ Divestiture
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Investment Patterns Revisited (Sanhua/Aweco)
Sanhua China
Aweco Germany
Insolvent
German patents
Banks
Sanhua Europe
European Subsidiaries
►Share – Asset Deal
▪Sanhua Europe buys Aweco’s European subsidiaries
▪Sanhua Europe buys Aweco’s customer contracts
▪Sanhua buys Aweco’s technology and intellectual property
rights (including patents)
▪Sanhua buys Aweco’s production plants and assumes all debts
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66
Share Deal v. Asset Deal
►Purchase of Companies
holding assets and liabilities
▪Assets kept a book value
▪Liabilities (disclosed and
undisclosed) acquired by the
Purchaser, subject to
contractual stipulations
▪Tax risks
▪’skeletons in the cupboard’
►Purchase of Assets of
Liabilities
▪Re-setting of amortisation
▪Explicitly assume liabilities
(BUT CF. TAX, LABOUR,
ENVIRONMENT)
▪Flexibility (but consider
name of the company,
contracts and permits)
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Asset Deal v. Corporate Restructuring/Divestiture (HYPO 5)
►A corporation with a port
X has shares
€ 130,000
►A new corporate entity
Management Inc.
- a corporation -
Harbour Corporation
- Legal Capital € 1.7 bn -
A 100 pc subsidiary is
established, in exchange
for shares, the port is
transferred to the new
corporation
Port: 80 per cent
20 pc
of assets
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M & A – Typology III
►NEGOTIATED SHARE DEAL WITH SHAREHOLDERS
OF A NON-LISTED COMPANY ( FRIENDLY TAKEOVER)
Private Shareholders
(Family) Foundations
Putzmeister (high-tec
pumps) (medium-sized)
Sany Heavy Ind., 90%
360 m €, 3000
employees, 6m € profits
on sales of
Citic PE Advisors, 10%
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69
Planning an M & Deal – The Private Contracting Side
►Structuring the Negotiations: Analysis of the Situation
Letter of Intent
Confidentiality Agreement
►The Agreement
Deal Protection Clauses
MAC-Clauses
Buyer Protection
►Corporate Law Aspects (incl. Squeeze-outs)
► EU Takeover Law (Mandatory Bids)
►EU Competition Law
►Acquisition Finance
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70
Acquisition Finance of Packaging Group (HYPO 6 )
►Packaging Group is put up for sale by Packaging Co. (strategic
decisions)
• sold to its former management and a financial investor
• PURCHASE PRICE € 340m, liabilities to the banks € 100m +
transaction fees € 5m.
►Total transaction volume: € 445m.
CONFLICTING INTERESTS
Equity capital investors: pro debt financing
Banks: pro high equity ratio for the minimising the credit
risk
Focus on cash flow
Use of Special Purpose Vehicles
of target company
Little Collateral
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71
Acquisition Finance by a Private Ltd. (HYPO 7)
►Consider competition between strategic buyers and other
financial investors
►Communication of seller’s criteria: price/speed/secure
financing
►Prepare purchase process
• Test and analyse financing of transaction at an early stage
• Constant update of latest developments
• Prepare negotiation process
• Transaction team including full senior level involvement at all
stages of the process
Professional due diligence process management
to ensure flow of information
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72
The Economics of M & A – Conceptualising the Deal Flow I
►Decision to Invest:
Expectation that future returns to existing shareholders,
discounted to present value at a rate reflecting the risks, will
then exceed the amount presently invested (add value to the
resulting corporation?)
▪How to quantify ‘synergistic’ or other gains? ‘Rational’ norms
for ascertaining the gains from the deal – Manager self-interest
►The Decision to Sell:
Is enough being received for the value given up? In case of
merger: any increased efficiency or profitability? Side-payment
for management?
►Distinguish Family Company or close corporation from a target
corporation listed at the stock exchange!
