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?

The use of heads of terms is crucial to layout the exact requirements on both buy-side and sell-side.

From a regulatory standpoint, legal advice should be obtained early in the pro­cess on the applicable laws and regulations guiding M&A activities, to determine whether regulatory filings and approvals are necessary. These include securities laws, tender offer rules, industry-specific regulations, foreign shareholding restric­tions, and applicable labour and antitrust laws.

Even if the transaction is not subject to Spanish Law, there are certain mandatory legal provisions that will apply on any deal that takes place in Spain.

We would like to emphasise that local comprehensive knowledge of corporate, labour, tax and financial law is required to profit the advantages of the legal system and to eliminate possible threats.

There are some sectors regulated by specific rules in addition to the general requirements. In such cases, an authorisation from the competent authority will be required. This includes acquisitions of significant stakes in companies that carry out activities in regulates sectors like the energy industry, banking, telecommunications and insurance.

Additionally, for cross-border transactions, any antitrust issues should be cleared with the relevant authorities prior to the execution of any cross-border M&A transac­tion. Acquirers should also include in their due diligence process a review for any bribery or corruption issues.

Particular attention should be given to the nuances of existing local and interna­tional anti-corruption legislation. If any bribery or corruption issues are discovered, legal counsel should advise on the appropriate resolution with the appropriate authorities and on structuring the transaction.

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?

Firstly, it is necessary to consider subscribing a Letter of Intent (LOI), Memoran­dum of Understanding (MoU) or Term Sheet between the parties to declare the intention to begin the negotiation of a sale transaction. The LOI is the guideline to the transaction. Among other matters, the LOI will include the purchase price for the subject business (and the associated payment terms) as well as the other key considerations and conditions to the transaction. By submitting an LOI the seller indicates the buyer’s intentions for the deal. Unlike a typical contract, the terms of an LOI frequently are non-binding on the parties except as specifically called out in the LOI. With this document and the due diligence, we minimise the risks that the negotiating process may entail, so it is important that the terms are carefully set out to reach a satisfactory agreement.

Signing a Non- Disclosure Agreement (NDA) is a key element in every single M&A transaction. Some information should be made available to all bidding parties, but other documents containing internal and confidential information need to be reserved for more serious contenders and the final buyer. The failure of a seller to segment this information as the M&A process moves forward increases the likelihood that sensitive business documents may be released at an early and inappropriate stage, increasing the chances they will be distributed to competitors.

The next step would be to proceed with the due diligence process. This allows a potential buyer to learn the legal and technical details about a company they are about to invest in. It covers in detail the legal & financial matters of the company and its obligations, liabilities, existing contracts and the situation with the current employees.

It is very important that the due diligence addresses the specific areas and critical transaction factors, as to provide for the main risks, opportunities and threats to design an accurate timed and effective due diligence process.

In any M&A transaction, future performance and strategic fit can be just as impor­tant as any current profitability. As a potential buyer, a key business diligence point is exploring the extent to which company will fit strategically within your current business or how you will be able to work together in the future. This includes considerations of human resources, integration and transition, marginal costs, technology and general work culture.

The financial due diligence will resolve many doubts and will help in understanding the business. It is important to learn the target company´s history, the current situation of the business, the market, the competitors, as well as the potential but realistic growth and profitability for the future. Once the financial due diligence is completed, there will be an appraisal value and solid arguments to use when negotiating the terms of the acquisition.

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?

With most M&A operations, there is a commercial risk that some negative aspects of the company might be uncovered after the deal has been closed. In order to solve those problems, an adequate scheme of warranties and representations, liabilities and remedies must be constructed.

A ‘warranty’ is a statement of fact made by one party to another. Including warran­ties in a sale and purchase contract is a way of guaranteeing the accuracy of the statement under the terms of the contract. Buyers need to have an assurance from the seller as to the condition of the business that is going to be purchased.

In order to have enough information about the target company, the representations and warranties must include the following subjects: who was the previous owner, organisation and good standing, financial accounts, inventory, domain name, deal­ers, distribution agreements, employees, taxes, litigation and absence of violations.

The main purposes of warranties are:

• Disclosing information about any known problems to which relate to all the subjects mentioned above.
• Allocating risk between the buyer and the seller, since they provide a remedy in case there is a breach of a warranty.

A breach of a warranty occurs when the statements made were untrue. That situa­tion creates a breach of the contract, in which must be established the damages for the breach in order to return the injured party to the position they would have been in if the facts assured by the warranty had been accurate.

Tips for completing a successful cross-border acquisition

Confidentiality is a key

It’s prudent for parties to enter into an M&A confidentiality agreement before exchanging any information during negotiations. If the other party has prepared the confidentiality agree­ment, you should ensure that you closely review the terms. A confidentiality agreement for an M&A transaction should be specifically tailored for the particular transaction, and it is important that you carefully review any terms before you enter into such agreements.

Understanding foreign markets and targets is fundamental

The buyer must have a clear vision and strategy around why it should expand globally. Foreign markets may use different strategies to reflect conditions in their own markets and regions, including cultural influences, language laws, buyer preferences, engineering standards or product regulations.

The company target must be chosen by the buyer carefully since it must match their growth goals. It is very important to have a meticulous strategy that’s reinforced with thorough target screening, focused due diligence and detailed integration planning.

Plan the due diligence and use a data room

Maintaining a fluent dialogue with the target company speeds up the due diligence process and helps to identify any problems.

Data rooms have become an indispensable tool during mergers and acquisitions. Usually set by the sell-side, data rooms host all documentation related to the companies, its business units, assets being sold or otherwise involved in the process.

This excerpt was taken from the IR Global Guide: International Deal Making: Assisting Acquirers. To view the full publication, please click here.