Stefan Brunnschweiler, partner for CMS von Erlach Henrici (Zurich), and Hendrik Hirsch, partner for CMS Hasche Sigle (Frankfurt), discussed their most recent study of transactions in Europe and the differences between the U.S. on issues such as purchase-price adjustment and cash-pooling during their presentation at the 2014 Chief Legal Officer Leadership Forum in Chicago on Sept. 17. In the presentation, the duo pointed out there are many differences between the U.S. and Europe when it comes to M&A transactions.
According to Brunnschweiler, purchase-price adjustment varies greatly between the U.S. and Europe. In the U.S., Brunnschweiler said, more than 85 percent of the deals have a classical purchase-price adjustment, but in Europe, more than half of the transactions don’t have such an adjustment mechanism. In addition, Hirsch noted the lockbox mechanism is viewed differently in the U.S. and Europe, and cash-pooling varies across these regions too: “You need to look at whether you’re cash-pooling arrangement is in compliance with applicable laws, because there are various differences within Europe. If you have European entities that are participating, this is extremely important because depending on where you look, [as] cash-pooling might require certain specific indemnifications from the seller’s side and probably from the buyer’s side as well.”
There are risks with cash-pooling arrangements, Hirsch said. However, an organization that understands how to minimize these risks, Hirsch noted, can avoid problems down the line: “So how can you reduce these liability risks? Sometimes it is necessary to adjust the articles of association of the participating entity, clearly stating that it is allowed to enter into intragroup arrangements. Sometimes it is necessary to come up with a shareholder resolution proving the entering into the cash-pooling arrangement for the participating entity. But in particular, that is true throughout Europe.”
- See more at: http://www.argylejournal.com/general-counsel/2014-chief-legal-officer-leadership-forum-stefan-brunnschweiler-partner-cms-von-erlach-henrici-zurich-and-hendrik-hirsch-partner-cms-hasche-sigle-frankfurt/#sthash.w276c2ou.dpuf
10. Key Differences
Purchase Price Adjustment vs. Locked Box
Cash Pooling in Europe – Implications on M&A Transactions
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11. CMS European M&A Study 2014
Sixth edition
More than 2,100 deals
Seven-year period (2007 – 2013)
Insight into M&A agreements
Sector Focus
Comparison of Europe / US
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12. Purchase Price Adjustment Europe/US
Europe 2013 US*
43%
57%
100% = all evaluated transactions
Yes
No
15% 85%
* US data derived from “2013 Private Target Mergers & Acquisitions Deal Points
Study” by the American Bar Association (ABA), Business Law Section
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13. Purchase Price Adjustment 2007–2013
Europe 2013
100% = transactions
with no purchase price
adjustment mechanism
47%
53%
Yes
No
41%
59%
Europe 2007–2012
43%
57%
40%
60%
“Locked-box”
2007–2012
“Locked-box”
2013
Yes
No
100% = all
evaluated
transactions
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14. Locked Box - What is it?
The locked box is a mechanism under which the parties agree a price
payable for the target company based on an agreed historical balance
sheet in advance of the SPA signing.
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15. Pricing/Completion Mechanism in the SPA
Locked Box Date
(balance sheet
used for valuation)
SPA signing date Closing date (no closing
accounts prepared)
Payment of final purchase
price
Buyer takes over economic ownership of the target before it legally
owns the business
No Leakage in the "Gap Period" (other than "Permitted Leakage") so
buyer gets expected level of working capital / net debt at closing
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16. How does the box lock?
