Distressed M&A: a golden year yet to come?

31 Maio 2021

  • Ucrânia
  • Empresa
  • Insolvência
  • Fusões e Aquisições

There were hardly even a few businesses worldwide not affected by the corona pandemic. As lockdown measures were expanding from March 2020, dozens of visitor-dependent (including retail, public transportation, HoReCa, leisure, entertainment & sport) companies’ value dropped astonishingly. This immediately resulted in numerous RFPs coming in and out NPL funds and distress investors being ready as never to pluck those companies ripe enough.

Well, at least that is how the things should have been.

A general picture of M&A demand remains with no great changes. According to the recent DataSite EMEA report first 2021 quarter shown 40 % deal value increase and 14 percent deal volume growth. Some sceptic experts already highlighted that Q1 references are insufficient – as Q1 2020 was painted in an unseen uncertainty and hard-model governmental interference whilst Q1 2021 came in much more predictable conditions with vaccination campaigns being successful and more lockdowns lightened.

The 2020 picture for the distressed part of the global (and particularly EMEA) part of M&A market is quite the same. With hundreds of companies still receiving governmental support and financial institutions still having a wide liquidity, the 2020 data from Bloomberg reports show no Big Bang in distress deals (either arising from pre-pack agreements between debtors and creditors or from formal insolvency processes), at least if compared with 2007-8 recession years.

Nevertheless Bloomberg themselves recognize that 2021 market might become red-hot. Whether this prognosis will materialize soon – here are four basic tips to hold in mind when thinking on insolvency-sed distress M&A deal on either – buyer or seller side:

  1. asset or going-concern purchase. A key business decision is understanding of whether a target business is viable enough and fits in the buyer’s existing\planned portfolio to be bought as a going-concern company. Should there be no certainty – a rule of thumb with almost always be to stick with the asset deal being more secured and the target itself much easier to allocate.
    On the other hand, for a manufacturing target license and related IP rights holding might constitute a large part of the business’ value – without which the desired asset appears to be a no-hand pot.
  1. watch for exclusivity – as asset-based distressed purchase might lack one because of the procedural obligation of going through bidding process.
  2. beware of easy ways. With so-called reverse vesting orders and free-and-clean sales an SP process might look very comfortable for a buyer eager to obtaining the target clean of any burdens (liens, mortgages, tax liabilities). Might look – but rarely be such within FSU and a part of CEE countries where a big chance of facing clawback action exists, especially with a huge state (tax\duty) interest at stake.
  3. do post-deal homework. When purchasing a going concern company it is for the newly-appointed management to be concerned the most: in a number of jurisdictions they might be boomeranged with management-liability claims resulting from previous management\shareholders cadence.
  4. have an insurance company over the seller’s back. In case any post-closing tails appear, this will give a substantial level of calmness for both sides relying on the insurance to cover a part of the purchase price or post-deal liabilities.

With the post-pandemic distress M&A yet to come and investors being ready as never, these rules will certainly be of use. As S&P 500 non-financials, in late 2020 corporate balance sheets reflected more than $2 trillion of cash – guess if there are funds for making your deal as well? Just remember: there is no one-size-fits-all approach in doing the distress deal and there always is a place for bespoke solutions given by true professionals.

In 2019 the Private Equity and Venture Capital players have invested Euro 7,223 million in 370 transactions in the Italian Market, 26% less than 2018; these are the outcomes released on March 24th by AIFI (Italian Association of Private Equity, Venture Capital e Private Debt).

In this slowing down scenario the spreading of Covid-19 is impacting Private Equity and Venture Capital transactions currently in progress, thus raising implications and alerts that will considerably affect both further capital investments and the legal approach to investments themselves.

Companies spanning a wide range of industries are concerned by Covid-19 health emergency, with diverse impacts on businesses depending on the industry. In this scenario, product companies, direct-to-consumer companies, and retail-oriented businesses appear to be more affected than service, digital, and hi-tech companies. Firms and investors will both need to batten down the hatches, as to minimize the effects of the economic contraction on the on-going investment transactions. In this scenario, investors hypothetically backing off from funding processes represent an issue of paramount concern for start-ups, as these companies are targeted by for VC and PE investments. In that event, the extent of the risk would be dependent upon the investment agreements and share purchase agreements (SPAs) entered into and the term sheets approved by the parties.

MAC/MAE clauses

The right of investors to withdrawal (way out) from a transaction is generally secured by the so-called MAC or MAE clauses – respectively, material adverse change clause or material adverse effect. These clauses, as the case may be and in the event of unforeseeable circumstances, upon the subscription of the agreements, which significantly impact the business or particular variables of the investment, allow investors to decide not to proceed to closing, not to proceed to the subscription and the payment of the share capital increase, when previously resolved, to modify/renegotiate the enterprise value, or to split the proposed investment/acquisition into multiple tranches.

These estimates, in terms of type and potential methods of application of the clauses, usually depend on a number of factors, including the governing law for the agreements – if other than Italian – with this circumstance possibly applying in the case of foreign investors imposing the existing law in their jurisdiction, as the result of their position in the negotiation.

When the enforcement of MAC/MAE clauses leads to the modification/renegotiation of the enterprise value – that is to be lowered – it is advisable to provide for specific contract terms covering calculating mechanisms allowing for smoothly redefining the start-up valuation in the venture capital deals, with the purpose of avoiding any gridlocks that would require further involvement of experts or arbitrators.

In the absence of MAC/MAE clauses and in the case of agreements governed by the Italian law, the Civil Code provides for a contractual clause called ‘supervenient burdensomeness’ (eccessiva onerosità sopravvenuta) of a specific performance (i.e. the investment), with the consequent right for the party whose performance has become excessively burdensome to terminate the contract or to make changes to the contract, with a view to fair and balanced conditions – this solution however implies an inherent degree of complexity and cannot be instantly implemented. In case of agreements governed by foreign laws, it shall be checked whether or not the applicable provisions allow the investor to exit the transaction.

Interim Period clauses

MAC/MAE are generally negotiated when the time expected to closing is medium or long. Similarly, time factors underpin the concept of the Interim Period clauses regulating the business operation in the period between signing and closing, by re-shaping the company’s ordinary scope of business, i.e. introducing maximum expenditure thresholds and providing for the prohibition to execute a variety of transactions, such as capital-related transactions, except when the investors, which shall be entitled to remove these restrictions from time to time, agree otherwise.

It is recommended to ascertain that the Interim Period clauses provide for a possibility to derogate from these restrictions, following prior authorization from the investors, and that said clauses do not require, where this possibility is lacking, for an explicit modification to the provision because of the occurrence of any operational need due to the Covid-19 emergency.

Conditions for closing

The Government actions providing for measures to contain coronavirus have caused several slowdowns that may impact on the facts or events that are considered as preliminary conditions which, when occurring, allow to proceed to closing. Types of such conditions range from authorisations to public entities (i.e. IPs jointly owned with a university), to the achievement of turnover objectives or the completion of precise milestones, that may be negatively affected by the present standstill of companies and bodies. Where these conditions were in fact jeopardised by the events triggered by the Covid-19 outbreak, this would pose important challenges to closing, except where expressly provided that the investor can renounce, with consent to proceed to the investment in all cases. This is without prejudice to the possibility of renegotiating the conditions, in agreement with all the parties.

Future investments: best practice

Covid-19 virus related emergency calls for a change in the best practice of Private Equity and Venture Capital transactions: these should carry out detailed Due diligences on aspects which so far have been under-examined.

This is particularly true for insurance policies covering cases of business interruption resulting from extraordinary and unpredictable events; health insurance plans for employees; risk management procedures in supply chain contracts, especially with foreign counterparts; procedures for smart working and relevant GDPR compliance issues in case of targeted companies based in EU and UK; contingency plans, workplace safety, also in connection with the protocols that ensure ad-hoc policies for in-house work.

Investment protection should therefore also involve MAC/MAE clauses and relevant price adjustment mechanisms, including for the negotiation of contract-related warranties (representation & warranties). A special focus shall be given now, with a different approach, to the companies’ ability to tackle and minimize the risks that may arise from unpredictable events of the same scope as Covid-19, which is now affecting privacy systems, the workforce, the management of supply chain contracts, and the creditworthiness of financing agreements.

This emergency will lead investors to value the investments with even greater attention to information, other than financial ones, about targeted companies.

Indeed, it is mandatory today to gain overview on the resilience of businesses, in terms of structure and capability, when these are challenged by the exogenous variables of the market on the one side, and by the endogenous variables on the other side – to be now understood as part of the global economy.

There is however good news: Venture Capital and Private Equity, like any other ecosystem, will have its own response capacity and manage to gain momentum, as it happened in 2019 when Italy witnessed an unprecedented increase in investments. The relevant stakeholders are already developing coping strategies. Transactions currently in progress are not halted – though slowed down. Indeed, the quarantine does not preclude negotiations or shareholders’ meetings, which are held remotely or by videoconference. This also helps dispel the notion that meetings can only be conducted by getting the parties concerned round the same table.

The author of this post is Milena Prisco.

The COVID-19 pandemic’s dramatic disruption of the legal and business landscape has included a steep drop in overall M&A activity in Q1 2020.  Much of this decrease has been due to decreased target valuations, tighter access by buyers to liquidity, and perhaps above all underlying uncertainty as to the crisis’s duration.

For pending transactions, whether the buyer can walk away from the deal (or seek a purchase price reduction) by invoking a material adverse change (MAC) or material adverse effect (MAE) clause – or another clause in the purchase agreement – due to COVID-19 has become a question of increasing relevance.  MAC/MAE clauses typically allow a buyer to terminate an acquisition agreement if a MAC or MAE occurs between signing and closing.

Actual litigated cases in this area have been few and far between, as under longstanding Delaware case law[1], buyer has the burden of proving MAC or MAE, irrespective of who initiates the lawsuit.  And the standard of proof is high – a buyer must show that the effects of the intervening event are sufficiently large and long lasting as compared to an equivalent period of the prior year.  A short-term or immaterial deviation will not suffice.  In fact, Delaware courts have only once found a MAC, in the December 2018 case Akorn, Inc. v. Fresenius Kabi AG.

And yet, since the onset of the COVID-19 pandemic, numerous widely reported COVID-19 related M&A litigations have been initiated with the Delaware Court of Chancery.  These include:

  • Bed, Bath & Beyond suing 1-800-Flowers (Del. Ch. April 1, 2020) to complete its acquisition of Perosnalizationmall.com (purchaser sought an extension in closing, without citing specifically the contractual basis for the request);
  • Level 4 Yoga, franchisee of CorePower Yoga, suing CorePower Yoga (Del. Ch. Apr 2, 2020) to compel CorePower Yoga to purchase of Level 4 Yoga studios (after CorePower Yoga took the position that studio closings resulting from COVID-19 stay-at-home orders violated the ordinary course covenant);
  • Oberman, Tivoli & Pickert suing Cast & Crew (Del. Ch. Apr 6, 2020), an industry competitor, to complete its purchase of Oberman’s subsidiary (Cast & Crew maintained it was not obligated to close based on alleged insufficiencies in financial data provided in diligence);
  • SP VS Buyer LP v. L Brands, Inc. (Del. Ch. Apr 22, 2020), in which buyer sought a declaratory judgment in its favor on termination); and
  • L Brands, Inc. v. SP VS Buyer L.P., Sycamore Partners III, L.P., and Sycamore Partners III-A, L.P (Del. Ch. Apr 23), in which seller instead seeks declaratory judgment in its favor on buyer obligation to close.

Such cases, typically signed up at an early stage of the pandemic, are likely to increase.  Delaware M&A-MAC-related jurisprudence suggests that buyers seeking to cite MAC in asserting their positions should expect an uphill fight, given buyer’s high burden of proof.  Indeed, Delaware courts’ sole finding of a MAC in Akorn was based on rather extreme facts: target’s (Akorn’s) business deteriorated significantly (40% and 20% drops in profit and equity value, respectively), measured over a full year.  And quite material to the Court’s decision was the likely devastating effect on Akorn’s business resulting from Akorn’s deceptive conduct vis-à-vis the FDA.

By contrast, cases before and after Akorn, courts have not found a MAC/MAE, including in the 2019 case Channel Medsystems, Inc. v. Bos. Sci. Corp.  There, Boston Scientific Corporation (BSC) agreed to purchase Channel Medsystems, Inc., an early stage medical device company.  The sale was conditioned on Channel receiving FDA approval for its sole product, Cerene. In late December 2017, Channel discovered that falsified information from reports by its Vice President of Quality (as part of a scheme to steal over $2 million from Channel) was included in Channel’s FDA submissions.  BSC terminated the merger agreement in May 2018, asserting that Channel’s false representations and warranties constituted a MAC.

The court disagreed.  While Channel and Akron both involved a fraud element, Chanel successfully resubmitted its FDA application, such that the fraudulent behavior – the court found – would not cause the FDA to reject the Cerene device.  BSC also failed to show sufficiently large or long-lasting effects on Channel’s financial position.  Channel thus reaffirmed the high bar under pre-Akron Delaware jurisprudence for courts to find a MAC/MAE (See e.g. In re IBP, Inc. S’holders Litig., 789 A.2d 14 (Del. Ch. 2001); Frontier Oil Corp. v. Holly Corp., 2005 WL 1039027 (Del. Ch. Apr. 29, 2005); Hexion Specialty Chemicals v. Huntsman Corp., 965 A.2d 715 (Del. Ch. 2008)).