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73
CONCEPTUALIZING THE DEAL FLOW II
Discovering
Start of
Due Diligence
the Deal
Negotiations
Letter of
intent
Confidentiality
standstill
exclusivity
Signing the
Acquisition
Deal protection
PostClosing
Covenants
Internal Approval Date of Closing on
Requirements Acquisition Agreement
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74
NEGOTIATING AN M & A DEAL
- Small Corporations and Non-listed Corporations –
►Initial contact between the parties turn into negotiations
and details about merger or acquisitions Pre-contractual
Letter of Intent (entirely non-binding?)
Liability ?!
▪Necessity to be determined by parties’ discretion
▪Prevent deal-jumping
▪Combine binding/non-binding (Relating to rights
during interim process) Confidentiality (due diligence)
No-talk/no-shop
▪Prevent misunderstandings about the essentials
►Cf. potential liability under preliminary agreements
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75
M & A and Private Auctioning (Private M & A)
Phase I
▪Investment Advisor sound the Market (Teaser)
▪Interested buyers will be supplied with an Information
Memorandum after signed a Confidentiality Undertaking
▪Seller will then issue Process Letter
▪Indicative Bid
Phase II
▪Management Presentations
▪Vendor Due Diligence
▪Binding Offer
Signing and Closing
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76
THE LETTER OF INTENT (1) (HYPO 8)
►Officials of Palmer Golf Company and Fuqua meet several
times to consider a business relationship between the two
corporations. Several discussions and negotiations follow.
►A ‘Memorandum of Intent’ is signed:
“memorandum will serve to confirm the general understanding
which has been reached regarding the acquisition of 25 % of
Palmer by Fuqua in exchange for all outstanding stock of a
Fuqua subsidiary, and money in the amount of US $ 700,000
for the rendition of management services by Fuqua” …
“counsels of Palmer and Fuqua will proceed as promptly as
possible to prepare an agreement for the proposed
combination of business, satisfactory to either party”
“approval of such definitive agreement by the Board of
Directors of Fuqua”
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77
THE LETTER OF INTENT (2) (HYPO 9 :UAC vs. Paribas)
►On 15 November 1985 UAC sends a letter to Paribas,
expressing the intent: “to enter into an agreement pursuant
to which the Bank shall sell to UAC the common stock of the
Paribas subsidiaries for a price of US $ 2.5m”, …
“UAC and Paribas shall immediately direct their respective
attorneys to commence preparation of mutually satisfactory
form of Agreement, which shall, amongst other things,
(i) provide for payment of the price in cash …; (ii) require a
closing not later than 27 November 1985, or a later date at
the discretion of UAC; and (iii) warranties and conditions
which are customary in transactions of this kind”.
►Paribas does not execute this letter.
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78
NEGOTIATING AN M & A DEAL
- Confidentiality Agreement –
►Confidentiality Agreement (cf. due diligence information
exchange)
ANTITRUST CONCERNS !!
▪Non-competitively sensitive information (no restriction)
▪Confidential information (information not completely
competitively sensitive)
Team/’Clean room’ procedures
▪Competitively sensitive information (business and customer
information, prices, credit terms, marketing information)
►Can be exchanged without Antitrust Concerns
▪income statements and balance sheets
▪profit and loss statements No exchange of data on future
business strategies or specific
▪sales and gross margins
customer data
▪general data systems
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79
NEGOTIATING AN M & A DEAL
- Standstill Agreements ►History of no-shop/no-talk clauses (standstill agreements)
1980’s use in connection with confidentiality agreements:
selling corporations asking bidders to execute a standstill in
exchange for access to seller’s due diligence materials
►Today: standard – indication of bidder’s true intentions
(Potential buyer has a choice between preserving the right to
bring a hostile transaction or opt for a standstill)
▪Avoid disruption in negotiations
CORPORATE
▪Control bidding and negotiation process GOVERNANCE
ISSUES !