During the "Gap Period" no
leakage is allowed
Only payments in the ordinary
course of business are allowed
(unless "Permitted Leakage"
has been pre-agreed prior to
signing the SPA and buyer has
priced this into its equity value
already e.g. agreed dividend
amount)
Changes in working capital
should be balanced by equal
changes in net debt
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17. Relevant Contract Clauses
Definitions: "Leakage" vs. "Permitted Leakage"
Purchase Price / Interest
Transfer of benefit and risk
Conditions precedent
Conduct-of-Business
Warranties
• Financial Statements
• Changes since reference date
Remedies in the event of leakage
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18. Cash Pooling in Europe
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19. Cash Pooling in Europe
Introduction and Overview
Legal Frameworks for Cash Pooling
Liability Risks
Mitigating Liability Risks
Banking law and tax considerations
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20. Introduction and overview
Cash Pooling is a standard intra-group financing feature
Importance for post-merger integration
• Up-stream securities
• Pooling of liquidity
Importance for pre-merger preparation
• internal sanity check
• negotiating specific indemnifications from seller's and buyer's
perspective
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21. Legal Frameworks in Europe
Generally no explicit, comprehensive, specific legal framework in
most jurisdictions
Capital maintenance and liquidity protection rules
• no distribution to shareholders if payment would cause adverse balance
or overindebtedness
• treatment of repayment claim – fully recoverable?
• liquidity protection
• interest and security → arm's length test
• national particularities
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22. Liability Risks
Mainly: insolvency scenario
Personal liability of directors and (direct and indirect) shareholders
• directors of participating company
• directors of cash pool leader
• cash pool leader and ultimate parent company
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23. Mitigating Risks
Articles of Association
Shareholder resolution
Information rights of participating entities
Termination rights of participating entities
Target balancing
Joint and several liability of participating entities
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24. Banking law and tax considerations
Banking law
Tax law
• interest as income
• hidden profit distribution
• deductibility of interests – thin capitalization rules
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26. Contact
Stefan Brunnschweiler
Partner | Corporate / M&A
Stefan Brunnschweiler is a partner and specializes in international and
domestic mergers & acquisitions transactions, corporate restructurings,
corporate law and general contract matters (e.g. joint ventures,
partnerships and shareholders' agreements). He is experienced in a broad
range of national and international transactions both sell- and buy-side
(including corporate auction processes) and the assistance of clients in
their ongoing corporate and commercial activities.
Stefan Brunnschweiler graduated from the University of Zurich in 1997. In
2000, after serving as a law clerk at the district court of Winterthur, he was
admitted to the bar. He joined CMS von Erlach Poncet in 2001. Stefan
Brunnschweiler completed a masters program (Master of Laws, LL.M.) at
the University of San Diego School of Law and worked as a foreign
associate with Higgs, Fletcher & Mack in San Diego (USA) before
returning to CMS von Erlach Poncet by the end of 2003. He is a partner
with CMS von Erlach Poncet since 2008.
T +41 44 285 11 11
M +41 76 419 97 97
E stefan.brunnschweiler@cms-vep.com
CMS von Erlach Poncet Ltd
Dreikönigstrasse 7
8022 Zurich
Switzerland
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27. Contact
Dr. Hendrik Hirsch
Partner | Corporate / M&A / Private Equity
Hendrik Hirsch is a Corporate/M&A partner with CMS Hasche Sigle in
Frankfurt, Germany. His practice focuses on national and international
corporate transactions for strategic and financial investors as well as
corporate law, including corporate governance. He has more than 10
years of experience advising numerous national and international
investors and group companies on their investments and other business
activities in Germany.
Hendrik Hirsch is co-head of the Corporate/M&A group of CMS Hasche
Sigle representing the Frankfurt office.
Hendrik Hirsch studied law in Heidelberg and Carleton University / Ottawa,
Canada. Doctorate with Prof. Dr Peter Hommelhoff (1997/1998) with a
Ph.D. scholarship of Arbeitskreis Wirtschaft und Recht im Stifterverband
für die Deutsche Wissenschaft. From 1999 to 2001 legal traineeship in
Berlin, incl. Berlin Court of Appeal. Joined CMS Hasche Sigle in 2001. He
is a partner since 2007.
T +49 69 71701 226
M +49 174 344 45 96
E hendrik.hirsch@cms-hs.com
CMS Hasche Sigle
Barckhausstraße 12-16
60325 Frankfurt am Main
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