Applied to COVID-19, buyers may have challenges in invoking MAC/MAE clauses under their purchase agreements.

First, it may simply be premature at this juncture for a buyer to show the type of longer-term effects that have been required under Delaware jurisprudence.  The long-term effects of COVID-19 itself are unclear.  Of course, as weeks turn into months and longer, this may change.

A second challenge is certain carve-outs typically included in MAC/MAE clauses.  Notably, it is typical for these clauses to include exceptions for general economic and financial conditions generally affecting a target’s industry, unless a buyer can demonstrate that they have disproportionately affected the target.

A buyer may be able to point to other clauses in a purchase agreement in seeking to walk away from the deal.  Of note is the ordinary course covenant that applies to the period between signing and closing.  By definition, most targets are unable to carry out business during the COVID-19 crisis consistent with past practice.  It is unclear whether courts will allow for a literal reading of these clauses, or interpret them taking into account the broader risk allocation regime as evidenced by the MAC or MAE clause in the agreement, and in doing so reject a buyer’s position.

For unsigned deals, there may be some early lessons for practitioners as they prepare draft purchase agreements.  On buyer walk-away rights, buyers will want to ensure that the MAE/MAC definition includes express reference to “pandemics” and “epidemics”, if not to “COVID-19” itself.  Conversely, Sellers may wish to seek to loosen ordinary course covenant language, such as by including express exceptions for actions required by the MAC or MAE and otherwise ensure that they comply with all obligations under their control.  Buyers will also want to pay close attention to how COVID-19 affects other aspects of the purchase agreement, including seeking more robust representations and warranties on the impact of COVID-19 on the target’s business.

 

[1] Although the discussion of this based Delaware law, caselaw in other U.S. jurisdictions often is consistent Delaware.  

This week the Interim Injunction Judge of the Netherlands Commercial Court ruled in summary proceedings, following a video hearing, in a case on a EUR 169 million transaction where the plaintiff argued that the final transaction had been concluded and the defendant should proceed with the deal.

This in an – intended – transaction where the letter of intent stipulates that a EUR 30 million break fee is due when no final agreement is signed.

In addition to ruling on this question of construction of an agreement under Dutch law, the judge also had to rule on the break fee if no agreement was concluded and whether it should be amended or reduced because of the current Coronavirus / Covid-19 crisis.

English Language proceedings in a Dutch state court, the Netherlands Commercial Court (NCC)

The case is not just interesting because of the way contract formation is construed under Dutch law and application of concepts of force majeure, unforeseen circumstances and amendment of agreements under the concepts of reasonableness and fairness as well as mitigation of contractual penalties, but also interesting because it was ruled on by a judge of the English language chamber of the Netherlands Commercial Court (NCC).

This new (2019) Dutch state court offers a relatively fast and cost-effective alternative for international commercial litigation, and in particular arbitration, in a neutral jurisdiction with professional judges selected for both their experience in international disputes and their command of English.

The dispute regarding the construction of an M&A agreement under Dutch law in an international setting

The facts are straightforward. Parties (located in New York, USA and the Netherlands) dispute whether final agreement on the EUR 169 million transaction has been reached but do agree a break fee of €30 million in case of non-signature of the final agreement was agreed. However, in addition to claiming there is no final agreement, the defendant also argues that the break fee – due when there is no final agreement – should be reduced or changed due to the coronavirus crisis.

As to contract formation it must be noted that Dutch law allows broad leeway on how to communicate what may or may not be an offer or acceptance. The standard is what a reasonable person in the same circumstances would have understood their communications to mean.  Here, the critical fact is that the defendant did not sign the so-called “Transaction Agreement”. The letter of intent’s binary mechanism (either execute and deliver the paperwork for the Transaction Agreement by the agreed date or pay a EUR 30 million fee) may not have been an absolute requirement for contract formation (under Dutch law) but has significant evidentiary weight. In M&A practice – also under Dutch law – with which these parties are thoroughly familiar with, this sets a very high bar for  concluding a contract was agreed other than by explicit written agreement. So, parties may generally comfortably rely on what they have agreed on in writing with the assistance of their advisors.

The communications relied on by claimant in this case did not clear the very high bar to assume that despite the mechanism of the letter of intent and the lack of a signed Transaction Agreement there still was a binding agreement. In particular attributing the other party’s advisers’ statements and/or conduct to the contracting party they represent did not work for the claimant in this case as per the verdict nothing suggested that the advisers would be handling everything, including entering into the agreement.

Court order for actual performance of a – deemed – agreement on an M&A deal?

The Interim Injunction Judge finds that there is not a sufficient likelihood of success on the merits so as to justify an interim measure ordering the defendant to actually perform its obligations under the disputed Transaction Agreement (payment of EUR 169 million and take the claimant’s 50% stake in an equestrian show-jumping business).

Enforcement of the break fee despite “Coronavirus”?

Failing the conclusion of an agreement, there was still another question to answer as the letter of intent mechanism re the break fee as such was not disputed. Should the Court enforce the full EUR 30 million fee in the current COVID-19 circumstances? Or should the fee’s effects be modified, mitigated or reduced in some way, or  the fee agreement should even be dissolved?

Unforeseen circumstances, reasonableness and fairness

The Interim Injunction Judge rules that the coronavirus crisis may be an unforeseen circumstance, but it is not of such a nature that, according to standards of reasonableness and fairness, the plaintiff cannot expect the break fee obligation to remain unchanged. The purpose of the break fee is to encourage parties to enter into the transaction and attribute / share risks between them. As such the fee limits the exposure of the parties. Payment of the fee is a quick way out of the obligation to pay the purchase price of EUR 169 million and the risks of keeping the target company financially afloat. If financially the coronavirus crisis turns out less disastrous than expected, the fee of EUR 30 million may seem high, but that is what the parties already considered reasonable when they waived their right to invoke the unreasonableness of the fee. The claim for payment of the EUR 30 million break fee is therefore upheld by the Interim Injunction Judge.

Applicable law and the actual practice of it by the courts

The relevant three articles are in this case articles 6:94, 6:248 and 6:258 of the Dutch Civil Code. They relate to the mitigation of contractual penalties, unforeseen circumstances and amendment of the agreement under the tenets of reasonableness and fairness. Under Dutch law the courts must with all three exercise caution. Contracts must generally be enforced as agreed. The parties’ autonomy is deemed paramount and the courts’ attitude is deferential. All three articles use language stating, essentially, that interference by the courts in the contract’s operation is allowed only to avoid an “unacceptable” impact, as assessed under standards of reasonableness and fairness.

There is at this moment of course no well- established case law on COVID-19. However, commentators have provided guidance that is very helpful to think through the issues. Recently a “share the pain” approach has been advocated by a renowned law Professor, Tjittes, who focuses on preserving the parties’ contractual equilibrium in the current circumstances. This is, in the Court’s analysis, the right way to look at the agreement here. There is no evidence in the record suggesting that the parties contemplated or discussed the full and exceptional impact of the COVID-19 crisis. The crisis may or may not be unprovided for.  However, the court rules in the current case there is no need to rule on this issue. Even if the crisis is unprovided for, there is no support in the record for the proposition that the crisis makes it unacceptable for the claimant to demand strict performance by the defendant. The reasons are straightforward.

The break fee allocates risk and expresses commitment and caps exposure. The harm to the business may be substantial and structural, or it may be short-term and minimal. Either way, the best “share the pain” solution, to preserve the contractual equilibrium in the agreement, is for the defendant to pay the fee as written in the letter of intent. This allocates a defined risk to one party, and actual or potential risks to the other party. Reducing the break fee in any business downturn, the fee’s express purpose – comfort and confidence to get the deal done – would not be accomplished and be derived in precisely the circumstances in which it should be robust. As a result, the Court therefore orders to pay the full EUR 30 million fee. So the break fee stipulation works under the circumstances without mitigation because of the Corona outbreak.

The Netherlands Commercial Court, continued

As already indicated above, the case is interesting because the verdict has been rendered by a Dutch state court in English and the proceedings where also in English. Not because of a special privilege granted in a specific case but based on an agreement between parties with a proper choice of forum clause for this court. In addition to the benefit to of having an English forum without mandatorily relying on either arbitration or choosing an anglophone court, it also has the benefit of it being a state court with the application of the regular Dutch civil procedure law, which is well known by it’s practitioners and reduces the risk of surprises of a procedural nature.  As it is as such also a “normal” state court, there is the right to appeal and particularly effective under Dutch law access to expedited proceeding as was also the case in the example referred to above. This means a regular procedure with full application of all evidentiary rules may still follow, overturning or confirming this preliminary verdict in summary proceedings.

Novel technology in proceedings

Another first or at least a novel application is that all submissions were made in eNCC, a document upload procedure for the NCC. Where the introduction of electronic communication and litigation in the Dutch court system has failed spectacularly, the innovations are now all following in quick order and quite effective. As a consequence of the Coronavirus outbreak several steps have been quickly tried in practice and thereafter formally set up. At present this – finally – includes a secure email-correspondence system between attorneys and the courts.

And, also by special order of the Court in this present case, given the current COVID-19 restrictions the matter was dealt with at a public videoconference hearing on 22 April 2020 and the case was set for judgment on 29 April 2020 and published on 30 April 2020.

Even though it is a novel application, it is highly likely that similar arrangements will continue even after expiry of current emergency measures. In several Dutch courts videoconference hearings are applied on a voluntary basis and is expected that the arrangements will be formalized.

Eligibility of cases for the Netherlands Commercial Court

Of more general interest are the requirements for matters that may be submitted to NCC:

  • the Amsterdam District Court or Amsterdam Court of Appeal has jurisdiction
  • the parties have expressly agreed in writing that proceedings will be in English before the NCC (the ‘NCC agreement’)
  • the action is a civil or commercial matter within the parties’ autonomy
  • the matter concerns an international dispute.

The NCC agreement can be recorded in a clause, either before or after the dispute arises. The Court even recommends specific wording:

“All disputes arising out of or in connection with this agreement will be resolved by the Amsterdam District Court following proceedings in English before the Chamber for International Commercial Matters (“Netherlands Commercial Court” or “NCC District Court”), to the exclusion of the jurisdiction of any other courts. An action for interim measures, including protective measures, available under Dutch law may be brought in the NCC’s Court in Summary Proceedings (CSP) in proceedings in English. Any appeals against NCC or CSP judgments will be submitted to the Amsterdam Court of Appeal’s Chamber for International Commercial Matters (“Netherlands Commercial Court of Appeal” or “NCCA”).”

The phrase “to the exclusion of the jurisdiction of any other courts” is included in light of the Hague Convention on Choice of Court Agreements. It is not mandatory to include it of course and parties may decide not to exclude the jurisdiction of other courts or make other arrangements they consider appropriate. The only requirement being that such arrangements comply with the rules of jurisdiction and contract. Please note that choice of court agreements are exclusive unless the parties have “expressly provided” or “agreed” otherwise (as per the Hague Convention and Recast Brussels I Regulation).

Parties in a pending case before another Dutch court or chamber may request that their case be referred to NCC District Court or NCC Court of Appeal. One of the requirements is to agree on a clause that takes the case to the NCC and makes English the language of the proceedings. The NCC recommends using this language:

We hereby agree that all disputes in connection with the case [name parties], which is currently pending at the *** District Court (case number ***), will be resolved by the Amsterdam District Court following proceedings in English before the Chamber for International Commercial Matters (“Netherlands Commercial Court” or ”NCC District Court). Any action for interim measures, including protective measures, available under Dutch law will be brought in the NCC’s Court in Summary Proceedings (CSP) in proceedings in English. Any appeals against NCC or CSP judgments will be submitted to the Amsterdam Court of Appeal’s Chamber for International Commercial Matters (“Netherlands Commercial Court of Appeal” or “NCC Court of Appeal”).

To request a referral, a motion must be made before the other chamber or court where the action is pending, stating the request and contesting jurisdiction (if the case is not in Amsterdam) on the basis of a choice-of-court agreement (see before).

Additional arrangements in the proceedings before the Netherlands Commercial Court

Before or during the proceedings, parties can also agree special arrangements in a customized NCC clause or in another appropriate manner. Such arrangements may include matters such as the following:

  • the law applicable to the substantive dispute
  • the appointment of a court reporter for preparing records of hearings and the costs of preparing those records
  • an agreement on evidence that departs from the general rules
  • the disclosure of confidential documents
  • the submission of a written witness statement prior to the witness examination
  • the manner of taking witness testimony
  • the costs of the proceedings.

Visiting lawyers and typical course of the procedure

All acts of process are in principle carried out by a member of the Dutch Bar. Member of the Bar in an EU or EEA Member State or Switzerland may work in accordance with Article 16e of the Advocates Act (in conjunction with a member of the Dutch Bar). Other visiting lawyers may be allowed to speak at any hearing.