▪Avoid over-bids by third parties
May also be included in M & A Agreement to cover the
period between signing and closing (Overlap)
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80
CONCEPTUALIZING THE DEAL FLOW (Revisited)
Discovering
Start of
Due Diligence
the Deal
Negotiations
Letter of
intent
Confidentiality
standstill
exclusivity
Signing the
Acquisition
Deal protection
PostClosing
Covenants
Internal Approval Date of Closing on
Requirements Acquisition Agreement
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81
NEGOTIATING AN M & A DEAL
- THE M & A AGREEMENT I ►Price and Form of Consideration Terms
▪Valuation Issues
Distinguish share from asset deals
▪Earnout Clauses to adjust price ex post
▪Warranties and Representations (‘Best knowledge’)
▪Covenants (addressing the interim period between the
date of signing the agreement and closing)
▪Conditions precedent to the Closing
▪Remedies for Breach
Consider: Negotiating Team must also prepare exhibits
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82
NEGOTIATING AN M & A DEAL
- THE M & A AGREEMENT II ►Allocation of Risks between Signing and Closing
Regulatory and Financing Risk
Sandbagging Provisions
Survival Time of Warranties
Threshold
Deductibles and Caps
De Minimis and Baskets
Escrow, Holdbacks, Bank Guarantees and Warranty
Insurance
Indemnities (cf. Tax Indemnities/Environmental
Indemnities)
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83
NEGOTIATING AN M & A DEAL
- Intellectual Property Rights ►Intellectual Property Rights (Patents) and know-how are
frequently the most important assets of the target company
▪Essential Part of Due Diligence
Tax aspects
-Analyse intellectual property and licence contracts with
third parties (including inventions by personnel (may be
protected by special statute)
-Intellectual Property Rights in Asset Deals
-Know-how and GruppenfreistellungsVO on
Technologie-Transfer (316/2014)
Due diligence and freedom to operate (assess to what
extent third-party intellectual property rights may be
affected, consider third-party portfolios)
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84
NEGOTIATING AN M & A DEAL
- Deal Protection Clauses ►Motivate the Seller to Execute the M&A deal and Refrain
from Looking for a New Buyer between Signing and Closing
Consider costs of due diligence
Incentives to go through with due diligence and the deal
►Break-Up or Termination Fee (cf. 2-4% of the deal value)
►Asset Lock-Up
►No shop-clause/or no solicitation clause (i.e. exclusivity
agreement)
‘Fiduciary Out’: Unsolicited Superior Offers
Outside bankruptcy to be considered in the context of the
entire negotiated transaction (Business judgment rule)
►No-talk clause (renders any due diligence exams by third
parties impossible) (Consider Corporate Governance Issues)
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85
NEGOTIATING AN M & A DEAL
- MAC-Clauses I -
►Improve Allocation of Deal Risks Through Material and
Adverse Change (MAC) Clauses: “Any event, fact,
circumstance, development or change that, either singly or in
the aggregate, would reasonably be expected to have a
material adverse effect on various items (e.g. financial
condition, results of operations, assets, liabilities, prospects)”.
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86
MAC-Clauses II
► The Efficiency of MAC-Clauses (Consider Applicability of
Take-over Law!!!)
▪Symmetry?
Risk of intra-company procedures within the target puts
purchaser at risk, and MAC-clause is a contractual
readjustment of asymmetric risk allocation (but consider that
MAC-clause does not protect purchaser from a decrease in
the seller’s value).
▪Investment Analysis? (Mitigating Seller’s Moral Hazard)
Encourage seller to make investments during the interim
period (A realistic assessment?).
Endogenous risks to the seller, exogenous risks to the
purchaser.
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87
MAC-Clauses III (+HYPO 10 )
► The Efficiency of MAC-Clauses (ctd.)
▪Renegotiation Leverage: a bargaining chip or reduction of
uncertainty between the parties?
