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  • Distressed M&A deals: mergers and acquisitions of distressed companies

    The increase in distressed transactions is a growing trend in the field of mergers and acquisitions in Spain. Political and economic uncertainty is giving rise to an increasing number of distressed M&A transactions.

    On the one hand, there is liquidity in the market and investors with an appetite for risk, such as the Special Opportunities divisions of funds and investment entities. On the other hand, there are plenty of opportunities for companies with proven reliability but which are in financial trouble due to the global economic situation of the last few years. These are companies that are not financially viable but are economically viable. In other words, their real problem is not operational but stems from excessive indebtedness.

    What are distressed operations

    In distressed transactions, the selling company is experiencing financial difficulties and its shareholders are looking for corporate transactions that provide them with liquidity and/or viability alternatives to maintain part of the business and meet their financial liabilities. For this reason, these companies or some of their production units or business branches are now available at lower prices.

    On the other hand, the buyer has sufficient financial capacity to afford the transaction and is looking for medium to long term profitability. In the case of Spain, these buyers tend to be local and international investment funds.

    Distressed M&A transactions are usually bilateral, with no competitive sales process.

    Fast procurement, earn-out and anti-embarrasment clauses

    Distressed transactions are usually quick, mainly because the seller or the target company has a cash flow urgency that does not allow them to extend the deadlines. This speeds up the whole process, including due diligence, which entails a certain added risk for the buyer but also facilitates downward negotiation.

    In terms of pricing, the price is usually linked in part to the company’s future performance. This is known as an earn-out clause. Anti-embarrassment or «anti-shame» clauses are also common, whereby the seller ensures a price increase if the company is restored to health in the short term and the buyer sells his stake at a higher price.

    Payment is usually deferred at least partially.

    When is it best to undertake a distressed transaction: before or during the insolvency proceedings?

    In most of these types of transactions, the strategic decision of when is the best time to carry out the transaction: in a pre-insolvency or insolvency situation? There is no single answer either from the point of view of the target company or from the point of view of the acquirer.

    • In a pre-insolvency scenario the acquiring party has to assume certain termination risks.
    • In an insolvency scenario, it may seem that the seller has less room for negotiation, but the insolvency administrator and/or the commercial court will put pressure on the seller to obtain a reasonable exit for certain assets in order to provide liquidity to the insolvent company.

    Advantages of acquiring a distressed company

    Investment funds are attracted to distressed deals because the price is often much lower. But this is not the only reason. This type of M&A is also a way to gain risk-minimised access to an interesting sector or geographic area.

    Difficulties of distressed M&A 

    The main difficulty to be faced when undertaking such a transaction is that it involves not only the buyer and the seller, but also the interests of the sold company’s creditors. This entails the need to negotiate and execute the sale and purchase and the debt restructuring in parallel.

  • Which companies are affected by the new Whistleblower Act?

    Just this week, the new Law 2/2023 of 20 February, which regulates the protection of whistleblowers and the fight against corruption, came into force. Known as the Whistleblower Protection Act, this new law transposes the so-called Whistleblower Directive and obliges, among others, all companies with more than 50 employees to have an internal system that allows employees to report breaches of the law in the professional sphere.

    These may be criminal offences or serious or very serious administrative offences, the latter including, in any case, those involving financial loss to the Treasury and to the Social Security.

    Structure of the Whistleblower information system

    The management body or governing body of each entity shall be responsible for the implementation of the internal information system, after consultation with the legal representation of the employees.

    The information system shall ensure impartiality, respect for data, privacy and confidentiality of communications. It shall consist of two elements:

    • The internal reporting channel itself, which should facilitate the submission of information by post, electronically, by telephone or even in person. Oral communications should be recorded by the whistleblower through a full recording or transcript. The system should ensure the confidentiality and privacy of the identity of the whistleblower and allow reports to be sent and processed anonymously. A private archive shall be kept of data received and internal studies conducted.
    • The person responsible for the internal information system, who may be an individual or a collegial body. It is authorised by the board or management panel but performs its tasks independently and autonomously.

    The principles governing the internal information system should be public. Management can be internal or external to the company.

    Deadlines for action

    Within seven calendar days the internal reporting system administrator shall acknowledge receipt of the communication to the reporter.

    The response to the investigation proceedings may not take more than 3 months from receipt. Only in cases of particular complexity may it be extended for a further 3 months. If the facts prove to be criminal offences, the information must be sent immediately to the Public Prosecutor’s Office or the European Public Prosecutor’s Office.