The proceedings will typically follow the below steps:

  • Submitting the initiating document by the plaintiff (summons or request as per Dutch law)
  • Assigned to three judges and a senior law clerk.
  • The defendant submits its defence statement.
  • Case management conference or motion hearing (e.g. also in respect of preliminary issues such as competence, applicable law etc.) where parties may present their arguments.
  • Judgment on motions: the court rules on the motions. Testimony, expert appointment, either at this stage or earlier or later.
  • The court may allow the parties to submit further written statements.
  • Hearing: the court interviews the parties and allows them to present their arguments. The court may enquire whether the dispute could be resolved amicably and, where appropriate, assist the parties in a settlement process. If appropriate, the court may discuss with the parties whether it would be advisable to submit part or all of the dispute to a mediator. At the end of the hearing, the court will discuss with the parties what the next steps should be.
  • Verdict: this may be a final judgment on the claims or an interim judgment ordering one or more parties to produce evidence, allowing the parties to submit written submissions on certain aspects of the case, appointing one or more experts or taking other steps.

Continuous updates, online resources Netherlands Commercial Court

As a final note the English language website of the Netherlands Commercial Court provides ample information on procedure and practical issues and is updated with a high frequence. Under current circumstance even at a higher pace. In particular for practitioners it’s recommended to regularly consult the website. https://www.rechtspraak.nl/English/NCC/Pages/default.aspx

One of the most tricky steps in any M&A operation is when the issue of “warranties”, in particular with reference to the economic situation, the balance sheet and the financial position of the company or business (or of a branch), namely the so-called “business warranties“.

On one side, the buyer would like to “ironclad” his investment by reducing the risk of an unpleasant surprise to a minimum. The seller, by contrast, wishes to provide the least possible warranties, which often translate in a provisory restriction on the full enjoyment of the proceeds; the same may be essential for further investment.

It should be noted, first of all, that the term “warranties” is usually referred to, in a non-technical acceptation, to a complex set of contractual provisions containing:

  • any seller’s statements about the health of the company or business (or branch of business) being transferred;
  • any compensation obligations undertaken by the seller in case of “violation” (i.e. mistruth) of the assertions;
  • any remedies provided to ensure the effectiveness of the indemnity obligations entered into.

While there are several reasons why this set is necessary, the most significant one is that in M&A contracts, statutory sale warranties only apply to the good sold; therefore, if the good sold is an equity investment, the warranties do not cover any of the company’s underlying assets; and even as they exceptionally do apply, short terms and strict limitations still justify an ancillary obligation designed to ensure the economic success of the transaction.

As confirmed by current practice, there is not a single M&A agreement that does not include a set of warranties.

In particular, representations typically incorporate the buyer’s due diligence, which for its part usually follows a non-disclosure agreement (NDA) to protect any information disclosed.

Any criticalities identified should be properly mentioned. Clearly, wherever a criticality arises, it may not necessarily trigger an indemnity obligation. It will be up to the parties to lay down the rules, as they may also provide that any related risk is to be borne by the buyer; this may be offset by a reduction in the price.

Some aspects of the compensation obligation will have to be carefully negotiated. The main ones are certainly:

  • duration (e.g. longer for tax-related warranties);
  • who is entitled to compensation (the buyer or the company; one or the other as the case may be);
  • any deductions and/or limitations (e.g. tax losses);
  • compensation cap;
  • any possible deductible;
  • the compensation procedure (e.g. application deadlines, settlement procedure, particular circumstances).

These are highly relevant aspects and should by no means be underestimated. As an example, it is obvious that if the compensation procedure is poorly regulated, all the previous efforts are jeopardised.

Finally, suitable measures to ensure an effective protection of the buyer must be provided. Among these, the most conventional tools are:

  • the surety;
  • the “independent contract of guarantee”;
  • the escrow;
  • the deferment of payment;
  • the “earn-out”-scheme;
  • the “price adjustment”;
  • the letter of patronage;
  • the pledge and/or mortgage.

These are more or less widely used instruments, each one with its pros and cons.

At this point, however, we would like to address a new tool with an insurance character, which has been being used recently: the so-called “Warranty & Indemnity Policies“.

With a W&I insurance policy, basically, the insurer assumes the risk resulting from breaches of warranties and indemnities included in an M&A contract upon payment of a premium.

It is obviously a key condition that the violation arose from facts preceding the closing and which were not known at that time (and, therefore, not highlighted by the due diligence carried out).

The insurance policy may be subscribed by the buyer (buyer side) or the seller (seller side). Usually the first option is preferred. These W&I insurance policies come with a number of advantages:

  • a warranty is given even when the seller has been unwilling to commit himself contractually;
  • the insurance policy usually does not provide for any recourse against the seller, other than in the case of malice, so that the seller is fully released;
  • it is also possible to achieve a higher ceiling than that provided for in a purchase agreement;
  • likewise, coverage may be provided for a longer period;
  • it is easier to deal with the seller, especially if there are several and some are still part of the company, perhaps as members of the Board of Directors;
  • compensation procedures become significantly easier, especially in cases where there are multiple sellers, including individuals;
  • the buyer gains a higher certainty of solvency.

The cost of the insurance policy may be shared between the parties, eventually by discounting the purchase price, which the seller may be more willing to grant, considering that he will not be required to issue other warranties and can immediately use the proceeds of the sale.

Premiums are usually set somewhere between 1% and 2% of the compensation limit (with a minimum premium).

Besides the price, which makes the tool mostly suitable for operations of not modest entity, currently, the main limitation seems to be the commonly required deductible, equal to 1% of the Enterprise Value of the Target, which may be reduced to 0.5% in case of higher premiums. Keep in mind that the W&I insurance policy implies a review of the due diligence by the insurance company, which can translate into an actual intervention in the negotiation of the warranties.

Beyond this, this tool needs to be carefully evaluated: facing highly complex scenarios, it could be the ideal solution to solve an impasse in negotiations and make relations between professional investors and SMEs easier.

Acquisitions (M&A) in Italy are carried out in most cases through the purchase of shareholdings (‘share deal’) or business or business unit (‘asset deal’). For mainly tax reasons, share deals are more frequent than asset deals, despite the asset deal allows a better limitation of risks for the buyer. We will explain the main differences between share deal and asset deal in terms of risks, and in terms of relationships between seller and buyer.

Preference for acquisitions through the purchase of shareholdings (‘share deal’) rather than the purchase of business or business unit (‘asset deal’) in the Italian market

In Italy, acquisitions are carried out, in most cases, through the purchase of shareholdings (‘share deal’) or of business or business unit (‘asset deal’). Other structures, such as mergers, are less frequent.

By purchasing shareholdings of the target company (‘share deal‘), the buyer indirectly acquires all the company’s assets, liabilities and legal relationships. Therefore, the buyer bears all the risks relating to the previous management of the company.

With the purchase of the business or of a business unit of the target company (‘asset deal‘), the buyer acquires a set of assets and relationships organized for the operation of the business (real estate, machineries, patents, trademarks, employees, contracts, credits, debts, etc.). The advantage of the asset deal lies in the possibility for the parties to select the assets and liabilities included in the deal: hence the buyer can limit the legal risks of the transaction.

Despite this advantage, most acquisitions in Italy are made through the purchase of shareholdings. In 2018, there were approximately 78,400 purchases of shareholdings (shares or quotas), while there were approximately 35,900 sales of businesses or business units. (source: www.notariato.it/it/news/dati-statistici-notarili-anno-2018). It should be noted that the number of transfers of business also includes small or very small businesses owned by individual entrepreneurs, for whom the alternative of the share deal (though feasible, through the contribution of the business in a newco and the sale of the shares in the newco) is not viable in practice for cost reasons.

Taxation of share deal and asset deal in Italy

The main reason for the preference for share deal over asset deal lies in the tax costs of the transaction. Let’s see what they are.

In a share deal, the direct taxes borne by the seller are calculated on the capital gain, according to the following rates:

  • if the seller is a joint-stock company (società per azioni – s.p.a.; società a responsabilità limitata – r.l.; società in accomandita per azioni – s.a.p.a.), the corporate tax rate is 24% of the capital gain. However, under certain conditions, the so-called PEX (participation exemption) regime is applied with the application of the rate of 24% on 5% of the capital gain only.
  • If the seller is a partnership (società semplice – s.s.; società in nome collettivo – s.n.c..; società in accomandita semplice – s.a.s.) the capital gain is fully taxable. However, under certain conditions, the taxable amount is limited to 60% of the amount of the capital gain. In both cases, the taxable amount is attributed pro rata to each shareholder of the partnership, and added to the shareholders’ income (the tax rate depends on the shareholders’ income).
  • If the seller is a natural person, the rate on the capital gain is 26%.

A share deal is subject to a fixed registration tax of € 200,00, normally paid by the buyer.

In an asset deal, the direct taxes to be paid by the seller are calculated on the capital gain. If the seller is a joint-stock company, the corporate tax rate is 24% of the capital gain. If the seller is a partnership (with individual partners) or an individual entrepreneur, the rate depends on the seller’s income.

In an asset deal the transfer of the business or of the business unit is subject to registration tax, generally paid by the buyer. However both the seller and the buyer are jointly and severally liable for the payment of the registration tax. The tax is calculated on the part of the price attributable to the assets transferred. The price is the result of the transferred assets minus the transferred liabilities. The tax rate depends on the type of asset transferred. In general:

  • movable assets, including patents and trademarks: 3%;
  • goodwill: 3%;
  • buildings: 9%;
  • land: between 9% and 12% (depending on the buyer).

If the parties do not apportion the purchase price to the different assets in proportion to their values, the registration tax is applied to the entire purchase price at the highest rate of those applicable to the assets.

It should be noted that the tax authorities may assess the value attributed by the parties to real estate and goodwill, with the consequent risk of application of higher taxes.

Share deal and asset deal: risks and responsibilities towards third parties

In the purchase of shares or quotas (‘share deal‘), the purchaser bears, indirectly, all the risks relating to the previous management of the company.

In the purchase of business or business unit (‘asset deal‘), on the other hand, the parties can select which assets and liabilities will be transferred, hence establishing, among them, the risks that the buyer will bear.

However, there are some rules, which the parties cannot derogate from, relating to relationships with third parties, that have a significant impact on the risks for the seller and the buyer, and therefore on the negotiation of the purchase agreement. The main ones are as follows.

  • Employees: the employment relationship continues with the buyer of the business. The seller and the buyer are jointly and severally liable for all the employee’s rights and claims at the time of transfer (art. 2112 of the Italian Civil Code).
  • Debts: the seller is obliged to pay all debts up to the date of transfer. The buyer is liable for the debts that are shown in the mandatory accounting books (art. 2560 of the Italian Civil Code).
  • Tax debts and liabilities: the seller is obliged to pay debts, taxes and tax penalties relating to the period up to the date of transfer. In addition to the liability for tax debts resulting from mandatory accounting books (Article 2560 of the Italian Civil Code), the buyer is liable for taxes and penalties, even if they are not shown in the accounting books, with the following limits (Article 14 of Legislative Decree 472/1997):
  • the buyer benefits from the prior enforcement of the seller;
  • the buyer is liable up to the value of the business or business unit;
  • for taxes and penalties not emerging from a tax audit by the tax authorities that has taken place before the date of transfer, the buyer is liable for those relating to the year of the sale of the business and the two preceding years only;
  • the tax authorities shall issue a certificate on the existence and amount of debts and ongoing tax audits. If the certificate is not issued within 40 days of the request, the buyer will be released from liability. If the certificate is issued, the buyer will be liable up to the amount resulting from the certificate.
  • Contracts: the parties can choose which contracts to transfer. With respect to the contracts transferred, the buyer takes over, even without the consent of the third contracting party, contracts for the operation of the business that are not of a personal nature. In addition, the third contracting party may withdraw from the contract within three months if there is a just cause (e.g. if the buyer does not guarantee to be able to fulfil the contract due to his financial situation or technical skills) (Art. 2558 of the Italian Civil Code).

Some ways to deal with the risks

To manage the risks arising from third party liability and the general risks associated with the acquisition, a number of negotiation and contractual tools can be used. Let’s see some of them.

In an asset deal:

Employees: it is possible to agree with the employee changes to the contractual terms and conditions, and waive of joint and several liability of the buyer and seller (pursuant to art. 2112 c.c.). In order to be valid, the agreement with the employee must be concluded with certain requirements (for example, with the assistance of the trade unions).

Debts:

  • transfer the debts to the buyer and reduce the price accordingly. The price reduction leads to a lower tax cost of the transaction as well. In case of transfer of debts, in order to protect the seller, a declaration of release of the seller from liability pursuant to art. 2560 of the Italian Civil Code can be obtained from the creditor; or, the parties can agree that the payment of the debt by the buyer will take place at the same time as the transfer of the business (‘closing‘).
  • For debts not transferred to the buyer, obtain from the creditor a declaration of release of the buyer from liability pursuant to art. 2560 of the Italian Civil Code.
  • For debts for which it is not possible to obtain a declaration of release from the creditor, agree on forms of security in favor of the seller (for debts transferred) or in favor of the buyer (for debts not transferred), such as, for example, the deferment of payment of part of the price; the escrow of part of the price; bank or shareholder guarantees.

Tax debts and tax liabilities:

  • obtain from the tax authorities the certificate pursuant to art. 14 of Legislative Decree 472/1997 on debts and tax liabilities;
  • transfer the debts to the buyer, and reduce the price accordingly;
  • agree on forms of guarantee in favor of the seller (for debts transferred) and in favour of the buyer (for debts not transferred or for tax liabilities), such as those set out above for debts in general.

Contracts: for those that will be transferred:

  • verify that the seller’s obligations up to the date of transfer have been properly performed, in order to avoid the risk of disputes by the third contracting party, that could stop the performance of the contract;
  • at least for the most important contracts, obtain in advance from the third contracting party the approval of transfer of the contract.

