Foreword by Andrew Chilvers
For ambitious companies eager to expand into overseas markets, often the
conventional route of organic business development is simply not fast enough. The other option to invest in or buy a business outright is far quicker but often fraught with unforeseen dangers. And even the biggest, most experienced players can get it badly wrong if they go into an M&A with their eyes wide shut.
If you search for good and bad M&As online the Daimler-Benz merger/acquisition with Chrysler back in 1998 is generally at the top of most search engines on how NOT to undertake a big international merger. Despite carrying out all the necessary financial and legal measures to ensure a relatively smooth deal, the merger quickly unravelled because of cultural and organisational differences. Something that neither side had foreseen when both parties had first sat down at the negotiating table.
These days the failed merger of the two car manufacturers is held up as a classic example of the failure of two distinctly different corporate cultures. Daimler-Benz was typically German; reliably conservative, efficient, and safe, while Chrysler was typically American; known to be daring, diverse and creative. Daimler-Benz was hierarchical and authoritarian with a distinct chain of command, while Chrysler was egalitarian and advocated a dynamic team approach. One company put its value in tradition and quality, while the other with innovative designs and competitive pricing.
Michiel Pouillon discussed The Art of Deal Making: Using External Expertise Effectively as part of the M&A chapter.
Which warranties and indemnities are most valuable as part of an M&A contract in your experience? Do you have a process that helps to formulate an effective schedule for either buy or sell-side clients?
The representations and indemnities (‘reps and warranties’) that are most valuable in an M&A contract depend on the nature of the deal.
In an asset deal, there are mandatory legal provisions providing protection for the buyer against things like hidden defects of the asset. These provisions also apply in a share deal, but do not address the underlying business, only the shares as the scope of said provisions is limited to the object of the transaction.
Hence, as a buyer, you are a priori better protected in an asset deal, whereas as a seller you have a priori more limited liability.
The object of the transaction, as well as whether you are on the buy or sell-side, thus highly influences the reps and warranties’ focus.
So-called basic representations are the most important. They address the valid incorporation of a company, the free and clear title to the shares and the capacity and authority of the seller to engage in the transaction.
In a share deal, a buyer expects compliance with applicable tax regulations (through tax representations or a tax indemnity) and a confirmation that the target’s annual accounts present a true and fair view. If the company owns real estate, adequate reps and warranties regarding the ownership and state of the building and its compliance with urban and environmental regulations are a necessity.
Other than that, a warranty regarding the conduct of the business (stating that no events occurred that could potentially influence the business negatively and that it has been conducted as a going concern) for the period since the warranted accounts is a must. A final key warranty is that there are no contracting parties of the target that have the right to terminate or substantially alter their contractual relationship with the target company because of the transaction.
What methods of financing a deal are most common in your jurisdiction, for instance private placements, asset finance, mezzanine debt? What advice can you provide around structuring debt into a transaction?
The most common financing combination in Belgium is private equity combined with bank financing. A (whether or not subordinated) vendor loan has become increasingly common as well.
Financial assistance provides the opportunity to effectively make use of a target company’s funds, thus lowering the financial impact (and risk) for the buyer. In Belgium, a target company used to be prohibited to advance funds, provide loans or provide security in a view of acquisition of its own shares by a third party. Today, however, financial assistance is allowed if several conditions are met, such as that the company has profits available for distribution (whereby the Belgian law definition complies substantially with Directive 2017/1132/EU) and that anti-money laundering procedures have been complied with (which are substantially aligned with Directive 2006/68/EC on the formation of public limited liability companies and the maintenance and alteration of their capital)). Although these provisions on financial assistance were alleviated as of 2009, they still hamper the structuring of acquisition financing.
A detailed acquisition finance structuring analysis is advised, considering that there are a number of risks and opportunities to be considered from a Belgian tax and company law perspective, such as:
• Belgian tax law does not provide a system of group relief relevant for M&A transactions, but a number of debt-push down techniques (e.g. step by step acquisition, leveraged dividend distribution, downstream mergers, etc.) are still regularly applied in close consultation with the financial institutions providing third party financing for the transaction
• Belgian tax law contains a very broad definition of tax-deductible costs, the specificities of which are filled in by a long legacy of court cases and jurisprudence.
Is private equity widely available in your jurisdiction? What are the advantages and drawbacks of financing a deal using equity, in your experience?
Private equity is widely available in Belgium and is most commonly combined with bank financing or a vendor loan in the event of, for example, a leveraged buy-out as indicated earlier.
The advantages of private equity are that the investor (or in the case of a leveraged buy-out, the selling and reinvesting shareholder) is investing with his own money and has ‘skin in the game’. The investment will consequently be closely monitored, thus increasing the chances of a successful investment. Private equity furthermore enables all parties to work towards a fully negotiated agreement, since all parameters can be altered inter partes whereas a financial institution for example will dictate the terms of the investment, thus limiting the possibilities.
The most obvious advantage of using equity is also the most obvious drawback: since the private investor will most likely monitor his investment; this often results in more complex governance agreements with veto rights, a specific quorum for certain decisions etc., often making the negotiations more complex.
Top Tips – For A Watertight Contract
• Create the right circumstances to enter into a deal: a professional contract in a professional process. It is common that an investor wishes to limit its costs for a deal. However, paying attention to the right details before entering into a deal will ultimately be the best investment.
• Drafting a transparent, ‘simple’ and balanced contract is key. All parties to the table need to be aware of what they are signing.
• Drafting a transparent, ‘simple’ and balanced contract is key. All parties to the table need to be aware of what they are signing.
• Notwithstanding the above, it is not uncommon that parties enter into more elaborate agreements. Since the principle of consensualism re. contract law is a basic principle in Belgium, this is perfectly possible if all parties understand the content of the agreement (no ambush drafting).
• Make sure the agreement foresees in realistic procedures and terms. It is better to include realistic procedures, such as a procedure for determining the amount of earn-out to be paid and reasonable timing.