    Whistleblower protection measures

    The fundamental objective of the Whistleblower Protection Act is to safeguard whistleblowers against retaliation. It therefore grants them protection for a minimum of 24 months.

    Retaliation is defined as any act or omission involving unfavourable treatment that results in a disadvantage in the employment context solely because of their status as whistleblowers. Such acts or omissions shall be completely invalid and, where appropriate, may result in the payment of compensation.

    Support measures for whistleblowers, free public advice on available procedures and remedies, legal aid in cross-border criminal and civil proceedings or even financial assistance and psychological support are also envisaged.

    Fines of up to one million euros

    Infringements are punishable by fines of between €1,000 and €300,000 for natural persons and up to €1,000,000 for legal persons.

    What is the deadline for implementing Whistleblower in the company?

    Companies with 250 or more employees must implement the system by 13 June. Companies with up to 250 employees have an additional margin until 1 December.

    External reporting channels 

    The whistleblower may also choose to use the external reporting channel of the newly established Independent Whistleblower Protection Authority. The Authority will have to respond within three months: close the case, send it to the Public Prosecutor’s Office, transfer it to the appropriate authority or initiate sanction proceedings.

    Ultimately, after disclosure through internal and external channels and the expiry of the deadlines without appropriate action, the whistleblower may make a public disclosure of the breach if it poses an imminent danger to the public interest.

  • Alternatives for a business succession process in SMEs. Strategic and fiscal approach

    The aim of this conference is to provide some keys to situate the starting point, to assess the strategic pros and cons of the different alternatives (family or management succession, separation of businesses, merger, sale or entry of venture capital) and to delve specifically into the tax consequences of each of them.

    • Speakers:
      • Joaquín Moral, Partner of CONFIANZ, S.L.
      • 2 CEO family business
    • Date: April 19, 2023
    • Timetable: from 6.30 p.m. to 8.00 p.m.
    • Place: Salón de grados Facultad de Economía y Empresa UPV/EHU, Avda. Lehendakari Aguirre, 83  48015 Bilbao
    • Attendance: FREE

    (Prior registration on the website of the Chair in Family-Owned Business: http://www.ehu.eus/es/web/catedra-empresa-familiar/izena-emateko-orria)

    Further information

  • A wave of mergers in the insurance sector is on the horizon

    High inflation is driving up operating costs and drastically reducing the margins of insurers in Spain. This is particularly true for those specialising in motor insurance. The insurance sector has shown great resilience during the last crises, but in recent months it is struggling to overcome the increase in the number of claims, supply problems and rising repair costs.

    For this reason, M&A operations in the insurance sector are expected to multiply in the coming months. The first to come to the market is the Spanish subsidiary of the American group Liberty Mutual, a transaction that could move around 1.4 billion euros.

    Price hikes and job cuts in insurance companies

    Uncertainty is widespread. To cope with the difficulties, insurers are preparing a generalised increase in the price of policies, and three leading companies have already implemented or announced workforce restructuring to improve efficiency and profitability. Between 2021 and 2022 Mapfre took early retirement for almost 600 employees. At the end of last year, Catalana Occidente initiated a process of voluntary departures for up to 550 workers. For its part, France’s Axa has just announced its intention to carry out an ERE in its Spanish subsidiary.

    Possible takeover bid for Línea Directa 

    The insurance industry is highly fragmented. There are some 200 insurers in Spain, and policy increases and staff reductions will not be enough for all of them. Some will have to look for new partners.

    The aforementioned case of Liberty Seguros may soon be joined by one of the benchmark companies in car insurance: Línea Directa. After its flotation on the stock exchange in April 2021, the company’s shares have lost more than 35% of their value. This continued decline has triggered rumours that investment funds and other insurers may be preparing a takeover bid.

    To protect itself against the possibility of a hostile takeover bid, in recent weeks Línea Directa has attracted two new major shareholders to its capital structure. They are the management company Candriam, owned by the insurance company The New York Life, and the owners of the pharmaceutical company Rovi. Candriam has taken 3% of the capital, while the López-Belmonte family has taken 4.32%.

    A global trend worldwide

    In Spain, the latest major acquisition in the insurance sector was by Mutua Madrileña, which acquired 8% of El Corte Inglés for EUR 1.105 billion at the end of 2021, thus becoming its exclusive insurance provider.