In a share deal some tools are:

  • Due diligence. Carry out a thorough legal, tax and accounting due diligence on the company, to assess the risks in advance and manage them in the negotiation and in the acquisition contract (‘share purchase agreement’).
  • Representations and warranties (‘R&W’) and indemnification. Provide in the acquisition contract (‘share purchase agreement’) a detailed set of representations and warranties – and obligations to indemnify in the event of non-compliance – to be borne by the seller in relation to the situation of the company (‘business warranties‘: balance sheet; contracts; litigation; compliance with environmental regulations; authorizations for the conduct of business; debts; receivables, etc.). Negotiations on representations and warranties normally are carried on taking into account the outcomes of due diligence. Contractual representations and warranties on the situation of the company (‘business warranties‘) and contractual obligation to indemnify, are necessary in share deals in Italy, as in the absence of such clauses the buyer cannot obtain from the seller (except in extraordinary circumstances) compensation or indemnity if the situation of the company is different from that considered at the time of purchase.
  • Guarantees for the buyer. Means of ensuring that the buyer will be indemnified in the event of breach of representations and warranties. Among them: (a) the deferment of payment of part of the price; (b) the payment of part of the price in an escrow account for the duration of the liabilities arising from the representations and warranties and, in case of disputes between the parties, until the dispute is settled; (c) bank guarantee; (d) W&I policy: insurance contract covering the risk of the buyer in case of breach of representations and warranties, up to a maximum amount (and excluding certain risks).

Other factors influencing the choice between share deal and asset deal

Of course, the choice to carry out an acquisition operation in Italy through a share deal or an asset deal also depends on other factors, in addition to the tax cost of the transaction. Here are some of them.

  • Purchase of part of the business. The parties chose the asset deal when the transaction does not involve the purchase of the entire business of the target company but only a part of it (a business unit).
  • Situation of the target company. The buyer prefers the asset deal when the situation of the target company is so problematic that the buyer is not willing to assume all the risks arising from the previous management, but only part of them.
  • Maintenance of a role by the seller. The share deal is a better option when the seller will keep a role in the target company. In this case, the seller frequently retains, in addition to a role as director, a minority shareholdings, with exit clauses (put and call rights) after a certain period of time. The exit clauses often link the price to future results and, therefore, in the interest of the buyer, motivate the seller in his/her role as director, and, in the interest of the seller, put a value on the company’s earnings potential, not yet achieved at the time of purchase.

A legal due diligence of a Brazilian target company should analyze the existence and the content of Agency Agreements, including values paid to the agent and the nature of such payments and the factual situation of the target’s agents, in order to evaluate potential contingencies.

One usual suspect in legal due diligences of Brazilian target companies in M&A transactions that should not be overlooked is the existence of agency agreements, due to:

  • the obligation to indemnify the agent stipulated by law: at least 1/12th of all commissions paid throughout the entire term of the agency agreement; and
  • the risks for the agency being disregarded and considered as an employment relationship, subjecting the principal to compensate the agent as an employee with all rights, benefits, taxes and social contributions.

This should be considered for evaluation of potential contingencies and the impacts on the valuation of the target.

No doubt that agents can be an important component of the sales force of the business and can be strategic for the activity of the principal, in view of a certain independence and for not increasing the payroll of a company.

On the other hand, under Brazilian laws, the protective nature of the agency demands the principal a considerable level of attention.

Indemnification

Brazilian Federal Law No. 4,886/65 as amended – the Brazilian Agency Law – determines that the agent is entitled to, at the termination of an agency agreement, receive an indemnification of 1/12th calculated over all the commissions paid throughout the duration of the entire period of the agency agreement.

The Brazilian Agency Law stipulates that if the parties sign a new contract within 6 months after the expiration of the previous, the relation between agent and principal shall be deemed as the same relationship and thus, the duration to calculate the indemnification shall encompass the entire period (past and subsequent contract).

Termination by the agent

The Brazilian Agency Law also stipulates situations that agent could terminate the contract and still be entitled to receive the 1/12th indemnification:

  • reduction of the activities in disagreement with the contractual stipulation
  • breach of exclusivity (territory and/or products), if so stipulated in the agreement
  • determination of prices that makes the agency unfeasible and
  • default on payment of the commissions
  • force majeure

Termination without cause

Termination without cause can be done, upon payment to agent of the indemnification and with a previous notice of at least 30 days, in which situation the agent shall receive the payment of 1/3 of the remuneration received during the previous 90 days prior to the termination.

Can principal avoid the indemnification?

The only cases where the 1/12th indemnification would not be applicable are when the contract is terminated by principal with cause. The Brazilian Agency Law has limited situations for principal to terminate the contract with cause:

  • acts by agent causing disrepute of the principal
  • breach of obligations related to the agency activities
  • criminal conviction related to honor, reputation

These situations shall be clearly demonstrated. Producing the sufficiently strong evidence of the facts to configure cause for termination may not be an easy task, considering some of the facts may be subject to construing and interpreting by the parties, witnesses and ultimately the judge.

As a result, from past experiences, it is rare to see principals in conditions not to incur in the 1/12th indemnification.

Potential risk: configuring employment relationship

In addition to the indemnification, the activities developed by the agent could eventually be deemed as performed by a regular employee of the principal and, in this case, principal could be subject to compensate the agent as an employee.

Agent vs. employee

For the appreciation of the employment relationship, the individual acting as agent shall file a labor claim and demonstrate the existence of the employment relationship.

The Labor Court judge will consider the factual situation, prevailing upon the written agreements or other formal documents. The judge may rely on e-mails, witnesses and other evidence.

The elements of an employment relationship are:

  • Individual: in case the individual acts by himself to perform the services; Personal services: the services are in fact performed by the individual specifically to the Principal;;
  • Non-eventuality – exclusivity: the services are rendered in a regular basis;
  • Subordination: key factor – the individual has to follow strict instructions directed by principal, such as reporting to an employee of the principal, determined visits;
  • Rewarding – fixed remuneration: the individual is awarded regular amounts and expenses allowances

In the event the individual can demonstrate the existence of the elements to configure an employment relationship, he/she could have an award to entitle him/her to have his remuneration considered as of a regular employee for the last 5 years.

As a result, the individual would be awarded the payment of Christmas bonus (equivalent to 1 monthly remuneration per year), vacation allowance (1/3 of a monthly remuneration per year), unemployment guarantee fund (1 monthly remuneration per year) plus other benefits that he/she would be given as an employee of principal (based on the collective bargaining agreement between the employees’ and employers’ unions). The company would also be obliged to make the payment of the co-related social security contributions.

Needless to say, the result could turn into a considerable potential contingency.

The author of this article is Paulo Yamaguchi

The procedure to incorporate a foreign owned company in Spain is, in principle, easy and straight forward, however it is necessary to take into account certain new requirements derived from the tax and the anti-money laundering regulations, which could cause long delays in the incorporation process, even to EU and US companies, if they are not well advised and managed from the beginning of the procedure.

The first step consist in collecting information about the foreign shareholder, in order to be able to prove its legal existence and activities: the foreign shareholder(s) will have to grant before a Notary Public in its country of residence a power of attorney authorising somebody in Spain to obtain its tax identification number (“NIE”), and also represent it before the Spanish notary when signing the deed of incorporation. In case the foreign shareholder is an individual person, the NIE should be applied for before the Spanish police or the Spanish Consulate at the country where the investor lives.

If the shareholder is a corporation, apart from the Power of Attorney, it will have to obtain a certificate from its Companies’ Registry or Chamber of Commerce, stating its legal existence and main characteristics. This document is called “good standing certificate” (in the UK and US), “K-bis” (in France), “KvK” (in the Netherlands) or “visura” (in Italy). These two documents, the Power of Attorney mentioned in the above paragraph and the certificate from the Companies’ Registry, will have to be Apostilled or legalized by the correspondent Ministry, and Sworn translated into Spanish. Please note that we use to draft bilingual powers of attorney in order to avoid its sworn translation.

The foreign shareholder will have to prove that its income is obtained from legal activities in order to be able to open a bank account in the name of the new company. The main document to prove this could be the Corporate or the Personal Income Tax return filed in its country of residence, but there could be other means, especially in case of individual persons.

In case of a corporate shareholder, it will be necessary as well to declare, in principle through a public deed granted in Spain, who are the individual persons who, directly or through other companies, will hold more than a 25% interest in the new company to be incorporated. In case nobody holds more than a 25% (i.e. because there are 5 individual shareholders, holding each of them a 20%), it is declared that the effective control of the new company corresponds to its director.

At this stage, it is also necessary to mention that the person(s) who will be the director(s) of the new company, in case they are foreigners, will also need to obtain their personal “NIE”. The NIE should be applied for before the Spanish police (this could be done by a proxy duly authorised though a Power of Attorney granted by the foreign director) or before the Spanish Consulate nearest to the city where the investor lives. In order to be a director of a Spanish company it is not necessary to be a shareholder, nor to have residence and work permit in Spain (provided the foreign director does not live in Spain).

Meanwhile the necessary documents (Powers of Attorney, Companies’ Registry certificate, etc.) are being prepared by the foreign shareholder, the lawyer in Spain will apply for the new company’s name. It is advisable to point out that generic or usual names are not available quite often, therefore it is necessary to think in original names. Three different names could be applied for simultaneously.

The drafting of the company’s Articles of Association or By Laws could be very quick, except if the company is going to have several shareholders and they wish specific clauses. In this case, it is also advisable to draft a Shareholders Agreement. The Shareholders’ Agreement could just contain some basic rules on dedication, compensation, non-competition, etc. and some more sophisticated rules on the sale of shares (tag along and drag along rights). As regards the By-Laws, they should mention the company’s name, its activity or activities, address in Spain –which cannot be just a P.O. Box-, share capital, number of shares and its face value, and starting date for the fiscal year, among other standard clauses.

The management of the company could be organized through a sole director, two directors who could act jointly or separately, and in case there are more than three directors, they should organize themselves through a Board of Directors, being usual in this case to appoint a C.E.O. In order to be a director it is not necessary to be a shareholder. Under Spanish laws, the director(s) could be held liable for some company’s debts under certain circumstances which are legally defined. For this reason, it is necessary that the directors formally accept their appointment (personally appearing before the Notary or through a Power of Attorney).

Before the incorporation, it will be necessary that either the new company’s director (the person to be appointed) or the representative of the corporate shareholder appears personally before the bank where the company will have its first bank account and signs the correspondent documents (KYC regulation). Once the bank account is opened, the shareholder will have to send a bank transfer for the new company’s share capital. In Spain, the minimum share capital for a limited company (S.L.) is Euros 3.000, while for a “Sociedad Anónima” (S.A.) it is Euros 60.000, but only 25% should be paid off at the incorporation moment. It is interesting to note that contributions to the share capital could be made in cash – which is the most common operation, especially at the incorporation – or in kind, with any type of assets: real estate, machinery, goods, trademarks, etc. The money for the share capital should be sent to the new company’s bank account from an account owned by the shareholder (or from each account owned by each shareholder, should they be several ones), not by any other different person. Once the Spanish bank receives the transfer, it will issue a certificate, which is necessary in order to incorporate the company.

Once all the documents are ready, it is possible within very few days (almost immediately) to make the appointment with the Notary and sign the public deed of incorporation. This can be done at any notary in Spain, not being necessary that the notary practises at the same city where the company will have its corporate address. In order to summarize, the list of the necessary documents is:

  • Power(s) of Attorney granted by the foreign shareholder(s), apostilled and sworn translated.
  • Certificate regarding the legal existence of the foreign shareholder (only if it is a corporation), apostilled and sworn translated.
  • Statement on who are the last individual shareholders holding more than 25% interest in the new company, directly or indirectly (only in case of corporate shareholders).
  • NIE of the foreign shareholder(s).
  • NIE of the new company’s director(s), should they be a foreigners.
  • Certificate for the new company’s name.
  • Articles of Association.
  • Bank certificate regarding the contribution to the new company’s share capital.

The deed of incorporation is signed by the proxy (or the individual shareholder(s), should they prefer to personally appear before the notary) before the chosen public notary, being also necessary to sign an official form to report the foreign investment to a public registry depending on the Spanish Ministry of Finance.

Once the deed of incorporation is signed, the next steps consist in applying before the tax authorities to obtain the new company’s tax number (NIF / CIF) and filing the deed of incorporation before the Companies’ Registry. Some banks do allow new companies to operate once they have the NIF (which could be 2-3 days after the incorporation), while others request to wait until the deed of incorporation is filed at the Companies’ Registry (2-3 weeks).

An estimation of the necessary time to complete all the procedure is 30-45 days, but of course the main delay is related to speed of the foreign investor in obtaining the necessary documents.

Please note that if you wish to incorporate a foreign owned company in Spain it is always necessary to seek specific professional advice, as each case is different and regulations and the application of such regulations vary from time to time. The above article just explains the main steps and requirements for the incorporation of a company.

