Legal Due Diligence for M&A/ Investment in Europe. Donald Hess

Transcription

1 Legal Due Diligence for M&A/ Investment in Europe Donald Hess February 29, 2012

2 Why do companies do M&A deals? Access to new markets Growth in market share Access to new brands Access to new products Access to new technologies Access to distribution channels Increase market power Overcome barriers to entry Access to management or technical talent Enhanced reputation Increased speed to market 1 Reduce operating expenses Reduce number of competitors Reduce cost and risk of new product development Diversification Pure financial play Opportunistic investments

3 Understanding your objectives Need to understand your objectives This will impact priorities process risk mitigation strategies 2

4 The Transaction Process How are M&A transactions done? Why is due diligence important? When should due diligence be done? Who should be involved? Key documents Potential M&A problems Key due diligence issues in Europe Risk mitigation strategies Traps for the unwary 3

5 Overview of the Business Acquisition Process Key Phases of a Transaction Strategy Evaluation Transaction Execution Implementation Integration Develop the overall strategy & approach Due diligence Valuation and pricing Structuring the transaction Negotiation of detailed terms Detailed documentation Applications for Government approvals Completion It is important to recognize the interdependence between critical stages. This requires a multidisciplinary approach throughout the four phases. 4 Implement the business plan

6 Key Phases: Evaluation and Transaction Execution Due Diligence Valuation Transaction Structuring Contract Negotiations Implementation Integration Legal & financial preparation Preparation of pro-forma P&L and B/S Business preparation Pricing of the asset and equity transfer Structuring the transaction Liaison with regulatory authorities Tax analysis Identify potential risk mitigation strategies Contract drafting (JV Contract, SPAs, Ancillary Agreements) Government/ regulatory approvals Completion Implement the business plan Integration of the businesses 5

7 Key issues to consider in cross-border M&A transactions Foreign investment restrictions Employee issues Antitrust issues Regulatory approvals Tax issues Intellectual Property Environmental Procedural issues Conflicting laws and regulations Local custom and practice Choice of entity Governing law Dispute resolution 6

8 Key issues to consider in cross-border M&A transactions Forward planning essential Early identification of gating issues and time periods Choice of local counsel Tax planning Antitrust and approval issues Project management Create a roadmap 7

9 Key Documents Letter of Intent / Term Sheet / MOU Acquisition Agreement Shares Assets Shareholders Agreement? Joint venture agreement Investors rights agreement Joint operating agreement Document architecture 8

10 Key Documents Ancillary Agreements Employment / services agreements IP agreements trademarks patents copyright R&D / Technology Development Agreement(s) Distribution Agreements Export Services Agreements OEM Agreements Local requirements 9

11 Potential M&A Problems Post merger integration difficulties Mismatch of expectations Us and them Cultural differences Inadequate evaluation of target Large or extraordinary debt Acceleration of loan repayments Inability to realize synergy Lack of focus from too much diversification Managers overly focused on acquisitions Too large 10

12 What does due diligence entail? Financial Tax Legal HR IT systems Market Industry / Operational Other An integrated process Who s in charge? 11

13 Who are the participants in the M&A process? Buyer Seller Investment Bank / Corporate Finance Lenders Legal Accountants Tax Advisors Environmental HR IT consultants Management consultants Valuers / Appraisers Actuaries Other experts How to handle multiple jurisdictions? 12

14 Due diligence Aims Identify and manage risks: risk allocation Ensure value Regulatory issues Institutional memory 13

15 Due Diligence Aims To learn about the business What does it do? How does it do it? Where does it do it? Why does it do it? How will it integrate into the buyer s existing business? To confirm the assets and liabilities of the company / business identify material issues and potential solutions set the ground work for negotiating the deal confirm that the price is right Need clear understanding on level of detail desired / required 14

16 What factors should be considered in defining the scope and timing of due diligence? Deal size / nature (e.g. public vs public) Complexity (e.g. cross-border, carve out) Industry (e.g. regulatory approvals) Transparency and integrity of information (e.g. audited vs unaudited) Access to Target management Objectives of purchaser / vendor (e.g. a quick deal) Pricing + allocation of risk 15

17 What is the difference between an audit and a financial due diligence exercise? Audit Procedures Factors Due Diligence Procedures Auditors Who Experienced M&A professionals Opinion on historical financial information Objective Identification of deal issues + solutions Dictated by GASS* Scope Dictated by buyer/seller * Generally Accepted Auditing Standards 16

18 What is the difference between an audit and a financial due diligence exercise? Audit Procedures Factors Due Diligence Procedures Audit opinion Largely fixed: - Scope dictated by GAAS - Less possibility of overruns - Commodity product Deliverable Varies. Usually formal report, but may be presentation or bullet point summary Cost More variable - Scope can vary significantly - Overruns more likely - Premium priced product 17

19 Some red flag issues in Europe Germany France Labor laws - role of trade unions Compensation and benefits Environmental (esp. former East Germany) Financing arrangements (esp security over assets) Labor laws - non-compliance with working time rules; wrongful dismissals; employment contracts (categorization); obstruction of role of employee representatives Environmental 18

20 Some red flag issues in Europe Italy Spain Labor laws - workforce classification (contractors and business collaborators); litigation and potential claims by employees (eg asbestos); trade unions Environmental Regulatory - licences, permits and approvals Labor laws - esp potential redundancy payments Compensation and benefits Environmental Contractual issues (change of control clauses) 19

21 Some red flag issues in Europe UK Labor laws - esp Transfer of Undertaking (Protection of Employment) Regulations (TUPE) Pensions and benefits Environmental Bribery Act

22 Risk Mitigation Strategies: Transaction Structure Asset vs Share Purchase? Share deal Asset deal Reduce risk of past liabilities Simplicity Ability to cherry pick Ability to allocate proceeds Step up asset bases Goodwill amortisation Tax deductibility of interest Preserve/transfer of tax attributes Minimise transfer tax Time constraints Reduces risk of double tax Low risk of tax exposures 21

23 Risk Mitigation Strategies: Transaction Documents Representations and warranties Disclosure letters Indemnities Escrow Purchase price adjustments Contingent consideration Earnouts Clawback Put and call options 22

24 Some traps for the unwary PRC Anti Monopoly Law Anti-bribery legislation Anti-money laundering legislation Data privacy Financing arrangements: bank solvency 23

25 For the lawyers Buyer beware Fair disclosure Buyer s knowledge ( anti-sandbagging clauses) 24

26 For the lawyers Buyer s knowledge ( anti-sandbagging clauses) buyer learns of something in its diligence process that makes one of the seller s representations untrue seller informs the buyer before closing that one of its representations is untrue seller wants a provision to the effect that the buyer will not be entitled to indemnification for any breach of a representation if it were aware of such breach prior to closing seller wants a provision allowing it to update the disclosure schedules between signing and closing seller wants a provision stating that the buyer conducted (or relied on) its own independent investigation of the business seller wants a provision stating that the seller has made no representations except as set forth in the purchase agreement 25

27 Thank you Questions? 26