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.
Robert Lewandowski 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?
Polish civil law has several provisions relating to warranties if both parties are entrepreneurs. However, any warranties may be wholly or partially excluded and modified between the parties.
Within M&A contracts, there can be express warranty clauses made by the seller that differ from statutory provisions. Express warranties are more valuable for the seller as they may rely on them because they constitute a positive representation of the nature, quality, character, use and purpose of certain circumstances that induces the buyer to purchase a company and establishes the buyer’s liability. If the warranty is breached the buyer, after notifying the seller of it, may claim damages. For the seller it is important to avoid or restrict warranty liability by asking the buyer to undertake thorough due diligence. In such cases the seller insists on excluding any warranties regarding circumstances the buyer was aware of during the due diligence process. Also, statutory warranties will be denied due to the buyer’s assumed knowledge of certain factors. On the other hand, the buyer will want to extend the number and scope of warranty clauses in the contract protecting his/her interests in case of any encumbrances of the purchased enterprise.
Indemnity clauses in M&A contracts create a primary obligation of the seller to protect the buyer against loss, which may occur if the buyer, after closing the deal, is sued by tax authorities or a third party that he/she is not at fault for. In such cases the seller usually reimburses the buyer for any attorney fees and court costs incurred to defend the lawsuit and in the case of losing. From the seller’s perspective it is important to limit the scope of indemnity clauses and exclude the duty to indemnify if the loss incurred is due to the buyer’s negligent actions.
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?
There are many ways of financing the purchase of a business and in Poland it is common to use banks and other financial institutions to co-finance such deals and banks may lend money against a buyer’s assets (for instance, valuable commercial real estate or through registered pledges over shares). They may also lend money against a business if there is sufficient value to support a loan – for instance, due to its actual earning power. It is common that within private equity transactions, buyers usually invest their own capital (20-40%) and thanks to this they may also influence positively other investors and lenders. It is also still common practice to engage venture capital firms to co-finance a deal. However, it is expected that such venture capital firms would want equity in the company being purchased and to be cashed out in three to five years (exit) if the business is sold or goes public. Private placement is also a means of financing a transaction and, according to Polish Prospectus Law, a placement is deemed a private placement if it is not addressed to more than 149 investors or an unspecified investor.
Is private equity widely available in your jurisdiction? What are the advantages and drawbacks of financing a deal using equity, in your experience?
Poland is still the largest private equity market in Central and Eastern Europe because of its developed capital market and stable banking sector. However, the private equity market in Poland is relatively young compared to Western European economies or the United States. Their portfolios include big enterprises from sectors such as technology, media, medicine, telecommunications and logistics, side by side with medium-sized companies offering innovative products and services (start-ups). Equity holders usually take on higher risk and therefore would like to be compensated for this with higher returns, so the costs of equity are much higher compared to debt financing. On the other hand, the benefit of equity is that funds do not need to be repaid.
Top Tips – For A Watertight Contract
• Understanding each party’s rights and obligations within M&A transactions in the light of suggested warranties and indemnities.
• Perform a thorough due diligence prior to making any agreement or commitment to protect you against any surprise encumbrances.
• Include some non-judicial remedies into a M&A contract in the event of a breach the contract. Everyone loses in a lawsuit, so it is best to decide how to solve disputes out of court before any arise.