Anton Molchanov

Áreas de prática

  • Agricultura
  • Empresa
  • Cobrança de créditos
  • Financiamento e títulos
  • Insolvência
Contato Anton

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    Italy – How Covid19 impacts on Private Equity and Venture Capital transactions

    31 Maio 2020

    • Itália
    • Fusões e Aquisições

    There were hardly even a few businesses worldwide not affected by the corona pandemic. As lockdown measures were expanding from March 2020, dozens of visitor-dependent (including retail, public transportation, HoReCa, leisure, entertainment & sport) companies’ value dropped astonishingly. This immediately resulted in numerous RFPs coming in and out NPL funds and distress investors being ready as never to pluck those companies ripe enough.

    Well, at least that is how the things should have been.

    A general picture of M&A demand remains with no great changes. According to the recent DataSite EMEA report first 2021 quarter shown 40 % deal value increase and 14 percent deal volume growth. Some sceptic experts already highlighted that Q1 references are insufficient – as Q1 2020 was painted in an unseen uncertainty and hard-model governmental interference whilst Q1 2021 came in much more predictable conditions with vaccination campaigns being successful and more lockdowns lightened.

    The 2020 picture for the distressed part of the global (and particularly EMEA) part of M&A market is quite the same. With hundreds of companies still receiving governmental support and financial institutions still having a wide liquidity, the 2020 data from Bloomberg reports show no Big Bang in distress deals (either arising from pre-pack agreements between debtors and creditors or from formal insolvency processes), at least if compared with 2007-8 recession years.

    Nevertheless Bloomberg themselves recognize that 2021 market might become red-hot. Whether this prognosis will materialize soon – here are four basic tips to hold in mind when thinking on insolvency-sed distress M&A deal on either – buyer or seller side:

    1. asset or going-concern purchase. A key business decision is understanding of whether a target business is viable enough and fits in the buyer’s existing\planned portfolio to be bought as a going-concern company. Should there be no certainty – a rule of thumb with almost always be to stick with the asset deal being more secured and the target itself much easier to allocate.
      On the other hand, for a manufacturing target license and related IP rights holding might constitute a large part of the business’ value – without which the desired asset appears to be a no-hand pot.
    1. watch for exclusivity – as asset-based distressed purchase might lack one because of the procedural obligation of going through bidding process.
    2. beware of easy ways. With so-called reverse vesting orders and free-and-clean sales an SP process might look very comfortable for a buyer eager to obtaining the target clean of any burdens (liens, mortgages, tax liabilities). Might look – but rarely be such within FSU and a part of CEE countries where a big chance of facing clawback action exists, especially with a huge state (tax\duty) interest at stake.
    3. do post-deal homework. When purchasing a going concern company it is for the newly-appointed management to be concerned the most: in a number of jurisdictions they might be boomeranged with management-liability claims resulting from previous management\shareholders cadence.
    4. have an insurance company over the seller’s back. In case any post-closing tails appear, this will give a substantial level of calmness for both sides relying on the insurance to cover a part of the purchase price or post-deal liabilities.

    With the post-pandemic distress M&A yet to come and investors being ready as never, these rules will certainly be of use. As S&P 500 non-financials, in late 2020 corporate balance sheets reflected more than $2 trillion of cash – guess if there are funds for making your deal as well? Just remember: there is no one-size-fits-all approach in doing the distress deal and there always is a place for bespoke solutions given by true professionals.

    In 2019 the Private Equity and Venture Capital players have invested Euro 7,223 million in 370 transactions in the Italian Market, 26% less than 2018; these are the outcomes released on March 24th by AIFI (Italian Association of Private Equity, Venture Capital e Private Debt).

    In this slowing down scenario the spreading of Covid-19 is impacting Private Equity and Venture Capital transactions currently in progress, thus raising implications and alerts that will considerably affect both further capital investments and the legal approach to investments themselves.

    Companies spanning a wide range of industries are concerned by Covid-19 health emergency, with diverse impacts on businesses depending on the industry. In this scenario, product companies, direct-to-consumer companies, and retail-oriented businesses appear to be more affected than service, digital, and hi-tech companies. Firms and investors will both need to batten down the hatches, as to minimize the effects of the economic contraction on the on-going investment transactions. In this scenario, investors hypothetically backing off from funding processes represent an issue of paramount concern for start-ups, as these companies are targeted by for VC and PE investments. In that event, the extent of the risk would be dependent upon the investment agreements and share purchase agreements (SPAs) entered into and the term sheets approved by the parties.

    MAC/MAE clauses

    The right of investors to withdrawal (way out) from a transaction is generally secured by the so-called MAC or MAE clauses – respectively, material adverse change clause or material adverse effect. These clauses, as the case may be and in the event of unforeseeable circumstances, upon the subscription of the agreements, which significantly impact the business or particular variables of the investment, allow investors to decide not to proceed to closing, not to proceed to the subscription and the payment of the share capital increase, when previously resolved, to modify/renegotiate the enterprise value, or to split the proposed investment/acquisition into multiple tranches.

    These estimates, in terms of type and potential methods of application of the clauses, usually depend on a number of factors, including the governing law for the agreements – if other than Italian – with this circumstance possibly applying in the case of foreign investors imposing the existing law in their jurisdiction, as the result of their position in the negotiation.

    When the enforcement of MAC/MAE clauses leads to the modification/renegotiation of the enterprise value – that is to be lowered – it is advisable to provide for specific contract terms covering calculating mechanisms allowing for smoothly redefining the start-up valuation in the venture capital deals, with the purpose of avoiding any gridlocks that would require further involvement of experts or arbitrators.

    In the absence of MAC/MAE clauses and in the case of agreements governed by the Italian law, the Civil Code provides for a contractual clause called ‘supervenient burdensomeness’ (eccessiva onerosità sopravvenuta) of a specific performance (i.e. the investment), with the consequent right for the party whose performance has become excessively burdensome to terminate the contract or to make changes to the contract, with a view to fair and balanced conditions – this solution however implies an inherent degree of complexity and cannot be instantly implemented. In case of agreements governed by foreign laws, it shall be checked whether or not the applicable provisions allow the investor to exit the transaction.

    Interim Period clauses

    MAC/MAE are generally negotiated when the time expected to closing is medium or long. Similarly, time factors underpin the concept of the Interim Period clauses regulating the business operation in the period between signing and closing, by re-shaping the company’s ordinary scope of business, i.e. introducing maximum expenditure thresholds and providing for the prohibition to execute a variety of transactions, such as capital-related transactions, except when the investors, which shall be entitled to remove these restrictions from time to time, agree otherwise.

    It is recommended to ascertain that the Interim Period clauses provide for a possibility to derogate from these restrictions, following prior authorization from the investors, and that said clauses do not require, where this possibility is lacking, for an explicit modification to the provision because of the occurrence of any operational need due to the Covid-19 emergency.

    Conditions for closing

    The Government actions providing for measures to contain coronavirus have caused several slowdowns that may impact on the facts or events that are considered as preliminary conditions which, when occurring, allow to proceed to closing. Types of such conditions range from authorisations to public entities (i.e. IPs jointly owned with a university), to the achievement of turnover objectives or the completion of precise milestones, that may be negatively affected by the present standstill of companies and bodies. Where these conditions were in fact jeopardised by the events triggered by the Covid-19 outbreak, this would pose important challenges to closing, except where expressly provided that the investor can renounce, with consent to proceed to the investment in all cases. This is without prejudice to the possibility of renegotiating the conditions, in agreement with all the parties.

    Future investments: best practice

    Covid-19 virus related emergency calls for a change in the best practice of Private Equity and Venture Capital transactions: these should carry out detailed Due diligences on aspects which so far have been under-examined.

    This is particularly true for insurance policies covering cases of business interruption resulting from extraordinary and unpredictable events; health insurance plans for employees; risk management procedures in supply chain contracts, especially with foreign counterparts; procedures for smart working and relevant GDPR compliance issues in case of targeted companies based in EU and UK; contingency plans, workplace safety, also in connection with the protocols that ensure ad-hoc policies for in-house work.

    Investment protection should therefore also involve MAC/MAE clauses and relevant price adjustment mechanisms, including for the negotiation of contract-related warranties (representation & warranties). A special focus shall be given now, with a different approach, to the companies’ ability to tackle and minimize the risks that may arise from unpredictable events of the same scope as Covid-19, which is now affecting privacy systems, the workforce, the management of supply chain contracts, and the creditworthiness of financing agreements.

    This emergency will lead investors to value the investments with even greater attention to information, other than financial ones, about targeted companies.

    Indeed, it is mandatory today to gain overview on the resilience of businesses, in terms of structure and capability, when these are challenged by the exogenous variables of the market on the one side, and by the endogenous variables on the other side – to be now understood as part of the global economy.

    There is however good news: Venture Capital and Private Equity, like any other ecosystem, will have its own response capacity and manage to gain momentum, as it happened in 2019 when Italy witnessed an unprecedented increase in investments. The relevant stakeholders are already developing coping strategies. Transactions currently in progress are not halted – though slowed down. Indeed, the quarantine does not preclude negotiations or shareholders’ meetings, which are held remotely or by videoconference. This also helps dispel the notion that meetings can only be conducted by getting the parties concerned round the same table.

    The author of this post is Milena Prisco.

    The COVID-19 pandemic’s dramatic disruption of the legal and business landscape has included a steep drop in overall M&A activity in Q1 2020.  Much of this decrease has been due to decreased target valuations, tighter access by buyers to liquidity, and perhaps above all underlying uncertainty as to the crisis’s duration.

    For pending transactions, whether the buyer can walk away from the deal (or seek a purchase price reduction) by invoking a material adverse change (MAC) or material adverse effect (MAE) clause – or another clause in the purchase agreement – due to COVID-19 has become a question of increasing relevance.  MAC/MAE clauses typically allow a buyer to terminate an acquisition agreement if a MAC or MAE occurs between signing and closing.

    Actual litigated cases in this area have been few and far between, as under longstanding Delaware case law[1], buyer has the burden of proving MAC or MAE, irrespective of who initiates the lawsuit.  And the standard of proof is high – a buyer must show that the effects of the intervening event are sufficiently large and long lasting as compared to an equivalent period of the prior year.  A short-term or immaterial deviation will not suffice.  In fact, Delaware courts have only once found a MAC, in the December 2018 case Akorn, Inc. v. Fresenius Kabi AG.

    And yet, since the onset of the COVID-19 pandemic, numerous widely reported COVID-19 related M&A litigations have been initiated with the Delaware Court of Chancery.  These include:

    • Bed, Bath & Beyond suing 1-800-Flowers (Del. Ch. April 1, 2020) to complete its acquisition of Perosnalizationmall.com (purchaser sought an extension in closing, without citing specifically the contractual basis for the request);
    • Level 4 Yoga, franchisee of CorePower Yoga, suing CorePower Yoga (Del. Ch. Apr 2, 2020) to compel CorePower Yoga to purchase of Level 4 Yoga studios (after CorePower Yoga took the position that studio closings resulting from COVID-19 stay-at-home orders violated the ordinary course covenant);
    • Oberman, Tivoli & Pickert suing Cast & Crew (Del. Ch. Apr 6, 2020), an industry competitor, to complete its purchase of Oberman’s subsidiary (Cast & Crew maintained it was not obligated to close based on alleged insufficiencies in financial data provided in diligence);
    • SP VS Buyer LP v. L Brands, Inc. (Del. Ch. Apr 22, 2020), in which buyer sought a declaratory judgment in its favor on termination); and
    • L Brands, Inc. v. SP VS Buyer L.P., Sycamore Partners III, L.P., and Sycamore Partners III-A, L.P (Del. Ch. Apr 23), in which seller instead seeks declaratory judgment in its favor on buyer obligation to close.

    Such cases, typically signed up at an early stage of the pandemic, are likely to increase.  Delaware M&A-MAC-related jurisprudence suggests that buyers seeking to cite MAC in asserting their positions should expect an uphill fight, given buyer’s high burden of proof.  Indeed, Delaware courts’ sole finding of a MAC in Akorn was based on rather extreme facts: target’s (Akorn’s) business deteriorated significantly (40% and 20% drops in profit and equity value, respectively), measured over a full year.  And quite material to the Court’s decision was the likely devastating effect on Akorn’s business resulting from Akorn’s deceptive conduct vis-à-vis the FDA.

    By contrast, cases before and after Akorn, courts have not found a MAC/MAE, including in the 2019 case Channel Medsystems, Inc. v. Bos. Sci. Corp.  There, Boston Scientific Corporation (BSC) agreed to purchase Channel Medsystems, Inc., an early stage medical device company.  The sale was conditioned on Channel receiving FDA approval for its sole product, Cerene. In late December 2017, Channel discovered that falsified information from reports by its Vice President of Quality (as part of a scheme to steal over $2 million from Channel) was included in Channel’s FDA submissions.  BSC terminated the merger agreement in May 2018, asserting that Channel’s false representations and warranties constituted a MAC.

    The court disagreed.  While Channel and Akron both involved a fraud element, Chanel successfully resubmitted its FDA application, such that the fraudulent behavior – the court found – would not cause the FDA to reject the Cerene device.  BSC also failed to show sufficiently large or long-lasting effects on Channel’s financial position.  Channel thus reaffirmed the high bar under pre-Akron Delaware jurisprudence for courts to find a MAC/MAE (See e.g. In re IBP, Inc. S’holders Litig., 789 A.2d 14 (Del. Ch. 2001); Frontier Oil Corp. v. Holly Corp., 2005 WL 1039027 (Del. Ch. Apr. 29, 2005); Hexion Specialty Chemicals v. Huntsman Corp., 965 A.2d 715 (Del. Ch. 2008)).