    Internationally, insurance mergers and acquisitions set an all-time record last year. A recent report by global law firm Clyde & Co puts the number of deals registered in 2022 worldwide at 449. This is 31 more than in 2021. The Americas remained the most active region in 2022, with 236 mergers and acquisitions. Europe saw 127 transactions; Asia-Pacific, 60; and the Middle East and Africa, 24.

    There were 19 large deals worth more than USD 1 billion, and the number of mega-deals is expected to grow among large companies in the insurance sector in 2023. Because mergers and acquisitions are the best way to grow fast.

  • New 15% minimum tax directive: how it will affect large companies

    On 22 December 2022, the new directive establishing a global minimum taxation threshold for large companies  was published in the Official Journal of the European Union. Its objective is to establish a minimum level of international taxation for multinationals. To this end, it establishes a framework of rules that foresees that, when the effective rate in a country is lower than 15%, an additional or complementary tax is levied.

    The OECD estimates that this major development in international taxation will raise 220 billion euros globally.

    Which companies will be affected

    Council Directive (EU) 2022/2523 will apply to those corporate groups with a presence in the European Union (EU) whose annual revenues have been equal to or greater than EUR 750 million in at least two of the previous four financial years. This includes ultimate parents, intermediate parents and subsidiaries resident in the EU.

    When will the minimum tax directive enter into force

    This directive will have to be transposed into Member States’ legislation during 2023, in order to start applying the income inclusion rule from 1 January 2024. The under-taxed profits rule will start to apply from 1 January 2025.

    How the 15% minimum tax will be paid

    Income inclusion rule

    The ultimate EU-resident parent of the group must pay the additional tax of the parent itself and of any of its subsidiaries, whether resident in the EU or not, where both are taxed at a rate of less than 15%.

    Under-taxed profits rule

    In some situations the income inclusion rule cannot be applied. For example, where the jurisdiction in which the parent is located does not provide for it. In these cases it will be the intermediate parent entities or EU resident subsidiaries of the group that will have to pay the supplementary tax.

    Complementary national taxes

    In addition, the directive allows Member States to adopt domestic taxes to ensure a minimum taxation of 15% for companies located in their jurisdiction. These domestic top-up taxes will be deducted from the overall top-up tax of the group.

    This is how the effective tax rate will be calculated

    The calculation of the effective group tax rate is a complex operation.

    First, the effective tax rate is measured in each jurisdiction separately. To determine the effective tax rate, the adjusted covered taxes are divided by the eligible profits and losses.

    The adjusted hedged taxes correspond to corporate income tax, albeit with some corrections. For example, in jurisdictions where the nominal tax rate is higher than 15%, deferred tax assets and liabilities are recalculated at 15%.

    Eligible profits and losses are calculated on the basis of the profit and loss account used to prepare the consolidated financial statements. Adjustments are made to this accounting magnitude to eliminate income or expenses that are usually excluded from the tax base for corporate income tax purposes according to the different regulations in the various countries. For example: qualified dividends, impairment of fixed assets, expenses for illicit payments or penalties…

    Consequences in Spain

    These new rules should not have a major revenue impact in Spain, given that there is already a domestic minimum taxation rule that already puts the effective corporate rate, in general, above 15%.

    However, some groups could be affected, since in some cases it is still possible today to be taxed below 15%. This is the case for companies under special tax regimes or applying double taxation deductions.

  • 72 key hours for a company to exonerate its debts with Social Security and Tax Authorities

    The new Insolvency Act provides companies with fewer than ten employees and a turnover of less than two million euros that are in difficulties with the possibility of opening a special continuation procedure. This procedure may allow them to exonerate their debts with the Social Security and Tax Authorities for a maximum value of 10,000 euros in each case.

    This is an important advantage over the previous legislation, which set the limit at €1,000 of debt owed to each public entity. However, this possibility is subject to some conditions and it is important to act quickly.

    Micro-enterprises in insolvency proceedings may lose their exemption if they do not inform the Adminstration

    72 hours from the request to open a special continuation procedure. This is the deadline for companies to inform the Social Security and Tax Authorities, according to a recent publication on the Social Security website. Otherwise, they could lose the right to exonerate their public debts.

    This is a very relevant issue in a procedure of this type. Failure to notify the opening of insolvency proceedings to the administration, or failure to do so in time or correctly following the established channels, may mean that the company loses the right to the reductions and waivers resulting from the special continuation procedure.

