International Deal Making – Assisting Acquirers
QUESTION ONE – In your experience, what are the key considerations that international clients should have the front of mind when assessing a target company for acquisition in your jurisdiction?
Under Belgian law, there is a binding agreement as soon as there is consent between the parties regarding the object and the price of the sale. It’s important as parties to the agreement to indicate in the letter of intent (LOI) which of its provisions are binding and which are non-binding. You can use the LOI to negotiate important deal points.
Convince your counterpart to hire a good lawyer, to start preparing the data room as soon as possible, to answer all questions and to start with the preparation of the disclosures. It’s also important to start the preparation of the tax structure of the transaction (e.g., share deal v. asset deal) in a timely fashion. It makes no sense to prepare the acquisition documents if the tax structure is not yet in place.
When setting up a deal structure, be sure to consider Belgian rules on financial assistance, corporate interest and thin capitalisation etc. Involve your Belgian lawyers rather sooner than later. Make sure that you get the management of the target on board. Specify roles for the top executives that will remain with the target. Put the right executive compensation system and incentives in place.
The sellers will usually wish to maintain some form of legal status, control, or power of veto, in view of ensuring the ‘earn-out’ is successful for them. This may cause anxiety for the buyer as far as formulating long-term planning and integration. Make sure that all details are clearly outlined as far as both parties’ interests are concerned before finalisation.
Employment law is strictly regulated in Belgium and is, therefore, one of the important issues which require specialised advice before as well as after the closing of a deal. This will include the language of employment agreements, re-qualification of self-employed agreements, the possibly illicit disposal of personnel and rules on overtime and part-time work.
QUESTION TWO – How would you, as a professional advisor, approach the due diligence process to ensure all bases are covered prior to a sale price being agreed?
In the context of M&A, the due diligence process plays an essential role in the valuation of the target by the buyer, and in the structuring of the transaction and the contractual protections needed by the buyer. It also enables the potential buyer to gain as much background information as possible about the business to be acquired.
In terms of substantiating the valuation, the due diligence exercise seeks to find and quantify (as the case may be) material facts, and potential contingencies and liabilities relating to the target company, as well as possible obstacles for the completion of the transaction. Therefore, its scope is usually comprehensive, involving different types of experts and, on the legal side, various areas of practice.
At the end of the process, buyers typically expect to receive comprehensive reports describing the target, identifying red flags and helping them to quantify liabilities (when possible) so that they may be able to confirm their interest in the target and properly negotiate the transaction documents with the seller. On the basis of the due diligence, it can be determined which pre-closing and post-closing actions must still be taken and which additional warranties, specific indemnities and closing conditions should be undertaken in the share purchase agreement.
Legal due diligence is typically conducted by law firms enabled to practice the law of the jurisdictions involved. They will coordinate with several other types of experts depending on the circumstances of each case. Typically, parties perform due diligence into both legal and financial (including tax) aspects of the target. In some cases, prospective buyers also prefer to conduct a commercial, environmental or IP/IT due diligence.
The following issues are always important when organising or conducting due diligence:
- Define the scope carefully, implement a realistic but strict timetable and make sure to carry out due diligence on the business culture of the target in order to examine organisational health, leadership talent and managerial abilities
- Strategic fit with the buyer: the buyer is concerned not only with the likely future performance of the target company as a stand-alone business; it will also want to understand the extent to which the company will fit strategically within the larger buyer organisation
- Financial matters: the buyer will be concerned with all of the target company’s historical financial statements and related financial metrics, as well as the reasonableness of the target’s projections of its future performance
- The online data room is very important to the success of a due diligence investigation. It is vital that the target company assembles, maintains, and updates as a well-organised online data room to enable the buyer to conduct diligence in an orderly fashion.
- It is also important to work with a Q&A template, which allows sending back and forth questions and answers related to the due diligence results or to e.g. missing documents.
QUESTION THREE – Once an acquisition is agreed, what are the key clauses or warranties and indemnities you would recommend for inclusion in the sales contract?
The following warranties and indemnities should be included in a sales contract: Power and Authority; No conflicts with the execution of the agreement; Corporate (Existence, Organization of the company and Capital of the company); Accuracy of annual account and management account; and Conduct of business since the accounts date.
Further, one can include warranties and indemnities for Assets (Title to the assets and the inventory); Real property; Agreements and commitments; Full Disclosure; No Broker Fees; Intellectual property; Computer systems; Privacy and use of user data; Insurance; Regulatory; and Compliance (Authorizations, Permits, Compliance with law, and Proper business practice).
Tips for completing a successful cross-border acquisition
Doing your homework is very important
I learnt a great tip from a US lawyer whom I was working within a large cross-border transaction. He used a small hardcover book for each important transaction and took note of everything that was said during the transaction in that little booklet. If you make a point, it is important that you are well-reasoned and can remind the other side or even your client what they have said before.
Humour
Humour is a very important way to break the ice at the beginning of a meeting, or after long hours of negotiation.
Hire the right advisors
The acquisition process will run more smoothly if you put the right deal team of experienced M&A advisors together to help you.
This excerpt was taken from the IR Global Guide: International Deal Making: Assisting Acquirers. To view the full publication, please click here.