    Applied to COVID-19, buyers may have challenges in invoking MAC/MAE clauses under their purchase agreements.

    First, it may simply be premature at this juncture for a buyer to show the type of longer-term effects that have been required under Delaware jurisprudence.  The long-term effects of COVID-19 itself are unclear.  Of course, as weeks turn into months and longer, this may change.

    A second challenge is certain carve-outs typically included in MAC/MAE clauses.  Notably, it is typical for these clauses to include exceptions for general economic and financial conditions generally affecting a target’s industry, unless a buyer can demonstrate that they have disproportionately affected the target.

    A buyer may be able to point to other clauses in a purchase agreement in seeking to walk away from the deal.  Of note is the ordinary course covenant that applies to the period between signing and closing.  By definition, most targets are unable to carry out business during the COVID-19 crisis consistent with past practice.  It is unclear whether courts will allow for a literal reading of these clauses, or interpret them taking into account the broader risk allocation regime as evidenced by the MAC or MAE clause in the agreement, and in doing so reject a buyer’s position.

    For unsigned deals, there may be some early lessons for practitioners as they prepare draft purchase agreements.  On buyer walk-away rights, buyers will want to ensure that the MAE/MAC definition includes express reference to “pandemics” and “epidemics”, if not to “COVID-19” itself.  Conversely, Sellers may wish to seek to loosen ordinary course covenant language, such as by including express exceptions for actions required by the MAC or MAE and otherwise ensure that they comply with all obligations under their control.  Buyers will also want to pay close attention to how COVID-19 affects other aspects of the purchase agreement, including seeking more robust representations and warranties on the impact of COVID-19 on the target’s business.

     

    [1] Although the discussion of this based Delaware law, caselaw in other U.S. jurisdictions often is consistent Delaware.  

    This week the Interim Injunction Judge of the Netherlands Commercial Court ruled in summary proceedings, following a video hearing, in a case on a EUR 169 million transaction where the plaintiff argued that the final transaction had been concluded and the defendant should proceed with the deal.

    This in an – intended – transaction where the letter of intent stipulates that a EUR 30 million break fee is due when no final agreement is signed.

    In addition to ruling on this question of construction of an agreement under Dutch law, the judge also had to rule on the break fee if no agreement was concluded and whether it should be amended or reduced because of the current Coronavirus / Covid-19 crisis.

    English Language proceedings in a Dutch state court, the Netherlands Commercial Court (NCC)

    The case is not just interesting because of the way contract formation is construed under Dutch law and application of concepts of force majeure, unforeseen circumstances and amendment of agreements under the concepts of reasonableness and fairness as well as mitigation of contractual penalties, but also interesting because it was ruled on by a judge of the English language chamber of the Netherlands Commercial Court (NCC).

    This new (2019) Dutch state court offers a relatively fast and cost-effective alternative for international commercial litigation, and in particular arbitration, in a neutral jurisdiction with professional judges selected for both their experience in international disputes and their command of English.

    The dispute regarding the construction of an M&A agreement under Dutch law in an international setting

    The facts are straightforward. Parties (located in New York, USA and the Netherlands) dispute whether final agreement on the EUR 169 million transaction has been reached but do agree a break fee of €30 million in case of non-signature of the final agreement was agreed. However, in addition to claiming there is no final agreement, the defendant also argues that the break fee – due when there is no final agreement – should be reduced or changed due to the coronavirus crisis.

    As to contract formation it must be noted that Dutch law allows broad leeway on how to communicate what may or may not be an offer or acceptance. The standard is what a reasonable person in the same circumstances would have understood their communications to mean.  Here, the critical fact is that the defendant did not sign the so-called “Transaction Agreement”. The letter of intent’s binary mechanism (either execute and deliver the paperwork for the Transaction Agreement by the agreed date or pay a EUR 30 million fee) may not have been an absolute requirement for contract formation (under Dutch law) but has significant evidentiary weight. In M&A practice – also under Dutch law – with which these parties are thoroughly familiar with, this sets a very high bar for  concluding a contract was agreed other than by explicit written agreement. So, parties may generally comfortably rely on what they have agreed on in writing with the assistance of their advisors.

    The communications relied on by claimant in this case did not clear the very high bar to assume that despite the mechanism of the letter of intent and the lack of a signed Transaction Agreement there still was a binding agreement. In particular attributing the other party’s advisers’ statements and/or conduct to the contracting party they represent did not work for the claimant in this case as per the verdict nothing suggested that the advisers would be handling everything, including entering into the agreement.

    Court order for actual performance of a – deemed – agreement on an M&A deal?

    The Interim Injunction Judge finds that there is not a sufficient likelihood of success on the merits so as to justify an interim measure ordering the defendant to actually perform its obligations under the disputed Transaction Agreement (payment of EUR 169 million and take the claimant’s 50% stake in an equestrian show-jumping business).

    Enforcement of the break fee despite “Coronavirus”?

    Failing the conclusion of an agreement, there was still another question to answer as the letter of intent mechanism re the break fee as such was not disputed. Should the Court enforce the full EUR 30 million fee in the current COVID-19 circumstances? Or should the fee’s effects be modified, mitigated or reduced in some way, or  the fee agreement should even be dissolved?

    Unforeseen circumstances, reasonableness and fairness

    The Interim Injunction Judge rules that the coronavirus crisis may be an unforeseen circumstance, but it is not of such a nature that, according to standards of reasonableness and fairness, the plaintiff cannot expect the break fee obligation to remain unchanged. The purpose of the break fee is to encourage parties to enter into the transaction and attribute / share risks between them. As such the fee limits the exposure of the parties. Payment of the fee is a quick way out of the obligation to pay the purchase price of EUR 169 million and the risks of keeping the target company financially afloat. If financially the coronavirus crisis turns out less disastrous than expected, the fee of EUR 30 million may seem high, but that is what the parties already considered reasonable when they waived their right to invoke the unreasonableness of the fee. The claim for payment of the EUR 30 million break fee is therefore upheld by the Interim Injunction Judge.

    Applicable law and the actual practice of it by the courts

    The relevant three articles are in this case articles 6:94, 6:248 and 6:258 of the Dutch Civil Code. They relate to the mitigation of contractual penalties, unforeseen circumstances and amendment of the agreement under the tenets of reasonableness and fairness. Under Dutch law the courts must with all three exercise caution. Contracts must generally be enforced as agreed. The parties’ autonomy is deemed paramount and the courts’ attitude is deferential. All three articles use language stating, essentially, that interference by the courts in the contract’s operation is allowed only to avoid an “unacceptable” impact, as assessed under standards of reasonableness and fairness.

    There is at this moment of course no well- established case law on COVID-19. However, commentators have provided guidance that is very helpful to think through the issues. Recently a “share the pain” approach has been advocated by a renowned law Professor, Tjittes, who focuses on preserving the parties’ contractual equilibrium in the current circumstances. This is, in the Court’s analysis, the right way to look at the agreement here. There is no evidence in the record suggesting that the parties contemplated or discussed the full and exceptional impact of the COVID-19 crisis. The crisis may or may not be unprovided for.  However, the court rules in the current case there is no need to rule on this issue. Even if the crisis is unprovided for, there is no support in the record for the proposition that the crisis makes it unacceptable for the claimant to demand strict performance by the defendant. The reasons are straightforward.

    The break fee allocates risk and expresses commitment and caps exposure. The harm to the business may be substantial and structural, or it may be short-term and minimal. Either way, the best “share the pain” solution, to preserve the contractual equilibrium in the agreement, is for the defendant to pay the fee as written in the letter of intent. This allocates a defined risk to one party, and actual or potential risks to the other party. Reducing the break fee in any business downturn, the fee’s express purpose – comfort and confidence to get the deal done – would not be accomplished and be derived in precisely the circumstances in which it should be robust. As a result, the Court therefore orders to pay the full EUR 30 million fee. So the break fee stipulation works under the circumstances without mitigation because of the Corona outbreak.

    The Netherlands Commercial Court, continued

    As already indicated above, the case is interesting because the verdict has been rendered by a Dutch state court in English and the proceedings where also in English. Not because of a special privilege granted in a specific case but based on an agreement between parties with a proper choice of forum clause for this court. In addition to the benefit to of having an English forum without mandatorily relying on either arbitration or choosing an anglophone court, it also has the benefit of it being a state court with the application of the regular Dutch civil procedure law, which is well known by it’s practitioners and reduces the risk of surprises of a procedural nature.  As it is as such also a “normal” state court, there is the right to appeal and particularly effective under Dutch law access to expedited proceeding as was also the case in the example referred to above. This means a regular procedure with full application of all evidentiary rules may still follow, overturning or confirming this preliminary verdict in summary proceedings.

    Novel technology in proceedings

    Another first or at least a novel application is that all submissions were made in eNCC, a document upload procedure for the NCC. Where the introduction of electronic communication and litigation in the Dutch court system has failed spectacularly, the innovations are now all following in quick order and quite effective. As a consequence of the Coronavirus outbreak several steps have been quickly tried in practice and thereafter formally set up. At present this – finally – includes a secure email-correspondence system between attorneys and the courts.

    And, also by special order of the Court in this present case, given the current COVID-19 restrictions the matter was dealt with at a public videoconference hearing on 22 April 2020 and the case was set for judgment on 29 April 2020 and published on 30 April 2020.

    Even though it is a novel application, it is highly likely that similar arrangements will continue even after expiry of current emergency measures. In several Dutch courts videoconference hearings are applied on a voluntary basis and is expected that the arrangements will be formalized.

    Eligibility of cases for the Netherlands Commercial Court

    Of more general interest are the requirements for matters that may be submitted to NCC:

    • the Amsterdam District Court or Amsterdam Court of Appeal has jurisdiction
    • the parties have expressly agreed in writing that proceedings will be in English before the NCC (the ‘NCC agreement’)
    • the action is a civil or commercial matter within the parties’ autonomy
    • the matter concerns an international dispute.

    The NCC agreement can be recorded in a clause, either before or after the dispute arises. The Court even recommends specific wording:

    “All disputes arising out of or in connection with this agreement will be resolved by the Amsterdam District Court following proceedings in English before the Chamber for International Commercial Matters (“Netherlands Commercial Court” or “NCC District Court”), to the exclusion of the jurisdiction of any other courts. An action for interim measures, including protective measures, available under Dutch law may be brought in the NCC’s Court in Summary Proceedings (CSP) in proceedings in English. Any appeals against NCC or CSP judgments will be submitted to the Amsterdam Court of Appeal’s Chamber for International Commercial Matters (“Netherlands Commercial Court of Appeal” or “NCCA”).”

    The phrase “to the exclusion of the jurisdiction of any other courts” is included in light of the Hague Convention on Choice of Court Agreements. It is not mandatory to include it of course and parties may decide not to exclude the jurisdiction of other courts or make other arrangements they consider appropriate. The only requirement being that such arrangements comply with the rules of jurisdiction and contract. Please note that choice of court agreements are exclusive unless the parties have “expressly provided” or “agreed” otherwise (as per the Hague Convention and Recast Brussels I Regulation).

    Parties in a pending case before another Dutch court or chamber may request that their case be referred to NCC District Court or NCC Court of Appeal. One of the requirements is to agree on a clause that takes the case to the NCC and makes English the language of the proceedings. The NCC recommends using this language:

    We hereby agree that all disputes in connection with the case [name parties], which is currently pending at the *** District Court (case number ***), will be resolved by the Amsterdam District Court following proceedings in English before the Chamber for International Commercial Matters (“Netherlands Commercial Court” or ”NCC District Court). Any action for interim measures, including protective measures, available under Dutch law will be brought in the NCC’s Court in Summary Proceedings (CSP) in proceedings in English. Any appeals against NCC or CSP judgments will be submitted to the Amsterdam Court of Appeal’s Chamber for International Commercial Matters (“Netherlands Commercial Court of Appeal” or “NCC Court of Appeal”).

    To request a referral, a motion must be made before the other chamber or court where the action is pending, stating the request and contesting jurisdiction (if the case is not in Amsterdam) on the basis of a choice-of-court agreement (see before).

    Additional arrangements in the proceedings before the Netherlands Commercial Court

    Before or during the proceedings, parties can also agree special arrangements in a customized NCC clause or in another appropriate manner. Such arrangements may include matters such as the following:

    • the law applicable to the substantive dispute
    • the appointment of a court reporter for preparing records of hearings and the costs of preparing those records
    • an agreement on evidence that departs from the general rules
    • the disclosure of confidential documents
    • the submission of a written witness statement prior to the witness examination
    • the manner of taking witness testimony
    • the costs of the proceedings.

    Visiting lawyers and typical course of the procedure

    All acts of process are in principle carried out by a member of the Dutch Bar. Member of the Bar in an EU or EEA Member State or Switzerland may work in accordance with Article 16e of the Advocates Act (in conjunction with a member of the Dutch Bar). Other visiting lawyers may be allowed to speak at any hearing.