►Risk of reducing certainty that transaction will close
►Risk of reducing clarity on the Securities Markets
►HYPO:
▪Bain Capital and TH Lee agree to buy Clear Channel for US $
26 bn
-US $ 600 m break-up fee for wilful and material breach of
the merger agreement by private equity sponsors
-US $ 500 m break-up fee if merger did not close because the
private equity sponsors did not receive financing.
-Clear Channel sues banks for tortious interference
►Parties settle dispute by reducing price per share and slightly
increasing the interest spread.
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88
Seller’s Obligation to Tell the Truth? (HYPO 11)
►Negotiations on an Acquisition of a Software Company
During the negotiations of the deal seller makes incorrect
statements on turnover and profits. Due diligence does not
reveal the mistake. No evidence of fraudulent behaviour.
Acquisition Agreement does not contain stipulations on
seller’s representations or warranties as to turnover and
profits.
After the deal is consummated, it is found that shortly before
signing the Acquisition Agreement a 40% drop of turnovers
from servicing contracts had occurred due to customer
terminations of the respective contracts.
►Failure to Tell the Truth?
►What, if buyer knew he was buying a loss-making company
without knowing the exact figures?
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89
Seller’s Liability – Basics (1)
►Consider Differences National Contract Law Systems
►Anglo-Saxon contract theory:
▪Unless warranties or representations are made or covenants
given, sue for fraud, but not for breach of contract.
-representation: presentation of fact made to induce someone
to act, esp. to enter into a contract
-warranty: express or implied promise that something in
furtherance of the contract is guaranteed by one of the
contracting parties, esp. seller’s promise that the thing being
sold is as represented or promised.
i) Seller’s representations to do the deal
ii) Representations concerning condition and status of the
target (Cf. Negotiations on MAC-Clause!)
Provide Seller with Disclosure, serve as a Closing Condition
(and form a basis for indemnification claims for private deals)
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90
Seller’s Liability – Basics (2)
-covenants: promises or agreements to take or refrain from
taking certain actions.
conduct of business between signing and closing
degree of efforts and specified actions necessary to close
the transactions
post-closing covenants
►National Law Systems with Codified Contract Rules
-Contractual Duty: Supply object of sales contract free from
material defects and defects of title.
Distinguish share deals from asset deals
Do statutory definitions include profits?
Damages or ‘supplementary performance’ (cf. curing)
-Need for Private Contracting
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91
CHOOSING THE M&A DEAL STRUCTURE
- Revisited Shareholders
Board
Shareholders
Board
Target Co
Assets and
Liabilities
Assets and Liabilities
Bidder Co
Assets and
Liabilities
Consider Takeover law !
Old B Shareholders
FINANCE !?
T shareholders hold
Cash, no stock
Risk
Analysis!
Post-Merger: Bidder Co. holds its
assets and liabilities + the old T ones
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92
Asset Deal v. Corporate Restructuring/Divestiture
- Revisited -
►A corporation with a port
X has shares
€ 130,000
Management Inc.
- a corporation -
Harbour Corporation
- Legal Capital € 1.7 bn -
20 pc
►A new corporate entity
A 100 pc subsidiary is
established, in exchange
for shares, the port is
transferred to the new
corporation
Port: 80 percent
of assets
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93
NEGOTIATING AN M & A DEAL
- Deal Protection Clauses ( Revisited) ►Motivate the Seller to Execute the M&A deal and Refrain
from Looking for a New Buyer between Signing and Closing
Consider costs of due diligence
Incentives to go through with due diligence and the deal
►Break-Up or Termination Fee (cf. 2-4% of the deal value)
►Asset Lock-Up
►No shop-clause/or no solicitation clause (i.e. exclusivity
agreement)
‘Fiduciary Out’: Unsolicited Superior Offers
Outside bankruptcy to be considered in the context of the
entire negotiated transaction (Business judgment rule)
►No-talk clause (renders any due diligence exams by third
parties impossible) (Consider Corporate Governance Issues)
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94
M& A AND COMPANY LAW I
- Corporate Governance Aspects ►The Principal-Agent Problem: Agency costs as an inevitable
consequence of vesting discretion in someone other than the
shareholders.
