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?
When contemplating a cross-border acquisition, the main question for a potential buyer is whether the company considered for acquisition fits the buyer’s development strategy.
A buyer interested in a potential foreign target may have various reasons and strategies for such an acquisition. This may also be the case in the event the target is placed under receivership or restructuring measures.
When considering France, information on the legal environment should not be biased by former images of a non-competitive country. According to the latest Ernst & Young activity report on France (Baromètre de l’attractivité de la France 2019), the country is ranked before Germany in competitiveness in the fields of industry and research and development.
The same report indicates the year 2018 saw a historical 85 per cent increase in R&D projects, bringing to 144 the number of new or extended projects in this field. That is twice as many projects as Great Britain and Germany combined. In addition, foreign industrial investments have seen a 5 per cent increase in the same period, reaching 339 projects. This sets France at the top of the European podium.
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?
A due diligence process is a series of verifications meant to provide an investor or buyer contemplating a potential investment transaction with an idea of the precise situation of a company before expressing his intent to acquire or invest.
This process generally requires verifying a target’s strategy, fiscal situation, bookkeeping, workforce and environmental constraints. The extent of the due-diligence process depends on the size of the contemplated target as well as on the identity and experience of the buyer.
Two methods may be pursued, mostly depending on the identity of the buyer. On the one hand, when dealing with ‘seasoned’ clients, accustomed to similar operations, only red flag items are of interest. This is also true when dealing with bigger corporations or structures, such as private equity funds, which are staffed with numerous in-house advisors.
When dealing with clients that are less commercially-oriented the due diligence process must be more comprehensive.
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?
Most transactions contain standard clauses for reps and warranties. However, these are to be tailored according to the nature of the activity carried out by the target and the spirit in which negotiations are undertaken.
As the literature indicates and experience shows, reps and warranties are used to describe the assertions that a buyer and/or seller makes in a purchase and sale agreement. Both parties are relying on each other to provide a true account of all information and supporting documents.
The seller’s representations usually relate to the information that the buyer is relying on to value the company. Therefore, the seller ends up not only stating that all financial information provided is true and accurate, but also delivering information to support this statement, such as financial statements, customer and supplier listings, copies of all major contracts and equipment listings.
This information all forms part of the schedules to the purchase and sales agreement and may be referred back to post-transaction to ensure that what was effectively purchased truly does exist.
The buyer’s representations usually relate to the form of consideration being used to complete the transaction. If the buyer’s stock is part of the transaction consideration, then the buyer must represent that it is legally able to offer this stock. In addition, the buyer must provide a shareholder agreement for the seller to review and state that the stock is being offered free and clear of any encumbrances.
Reps and warranties form the basis of due diligence for buyers. Essentially, they provide an opportunity for the seller to disclose any potential issues with the company prior to completing the transaction. For example, if a contract with a significant customer that has been included in the valuation is about to expire, the seller is obligated to disclose this expiry as part of its reps and warranties.
Purchase and sale agreements usually contain an indemnification clause, to mitigate the risk of financial loss from either party not representing something significant. This clause protects the other party from an omitted or missed representation, which may lead to a post-transaction financial loss. Therefore, it is important that both parties provide all information upfront in their reps and warranties, to avoid costly legal disputes trying to enforce indemnification clauses. This is to show that, although you can work on the most comprehensive reps and warranties clauses, it will all really depend on the method used for determination of the purchase price.
In our experience, most difficulties arise in the presence of earn-out clauses. An earn-out clause is a contractual provision stating that the seller of a business is to obtain additional compensation in the future if the business achieves certain financial goals, which are usually stated as a percentage of gross sales or earnings.
In order to avoid lengthy discussions and potential disputes, these clauses are to be crafted meticulously and must rely on indisputable calculation methods. Associating such clauses to the setting up of an escrow account is to be privileged. The essential issue remaining will then be that of knowing how much cash is paid upfront.
Tips for completing a successful cross-border acquisition
A good understanding and good line of communication with the referring party.
Master the language and culture or find an advisor that masters both, in respect of the legal matter at hand.
Provide services of high international business standards.
This excerpt was taken from the IR Global Guide: International Deal Making: Assisting Acquirers. To view the full publication, please click here.