    The proceedings will typically follow the below steps:

    • Submitting the initiating document by the plaintiff (summons or request as per Dutch law)
    • Assigned to three judges and a senior law clerk.
    • The defendant submits its defence statement.
    • Case management conference or motion hearing (e.g. also in respect of preliminary issues such as competence, applicable law etc.) where parties may present their arguments.
    • Judgment on motions: the court rules on the motions. Testimony, expert appointment, either at this stage or earlier or later.
    • The court may allow the parties to submit further written statements.
    • Hearing: the court interviews the parties and allows them to present their arguments. The court may enquire whether the dispute could be resolved amicably and, where appropriate, assist the parties in a settlement process. If appropriate, the court may discuss with the parties whether it would be advisable to submit part or all of the dispute to a mediator. At the end of the hearing, the court will discuss with the parties what the next steps should be.
    • Verdict: this may be a final judgment on the claims or an interim judgment ordering one or more parties to produce evidence, allowing the parties to submit written submissions on certain aspects of the case, appointing one or more experts or taking other steps.

    Continuous updates, online resources Netherlands Commercial Court

    As a final note the English language website of the Netherlands Commercial Court provides ample information on procedure and practical issues and is updated with a high frequence. Under current circumstance even at a higher pace. In particular for practitioners it’s recommended to regularly consult the website. https://www.rechtspraak.nl/English/NCC/Pages/default.aspx

    One of the most tricky steps in any M&A operation is when the issue of “warranties”, in particular with reference to the economic situation, the balance sheet and the financial position of the company or business (or of a branch), namely the so-called “business warranties“.

    On one side, the buyer would like to “ironclad” his investment by reducing the risk of an unpleasant surprise to a minimum. The seller, by contrast, wishes to provide the least possible warranties, which often translate in a provisory restriction on the full enjoyment of the proceeds; the same may be essential for further investment.

    It should be noted, first of all, that the term “warranties” is usually referred to, in a non-technical acceptation, to a complex set of contractual provisions containing:

    • any seller’s statements about the health of the company or business (or branch of business) being transferred;
    • any compensation obligations undertaken by the seller in case of “violation” (i.e. mistruth) of the assertions;
    • any remedies provided to ensure the effectiveness of the indemnity obligations entered into.

    While there are several reasons why this set is necessary, the most significant one is that in M&A contracts, statutory sale warranties only apply to the good sold; therefore, if the good sold is an equity investment, the warranties do not cover any of the company’s underlying assets; and even as they exceptionally do apply, short terms and strict limitations still justify an ancillary obligation designed to ensure the economic success of the transaction.

    As confirmed by current practice, there is not a single M&A agreement that does not include a set of warranties.

    In particular, representations typically incorporate the buyer’s due diligence, which for its part usually follows a non-disclosure agreement (NDA) to protect any information disclosed.

    Any criticalities identified should be properly mentioned. Clearly, wherever a criticality arises, it may not necessarily trigger an indemnity obligation. It will be up to the parties to lay down the rules, as they may also provide that any related risk is to be borne by the buyer; this may be offset by a reduction in the price.

    Some aspects of the compensation obligation will have to be carefully negotiated. The main ones are certainly:

    • duration (e.g. longer for tax-related warranties);
    • who is entitled to compensation (the buyer or the company; one or the other as the case may be);
    • any deductions and/or limitations (e.g. tax losses);
    • compensation cap;
    • any possible deductible;
    • the compensation procedure (e.g. application deadlines, settlement procedure, particular circumstances).

    These are highly relevant aspects and should by no means be underestimated. As an example, it is obvious that if the compensation procedure is poorly regulated, all the previous efforts are jeopardised.

    Finally, suitable measures to ensure an effective protection of the buyer must be provided. Among these, the most conventional tools are:

    • the surety;
    • the “independent contract of guarantee”;
    • the escrow;
    • the deferment of payment;
    • the “earn-out”-scheme;
    • the “price adjustment”;
    • the letter of patronage;
    • the pledge and/or mortgage.

    These are more or less widely used instruments, each one with its pros and cons.

    At this point, however, we would like to address a new tool with an insurance character, which has been being used recently: the so-called “Warranty & Indemnity Policies“.

    With a W&I insurance policy, basically, the insurer assumes the risk resulting from breaches of warranties and indemnities included in an M&A contract upon payment of a premium.

    It is obviously a key condition that the violation arose from facts preceding the closing and which were not known at that time (and, therefore, not highlighted by the due diligence carried out).

    The insurance policy may be subscribed by the buyer (buyer side) or the seller (seller side). Usually the first option is preferred. These W&I insurance policies come with a number of advantages:

    • a warranty is given even when the seller has been unwilling to commit himself contractually;
    • the insurance policy usually does not provide for any recourse against the seller, other than in the case of malice, so that the seller is fully released;
    • it is also possible to achieve a higher ceiling than that provided for in a purchase agreement;
    • likewise, coverage may be provided for a longer period;
    • it is easier to deal with the seller, especially if there are several and some are still part of the company, perhaps as members of the Board of Directors;
    • compensation procedures become significantly easier, especially in cases where there are multiple sellers, including individuals;
    • the buyer gains a higher certainty of solvency.

    The cost of the insurance policy may be shared between the parties, eventually by discounting the purchase price, which the seller may be more willing to grant, considering that he will not be required to issue other warranties and can immediately use the proceeds of the sale.

    Premiums are usually set somewhere between 1% and 2% of the compensation limit (with a minimum premium).

    Besides the price, which makes the tool mostly suitable for operations of not modest entity, currently, the main limitation seems to be the commonly required deductible, equal to 1% of the Enterprise Value of the Target, which may be reduced to 0.5% in case of higher premiums. Keep in mind that the W&I insurance policy implies a review of the due diligence by the insurance company, which can translate into an actual intervention in the negotiation of the warranties.

    Beyond this, this tool needs to be carefully evaluated: facing highly complex scenarios, it could be the ideal solution to solve an impasse in negotiations and make relations between professional investors and SMEs easier.

    Acquisitions (M&A) in Italy are carried out in most cases through the purchase of shareholdings (‘share deal’) or business or business unit (‘asset deal’). For mainly tax reasons, share deals are more frequent than asset deals, despite the asset deal allows a better limitation of risks for the buyer. We will explain the main differences between share deal and asset deal in terms of risks, and in terms of relationships between seller and buyer.

    Preference for acquisitions through the purchase of shareholdings (‘share deal’) rather than the purchase of business or business unit (‘asset deal’) in the Italian market

    In Italy, acquisitions are carried out, in most cases, through the purchase of shareholdings (‘share deal’) or of business or business unit (‘asset deal’). Other structures, such as mergers, are less frequent.

    By purchasing shareholdings of the target company (‘share deal‘), the buyer indirectly acquires all the company’s assets, liabilities and legal relationships. Therefore, the buyer bears all the risks relating to the previous management of the company.

    With the purchase of the business or of a business unit of the target company (‘asset deal‘), the buyer acquires a set of assets and relationships organized for the operation of the business (real estate, machineries, patents, trademarks, employees, contracts, credits, debts, etc.). The advantage of the asset deal lies in the possibility for the parties to select the assets and liabilities included in the deal: hence the buyer can limit the legal risks of the transaction.

    Despite this advantage, most acquisitions in Italy are made through the purchase of shareholdings. In 2018, there were approximately 78,400 purchases of shareholdings (shares or quotas), while there were approximately 35,900 sales of businesses or business units. (source: www.notariato.it/it/news/dati-statistici-notarili-anno-2018). It should be noted that the number of transfers of business also includes small or very small businesses owned by individual entrepreneurs, for whom the alternative of the share deal (though feasible, through the contribution of the business in a newco and the sale of the shares in the newco) is not viable in practice for cost reasons.

    Taxation of share deal and asset deal in Italy

    The main reason for the preference for share deal over asset deal lies in the tax costs of the transaction. Let’s see what they are.

    In a share deal, the direct taxes borne by the seller are calculated on the capital gain, according to the following rates:

    • if the seller is a joint-stock company (società per azioni – s.p.a.; società a responsabilità limitata – r.l.; società in accomandita per azioni – s.a.p.a.), the corporate tax rate is 24% of the capital gain. However, under certain conditions, the so-called PEX (participation exemption) regime is applied with the application of the rate of 24% on 5% of the capital gain only.
    • If the seller is a partnership (società semplice – s.s.; società in nome collettivo – s.n.c..; società in accomandita semplice – s.a.s.) the capital gain is fully taxable. However, under certain conditions, the taxable amount is limited to 60% of the amount of the capital gain. In both cases, the taxable amount is attributed pro rata to each shareholder of the partnership, and added to the shareholders’ income (the tax rate depends on the shareholders’ income).
    • If the seller is a natural person, the rate on the capital gain is 26%.

    A share deal is subject to a fixed registration tax of € 200,00, normally paid by the buyer.

    In an asset deal, the direct taxes to be paid by the seller are calculated on the capital gain. If the seller is a joint-stock company, the corporate tax rate is 24% of the capital gain. If the seller is a partnership (with individual partners) or an individual entrepreneur, the rate depends on the seller’s income.

    In an asset deal the transfer of the business or of the business unit is subject to registration tax, generally paid by the buyer. However both the seller and the buyer are jointly and severally liable for the payment of the registration tax. The tax is calculated on the part of the price attributable to the assets transferred. The price is the result of the transferred assets minus the transferred liabilities. The tax rate depends on the type of asset transferred. In general:

    • movable assets, including patents and trademarks: 3%;
    • goodwill: 3%;
    • buildings: 9%;
    • land: between 9% and 12% (depending on the buyer).

    If the parties do not apportion the purchase price to the different assets in proportion to their values, the registration tax is applied to the entire purchase price at the highest rate of those applicable to the assets.

    It should be noted that the tax authorities may assess the value attributed by the parties to real estate and goodwill, with the consequent risk of application of higher taxes.

    Share deal and asset deal: risks and responsibilities towards third parties

    In the purchase of shares or quotas (‘share deal‘), the purchaser bears, indirectly, all the risks relating to the previous management of the company.

    In the purchase of business or business unit (‘asset deal‘), on the other hand, the parties can select which assets and liabilities will be transferred, hence establishing, among them, the risks that the buyer will bear.

    However, there are some rules, which the parties cannot derogate from, relating to relationships with third parties, that have a significant impact on the risks for the seller and the buyer, and therefore on the negotiation of the purchase agreement. The main ones are as follows.

    • Employees: the employment relationship continues with the buyer of the business. The seller and the buyer are jointly and severally liable for all the employee’s rights and claims at the time of transfer (art. 2112 of the Italian Civil Code).
    • Debts: the seller is obliged to pay all debts up to the date of transfer. The buyer is liable for the debts that are shown in the mandatory accounting books (art. 2560 of the Italian Civil Code).
    • Tax debts and liabilities: the seller is obliged to pay debts, taxes and tax penalties relating to the period up to the date of transfer. In addition to the liability for tax debts resulting from mandatory accounting books (Article 2560 of the Italian Civil Code), the buyer is liable for taxes and penalties, even if they are not shown in the accounting books, with the following limits (Article 14 of Legislative Decree 472/1997):
    • the buyer benefits from the prior enforcement of the seller;
    • the buyer is liable up to the value of the business or business unit;
    • for taxes and penalties not emerging from a tax audit by the tax authorities that has taken place before the date of transfer, the buyer is liable for those relating to the year of the sale of the business and the two preceding years only;
    • the tax authorities shall issue a certificate on the existence and amount of debts and ongoing tax audits. If the certificate is not issued within 40 days of the request, the buyer will be released from liability. If the certificate is issued, the buyer will be liable up to the amount resulting from the certificate.
    • Contracts: the parties can choose which contracts to transfer. With respect to the contracts transferred, the buyer takes over, even without the consent of the third contracting party, contracts for the operation of the business that are not of a personal nature. In addition, the third contracting party may withdraw from the contract within three months if there is a just cause (e.g. if the buyer does not guarantee to be able to fulfil the contract due to his financial situation or technical skills) (Art. 2558 of the Italian Civil Code).

    Some ways to deal with the risks

    To manage the risks arising from third party liability and the general risks associated with the acquisition, a number of negotiation and contractual tools can be used. Let’s see some of them.

    In an asset deal:

    Employees: it is possible to agree with the employee changes to the contractual terms and conditions, and waive of joint and several liability of the buyer and seller (pursuant to art. 2112 c.c.). In order to be valid, the agreement with the employee must be concluded with certain requirements (for example, with the assistance of the trade unions).

    Debts:

    • transfer the debts to the buyer and reduce the price accordingly. The price reduction leads to a lower tax cost of the transaction as well. In case of transfer of debts, in order to protect the seller, a declaration of release of the seller from liability pursuant to art. 2560 of the Italian Civil Code can be obtained from the creditor; or, the parties can agree that the payment of the debt by the buyer will take place at the same time as the transfer of the business (‘closing‘).
    • For debts not transferred to the buyer, obtain from the creditor a declaration of release of the buyer from liability pursuant to art. 2560 of the Italian Civil Code.
    • For debts for which it is not possible to obtain a declaration of release from the creditor, agree on forms of security in favor of the seller (for debts transferred) or in favor of the buyer (for debts not transferred), such as, for example, the deferment of payment of part of the price; the escrow of part of the price; bank or shareholder guarantees.

    Tax debts and tax liabilities:

    • obtain from the tax authorities the certificate pursuant to art. 14 of Legislative Decree 472/1997 on debts and tax liabilities;
    • transfer the debts to the buyer, and reduce the price accordingly;
    • agree on forms of guarantee in favor of the seller (for debts transferred) and in favour of the buyer (for debts not transferred or for tax liabilities), such as those set out above for debts in general.