▪The modern corporate structure Minority protection
and lack of accountability
▪Board of directors may not unilaterally reallocate
power/Majority-minority conflicts/stakeholders
▪Potential conflict of interest Ex ante approaches:
(self-dealing etc)
mandatory procedures
Fundamental Changes:
Ex post strategies: business
Corporate Divisions
judgment rule/fairness
and Sales of Assets
Take-over law (Capital
Assume Liabilities
Market Aspects)
Control Transactions
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95
Business Finance and Corporate Governance – Mergers
(HYPO 12)
Great Western
recapitalises
Co-op
Sugar Producers
Cooperative
22 March 1974
Acquisition Agmt.
100 %
Great Western
Sugar
22 March 1974
Favourable Fairness
Opinion
15 August 1974
Board of Directors realise that sugar
prices are rising
14 September 1974 Fairness opinion is withdrawn and
Directors recommend not accept deal
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96
Scope of Duties Owed by the Board of Directors (HYPO 13)
►TransUnion, a publicly traded, diversified holding company
with some difficulty to generate income. Van Gorkom, an
officer of TransUnion owns TransUnion shares which he is
willing to sell at US $ 55 per share.
►Van Gorkom knows that Pritzker, Inc. is interested in
making a cash-out merger offer at Van Gorkom’s proposed
price of US $ 55 per share (Sept. 18, 1980).
On Sept. 19, 1980 van Gorkom calls a Board Meeting for the
following day, and takes advice from TransUnion’s bank.
Pritzker is present.
During a two-hour meeting on Sept. 20, 1980 Van Gorkom
makes a presentation of the Pritzker offer. The CFO tells he
is unaware of the negotiations and declines to address the
fairness of the price formula. The Board accepts the deal
and on Sept. 22, 1980 a press statement on the “definitive
Merger Agreement” is made.
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97
M& A AND COMPANY LAW II
- Corporate Governance Aspects ctd.►The Role of the Board of Directors (Negotiated Acquisitions)
Proper Exercise of the Business Judgment/Duty of Care
Informed Decision-Making
►Obtain all information reasonable available
►Consult with outside financial advisers
►Fairness opinion from independent third party
Disclose all material information reasonable shareholder
would consider in deciding on an M&A deal
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98
M & A – Ex ante aspects (Securities Regulation) (HYPO 14)
►Prior to 20 Dec. 1978, Basic, Inc. was a publicly traded
company engaged in the business of steel products. As early
as 1965, Combustion, Inc. had expressed some interest in
acquiring Basic.
►Beginning in Sept. 1976, Combustion representatives had
meetings with Basic officers and directors, concerning the
possibility of a merger.
►During 1977 and 1978, Basic made three public statements
denying merger negotiations.
►On 18 Dec. 1978, Basic asks NYSE to suspend trading in
shares and issues a release stating it had been ‘approached’
by another company concerning a merger.
►On 19 Dec. 1978, Basic’s board endorses Combustion’s offer
of US $ 46 per share, and the following day, publicly
announces approval of tender offer.
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99
EU TAKE-OVER LAW I
Public Offer Mandatory Bid Defensive Measures Acceptance
►Instead of Agreement between buyer and seller: Public
takeover bid by the bidder to the shareholders of the target
company who decide for themselves normally without a
general meeting of shareholders.
▪Market for corporate control
▪Principal-agent problems in takeovers (management/
majority/
minority/shareholders and employers + creditors
▪Special protection problems (pressure to tender/private
benefits of control)
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100
EU TAKE-OVER LAW II
►EU Takeover Directive 2004/25/EC of 21 April 2004
▪Art 2 (1) (1) (a) : “‘takeover bid’ or ‘bid’ shall mean a public
offer (other than the offeree company itself) made to the
holders of the securities of a company to acquire all or some
of those securities, whether mandatory or voluntary, which
follows or has as its objective the acquisition of control of
the offeree company in accordance with national law”
▪Art. 2 (1) (1) (d): “‘persons acting in concert’ shall mean natural
or legal persons who cooperate with the offeror or the
offeree company on the basis of an agreement, either express
or tacit, either oral or written, aimed either at acquiring
control of the offeree company or at frustrating the
successful outcome of a bid”.