    Contracts: for those that will be transferred:

    • verify that the seller’s obligations up to the date of transfer have been properly performed, in order to avoid the risk of disputes by the third contracting party, that could stop the performance of the contract;
    • at least for the most important contracts, obtain in advance from the third contracting party the approval of transfer of the contract.

    In a share deal some tools are:

    • Due diligence. Carry out a thorough legal, tax and accounting due diligence on the company, to assess the risks in advance and manage them in the negotiation and in the acquisition contract (‘share purchase agreement’).
    • Representations and warranties (‘R&W’) and indemnification. Provide in the acquisition contract (‘share purchase agreement’) a detailed set of representations and warranties – and obligations to indemnify in the event of non-compliance – to be borne by the seller in relation to the situation of the company (‘business warranties‘: balance sheet; contracts; litigation; compliance with environmental regulations; authorizations for the conduct of business; debts; receivables, etc.). Negotiations on representations and warranties normally are carried on taking into account the outcomes of due diligence. Contractual representations and warranties on the situation of the company (‘business warranties‘) and contractual obligation to indemnify, are necessary in share deals in Italy, as in the absence of such clauses the buyer cannot obtain from the seller (except in extraordinary circumstances) compensation or indemnity if the situation of the company is different from that considered at the time of purchase.
    • Guarantees for the buyer. Means of ensuring that the buyer will be indemnified in the event of breach of representations and warranties. Among them: (a) the deferment of payment of part of the price; (b) the payment of part of the price in an escrow account for the duration of the liabilities arising from the representations and warranties and, in case of disputes between the parties, until the dispute is settled; (c) bank guarantee; (d) W&I policy: insurance contract covering the risk of the buyer in case of breach of representations and warranties, up to a maximum amount (and excluding certain risks).

    Other factors influencing the choice between share deal and asset deal

    Of course, the choice to carry out an acquisition operation in Italy through a share deal or an asset deal also depends on other factors, in addition to the tax cost of the transaction. Here are some of them.

    • Purchase of part of the business. The parties chose the asset deal when the transaction does not involve the purchase of the entire business of the target company but only a part of it (a business unit).
    • Situation of the target company. The buyer prefers the asset deal when the situation of the target company is so problematic that the buyer is not willing to assume all the risks arising from the previous management, but only part of them.
    • Maintenance of a role by the seller. The share deal is a better option when the seller will keep a role in the target company. In this case, the seller frequently retains, in addition to a role as director, a minority shareholdings, with exit clauses (put and call rights) after a certain period of time. The exit clauses often link the price to future results and, therefore, in the interest of the buyer, motivate the seller in his/her role as director, and, in the interest of the seller, put a value on the company’s earnings potential, not yet achieved at the time of purchase.

    A legal due diligence of a Brazilian target company should analyze the existence and the content of Agency Agreements, including values paid to the agent and the nature of such payments and the factual situation of the target’s agents, in order to evaluate potential contingencies.

    One usual suspect in legal due diligences of Brazilian target companies in M&A transactions that should not be overlooked is the existence of agency agreements, due to:

    • the obligation to indemnify the agent stipulated by law: at least 1/12th of all commissions paid throughout the entire term of the agency agreement; and
    • the risks for the agency being disregarded and considered as an employment relationship, subjecting the principal to compensate the agent as an employee with all rights, benefits, taxes and social contributions.

    This should be considered for evaluation of potential contingencies and the impacts on the valuation of the target.

    No doubt that agents can be an important component of the sales force of the business and can be strategic for the activity of the principal, in view of a certain independence and for not increasing the payroll of a company.

    On the other hand, under Brazilian laws, the protective nature of the agency demands the principal a considerable level of attention.

    Indemnification

    Brazilian Federal Law No. 4,886/65 as amended – the Brazilian Agency Law – determines that the agent is entitled to, at the termination of an agency agreement, receive an indemnification of 1/12th calculated over all the commissions paid throughout the duration of the entire period of the agency agreement.

    The Brazilian Agency Law stipulates that if the parties sign a new contract within 6 months after the expiration of the previous, the relation between agent and principal shall be deemed as the same relationship and thus, the duration to calculate the indemnification shall encompass the entire period (past and subsequent contract).

    Termination by the agent

    The Brazilian Agency Law also stipulates situations that agent could terminate the contract and still be entitled to receive the 1/12th indemnification:

    • reduction of the activities in disagreement with the contractual stipulation
    • breach of exclusivity (territory and/or products), if so stipulated in the agreement
    • determination of prices that makes the agency unfeasible and
    • default on payment of the commissions
    • force majeure

    Termination without cause

    Termination without cause can be done, upon payment to agent of the indemnification and with a previous notice of at least 30 days, in which situation the agent shall receive the payment of 1/3 of the remuneration received during the previous 90 days prior to the termination.

    Can principal avoid the indemnification?

    The only cases where the 1/12th indemnification would not be applicable are when the contract is terminated by principal with cause. The Brazilian Agency Law has limited situations for principal to terminate the contract with cause:

    • acts by agent causing disrepute of the principal
    • breach of obligations related to the agency activities
    • criminal conviction related to honor, reputation

    These situations shall be clearly demonstrated. Producing the sufficiently strong evidence of the facts to configure cause for termination may not be an easy task, considering some of the facts may be subject to construing and interpreting by the parties, witnesses and ultimately the judge.

    As a result, from past experiences, it is rare to see principals in conditions not to incur in the 1/12th indemnification.

    Potential risk: configuring employment relationship

    In addition to the indemnification, the activities developed by the agent could eventually be deemed as performed by a regular employee of the principal and, in this case, principal could be subject to compensate the agent as an employee.

    Agent vs. employee

    For the appreciation of the employment relationship, the individual acting as agent shall file a labor claim and demonstrate the existence of the employment relationship.

    The Labor Court judge will consider the factual situation, prevailing upon the written agreements or other formal documents. The judge may rely on e-mails, witnesses and other evidence.

    The elements of an employment relationship are:

    • Individual: in case the individual acts by himself to perform the services; Personal services: the services are in fact performed by the individual specifically to the Principal;;
    • Non-eventuality – exclusivity: the services are rendered in a regular basis;
    • Subordination: key factor – the individual has to follow strict instructions directed by principal, such as reporting to an employee of the principal, determined visits;
    • Rewarding – fixed remuneration: the individual is awarded regular amounts and expenses allowances

    In the event the individual can demonstrate the existence of the elements to configure an employment relationship, he/she could have an award to entitle him/her to have his remuneration considered as of a regular employee for the last 5 years.

    As a result, the individual would be awarded the payment of Christmas bonus (equivalent to 1 monthly remuneration per year), vacation allowance (1/3 of a monthly remuneration per year), unemployment guarantee fund (1 monthly remuneration per year) plus other benefits that he/she would be given as an employee of principal (based on the collective bargaining agreement between the employees’ and employers’ unions). The company would also be obliged to make the payment of the co-related social security contributions.

    Needless to say, the result could turn into a considerable potential contingency.

    The author of this article is Paulo Yamaguchi

    The procedure to incorporate a foreign owned company in Spain is, in principle, easy and straight forward, however it is necessary to take into account certain new requirements derived from the tax and the anti-money laundering regulations, which could cause long delays in the incorporation process, even to EU and US companies, if they are not well advised and managed from the beginning of the procedure.

    The first step consist in collecting information about the foreign shareholder, in order to be able to prove its legal existence and activities: the foreign shareholder(s) will have to grant before a Notary Public in its country of residence a power of attorney authorising somebody in Spain to obtain its tax identification number (“NIE”), and also represent it before the Spanish notary when signing the deed of incorporation. In case the foreign shareholder is an individual person, the NIE should be applied for before the Spanish police or the Spanish Consulate at the country where the investor lives.

    If the shareholder is a corporation, apart from the Power of Attorney, it will have to obtain a certificate from its Companies’ Registry or Chamber of Commerce, stating its legal existence and main characteristics. This document is called “good standing certificate” (in the UK and US), “K-bis” (in France), “KvK” (in the Netherlands) or “visura” (in Italy). These two documents, the Power of Attorney mentioned in the above paragraph and the certificate from the Companies’ Registry, will have to be Apostilled or legalized by the correspondent Ministry, and Sworn translated into Spanish. Please note that we use to draft bilingual powers of attorney in order to avoid its sworn translation.

    The foreign shareholder will have to prove that its income is obtained from legal activities in order to be able to open a bank account in the name of the new company. The main document to prove this could be the Corporate or the Personal Income Tax return filed in its country of residence, but there could be other means, especially in case of individual persons.

    In case of a corporate shareholder, it will be necessary as well to declare, in principle through a public deed granted in Spain, who are the individual persons who, directly or through other companies, will hold more than a 25% interest in the new company to be incorporated. In case nobody holds more than a 25% (i.e. because there are 5 individual shareholders, holding each of them a 20%), it is declared that the effective control of the new company corresponds to its director.

    At this stage, it is also necessary to mention that the person(s) who will be the director(s) of the new company, in case they are foreigners, will also need to obtain their personal “NIE”. The NIE should be applied for before the Spanish police (this could be done by a proxy duly authorised though a Power of Attorney granted by the foreign director) or before the Spanish Consulate nearest to the city where the investor lives. In order to be a director of a Spanish company it is not necessary to be a shareholder, nor to have residence and work permit in Spain (provided the foreign director does not live in Spain).

    Meanwhile the necessary documents (Powers of Attorney, Companies’ Registry certificate, etc.) are being prepared by the foreign shareholder, the lawyer in Spain will apply for the new company’s name. It is advisable to point out that generic or usual names are not available quite often, therefore it is necessary to think in original names. Three different names could be applied for simultaneously.

    The drafting of the company’s Articles of Association or By Laws could be very quick, except if the company is going to have several shareholders and they wish specific clauses. In this case, it is also advisable to draft a Shareholders Agreement. The Shareholders’ Agreement could just contain some basic rules on dedication, compensation, non-competition, etc. and some more sophisticated rules on the sale of shares (tag along and drag along rights). As regards the By-Laws, they should mention the company’s name, its activity or activities, address in Spain –which cannot be just a P.O. Box-, share capital, number of shares and its face value, and starting date for the fiscal year, among other standard clauses.

    The management of the company could be organized through a sole director, two directors who could act jointly or separately, and in case there are more than three directors, they should organize themselves through a Board of Directors, being usual in this case to appoint a C.E.O. In order to be a director it is not necessary to be a shareholder. Under Spanish laws, the director(s) could be held liable for some company’s debts under certain circumstances which are legally defined. For this reason, it is necessary that the directors formally accept their appointment (personally appearing before the Notary or through a Power of Attorney).

    Before the incorporation, it will be necessary that either the new company’s director (the person to be appointed) or the representative of the corporate shareholder appears personally before the bank where the company will have its first bank account and signs the correspondent documents (KYC regulation). Once the bank account is opened, the shareholder will have to send a bank transfer for the new company’s share capital. In Spain, the minimum share capital for a limited company (S.L.) is Euros 3.000, while for a “Sociedad Anónima” (S.A.) it is Euros 60.000, but only 25% should be paid off at the incorporation moment. It is interesting to note that contributions to the share capital could be made in cash – which is the most common operation, especially at the incorporation – or in kind, with any type of assets: real estate, machinery, goods, trademarks, etc. The money for the share capital should be sent to the new company’s bank account from an account owned by the shareholder (or from each account owned by each shareholder, should they be several ones), not by any other different person. Once the Spanish bank receives the transfer, it will issue a certificate, which is necessary in order to incorporate the company.

    Once all the documents are ready, it is possible within very few days (almost immediately) to make the appointment with the Notary and sign the public deed of incorporation. This can be done at any notary in Spain, not being necessary that the notary practises at the same city where the company will have its corporate address. In order to summarize, the list of the necessary documents is:

    • Power(s) of Attorney granted by the foreign shareholder(s), apostilled and sworn translated.
    • Certificate regarding the legal existence of the foreign shareholder (only if it is a corporation), apostilled and sworn translated.
    • Statement on who are the last individual shareholders holding more than 25% interest in the new company, directly or indirectly (only in case of corporate shareholders).
    • NIE of the foreign shareholder(s).
    • NIE of the new company’s director(s), should they be a foreigners.
    • Certificate for the new company’s name.
    • Articles of Association.
    • Bank certificate regarding the contribution to the new company’s share capital.

    The deed of incorporation is signed by the proxy (or the individual shareholder(s), should they prefer to personally appear before the notary) before the chosen public notary, being also necessary to sign an official form to report the foreign investment to a public registry depending on the Spanish Ministry of Finance.

    Once the deed of incorporation is signed, the next steps consist in applying before the tax authorities to obtain the new company’s tax number (NIF / CIF) and filing the deed of incorporation before the Companies’ Registry. Some banks do allow new companies to operate once they have the NIF (which could be 2-3 days after the incorporation), while others request to wait until the deed of incorporation is filed at the Companies’ Registry (2-3 weeks).

    An estimation of the necessary time to complete all the procedure is 30-45 days, but of course the main delay is related to speed of the foreign investor in obtaining the necessary documents.

    Please note that if you wish to incorporate a foreign owned company in Spain it is always necessary to seek specific professional advice, as each case is different and regulations and the application of such regulations vary from time to time. The above article just explains the main steps and requirements for the incorporation of a company.