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101
EU TAKE-OVER LAW III
►General Principles (art. 3)
▪equivalent treatment” (cf. protection of minority shareholders)
▪sufficiency of time and information (cf. information on bids)
▪duties of the board of the offeree company (‘the interests of the
company as a whole’)
▪avoidance of false markets (market abuse/secrecy/insider
trading)
▪offeror’s responsible conduct (ability to pay consideration in
cash)
►White List by ESMA (Nov. 2013) on
▪siege principle
Acting in concert
►Consider percentages indicating
control
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102
EU TAKE-OVER LAW IV
►Mandatory bid rule
▪no withdrawal of generous offer de facto control is obtained
▪protect minority/disincentive for potential bidders
▪depends on market conditions
▪includes takeover en cascade (may require mandatory bid to
minority shareholders of the target subsidiary under certain
circumstances)
▪acting in concert
▪consideration may be in cash and shares
►Time allowed for acceptance
▪between two and ten weeks after publication of offer document
(may be extended if offeror gives notice of closing the bid at
least two weeks’ notice)
►Equitable price
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103
EU TAKE-OVER LAW V
►Obligations of the Board of the Offeree Company
►Breakthrough (contra poison pill) (But Member States may
derogate from this rule)
►Squeeze-out (90 % situation)
Consider Appraisal Remedies under German and Italian
Corporate Laws
In case of merger (consideration paid is shares for shares)
shareholders may sue the surviving company if they wish to
attack the exchange ratio (
deterrent against mergers)
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104
TAKEOVER LAW AND POISON PILLS
Low
thresholds
►Based on the class of the security known as a right
▪blank-check preferred stock: Issuance of non-voting
convertible preferred stock as a special dividend, price
below market
What if no-squeeze out?
▪as above + flip-in element: holders may acquire common
shares at half price, but not for acquirer and its associates
or affiliates
Strong position for board
▪redemption provisions (buyer deterred from buying
control block prior to the formal offer)
▪Back-end plans: Issuance of rights to shareholders upon
specific event (share option)
Minimum price for target
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105
EUROPEAN MERGER (COMPETITION) LAW I
►EC Merger Regulation No. 139/2004 (Council)
(Commission Regulation No. 802/2004 implementing the EC
Merger Regulation and Guidelines on the assessment of
horizontal mergers (Feb. 2004))
•Prohibition of a concentration which would significantly impede
competition in the common market or a substantial part
thereof, in particular as a result of the creation or
strengthening of a dominant position,
•But no prohibition where a concentration, in spite of creating or
strengthening a dominant position, does not significantly
impede competition in the common market
•Pre-notification system (prior to conclusion of agreement,
announcement of public bid, or acquisition of control)
•Compatibility may be conditioned on appropriate measures
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EUROPEAN MERGER (COMPETITION) LAW II
►EC Merger Regulation No. 139/2004 (Council)
•Community Dimension:
-combined world-wide turnover is > 5 ban € and each of at
least two parties realized > 250 m € turnover in the EU, or
-combined world-wide turnover is > 2.5 ban €; their combined
turnover is > 100 m € in each of at least 3 Member States, the
turnover of each of at least two of the merging parties is > 25 m
€; the Community-wide turnover of each at least of the two
merging parties is > 100 m €,
unless each of the merging parties obtains more than 2/3 of its EU
turnover in and the same Member State.
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EU Commission: M & A Cases (1990 – 31 Jan 2014)
►Notified Cases
5449
Cases Withdrawn (Ph. I)
Cases Withdrawn (Ph. II)
►Referrals
►First Phase Decisions
Compatibility
Compatible
Compatible
►Phase II Proceedings
►Second Phase Decisions
Compatibility
Compatibility
114
37
52 (out of scope)
4781
2177 (simplified procedure)
229 (with commitments)
219
4 restore competition
54 24 prohibitions
102 (commitments)
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108
EUROPEAN MERGER (COMPETITION) LAW III
- The EU Commission ►Framework for Assessing Horizontal Concentrations
▪Market Shares and concentration levels
▪Market shares (50% or more) are indicators, but in some cases
market shares below 40% lead to a dominant position.
▪Market share of 25% or less is unlikely to impede competition
▪Horizontal competition concerns are unlikely, unless
-new entrant is involved
-important innovators are involved
-cross-shareholdings, mavericks, coordination
-one of the parties: pre-merger market share ≥ 50%.
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EUROPEAN MERGER (COMPETION) LAW IV
- The EU Commission ctd. ►Competitive Assessment of Horizontal Concentrations
▪Significant Non-coordinated effects
-Merging firms are close competitors
-Customers have limited possibilities of switching supplier
-Suppliers are unlikely to increase supply if prices increase
-Merged entity able to hinder expansion by competitors
-Merger eliminates an important competitive force
▪Coordinated effects
-Creation or strengthening of a collective dominant position
(economically rational to coordinate behaviour without
entering into an agreement)
-Consider deterrent mechanisms
►Analyse countervailing buyer power
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CHOOSING THE M&A DEAL STRUCTURE
- Revisited Shareholders
Board
Shareholders
Board
Target Co
Assets and
Liabilities
Assets and Liabilities
Bidder Co
Assets and
Liabilities
Consider Takeover law !
Old B Shareholders
FINANCE !?
T shareholders hold
Cash, no stock
Risk
Analysis!
Post-Merger: Bidder Co. holds its
assets and liabilities + the old T ones
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ACQUISITION FINANCE
►Scenario I: Purchase price to be raised by external loans
►Scenario II: Group of investors wants to acquire a group by
forming a new acquisition holding
• Equity investments in the holding
• Bulk of Purchase Price Raised by External Secured Loans
-Negotiate with syndicate of secured lenders
-External lenders will require over the assets of the new
holding company and subsidiaries
-Intra-group guarantees
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Secured Loans (Basics I) – HYPO 15
Bank provides cash for
acquisition finance
Purchaser to supply the
bank with collateral
(security)
Assets/book debts etc. of
Target Co.
►Bank is willing to credit for
cash, but requires security
(collateral)
►Purchaser pledges assets
and book debts of new
holdings or target company
to the bank subject to
pledge (security
agreement)
►Purchaser and target
company may not sell,
factor, discharge or assign
any asset or book debt to
third parties without the
consent of the bank.
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Secured Loans (Basics II) - Creation of a Security Interest
• Security agreement: Written (i.e. enforceable) agreement,
granting a security interest in property to a creditor to
guarantee performance of an obligation, to be realised in a
worst case scenario
• Debtor must have alienable right in the collateral (incl. a
leasehold, or a license or right to use the collateral)
• Creditor gives value to debtor: binding undertaking to
advance credit in the future, or actual advancement of
credit.
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114
Acquisition Finance – Syndicated Lending (HYPO 16)
Co-lender
Lead Bank
Co-lender
Master Agreement
Securities in a Trust or
Pool of Securities
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Borrower
pledges
Securities
either to
individual
lender or to
the pool
115
Corporate Investment Decisions (HYPO 17)
Syndicate of
senior lenders
Syndicate of
Secured Mezzanine
lenders
Working
Capital
Loan
Local
Subsidiary
Investors
(equity/loans)
Acquisition
Holding Co.
Original
shareholders
Group holding
company
Local
Subsidiary
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Local
Subsidiary
116