    Exemption of up to 20,000 euros on public debts of companies

    And these exonerations could amount to a total of 20,000 euros (10,000 euros for the Treasury and another 10,000 euros for the Social Security). Specifically, the new Insolvency Law foresees that the exoneration of public debts will be 50% of the total amount owed to the Administration and without being able to exceed 10,000 euros per entity. In other words, the company can only reach the maximum of 20,000 euros if it has outstanding obligations of more than 20,000 euros with the Tax Authorities and more than 20,000 euros with the Social Security.

    How to inform Social Security of the opening of special bankruptcy proceedings

    The Social Security has set up an online service through which microenterprises that are in special insolvency proceedings and have debts with the General Treasury can notify this situation.

    The basic condition is that the initiation of the special continuation procedure has been requested not earlier than 72 hours before.

    How to obtain discharge of public debt in special bankrupcy proceedings

    In order to be exonerated from its public debts, the microenterprise must prove its indebtedness through a special bankruptcy procedure. In order to facilitate this procedure, a procedure consisting of a digital test was launched on 9 January.

    This new insolvency platform allows microenterprises to communicate directly with the commercial courts. For example, it makes it easier for them to file the various standard forms. In this way, the information arrives and can be stored by the Commercial Registry or by the competent court, speeding up the procedures.

    There are two requirements for companies wishing to initiate the fast-track procedure:

    • Have an average of less than 10 workers over the previous year.
    • Have recorded a turnover of less than 700,000 euros and liabilities of less than 350,000 euros during the previous year.

    If your company is in difficulties and you are facing the filing of a special insolvency proceeding, Confianz can advise you throughout the whole process.

  • The advantages of family businesses in the face of the new tax on large fortunes

    The family business tax framework may be a good financial strategy for taxpayers affected by the new Temporary Solidarity Tax on the Great Fortunes (ITSGF).

    Family businesses enjoy advantages aimed at safeguarding productive assets in order to facilitate the survival of companies over time. Family business assets receive differentiated and harmonised tax treatment in all autonomous regions:

    • Exemption in Wealth Tax on the value of the family company. On the other hand, an entrepreneur who owns the business or shares of a non-family company must be taxed on them in his Wealth Tax and the ITSGF, according to the value of the company.
    • Inheritance and Gift Tax rebate. In some autonomous communities it reaches 99% of the value of the family business.
    • Deferral in personal income tax of the capital gains arising from donations of shares or holdings.

    How to plan your family business to save ont the ITSGF

    As we have seen, setting up a family business not only allows direct savings to be made in the amount of the Solidarity Tax on Large Fortunes, but also benefits the following generations. This is because the family business regime allows a large part of the taxation generated by the Inheritance and Gift Tax to be reduced.

    In addition, the tax on large fortunes exempts assets and rights taxed under Law 19/1991, of 6 June 1991, on Real Estate Tax (IBI). This means: cultural assets, permanent residences up to 300,000 euros and also family businesses. The aim is to prevent the possible relocation of this type of capital abroad.

    But in order to take full advantage of all its benefits, it is important to point out that the company created must fulfil a number of conditions:

    • It cannot be an asset-holding company whose main purpose is the management of movable or immovable assets. It must be an operating company with economic activity and at least 50% of its assets must be assigned to the development of the business activity.
    • Other members of the business family must own at least 20% of the company, or 5% individually. These family members can be the spouse as well as ascendants, descendants and collaterals up to the second degree.
    • The management of the company must be in the hands of a member of the family shareholder. The remuneration received for this work must amount to more than 50% of his or her income from work and business activities.
    • In case of inheritance, the shares must be held for at least 10 years.

    Little room for manoeuvre to redevelop assets 

    During the two years that the ITSGF will be in force, the government estimates that it will affect almost 23,000 taxpayers and raise 1.5 billion euros annually. However, it should be remembered that the legislative text leaves the door open to extending it for a longer period.

    The ITSGF has been approved in record legislative time. Moreover, this tax is already levied on wealth in 2022, even though it is payable in 2023. This has left the wealthy with little time to reorganise their wealth.

    Looking ahead to 2023, setting up a family business can be a way to save on the new wealth tax. However, this strategy requires careful planning by family business experts.

  • European Commission to scrutinise foreign subsidies in M&A deals

    As of 12 October, a merger control and foreign direct investment analysis will not be sufficient for M&A transactions. An analysis will also have to be carried out as to whether the transaction must also be subject to European Commission approval under the new foreign subsidy rules. This will inevitably lead to longer lead times and higher transaction costs.

    We tell you about it in detail.

    New regulation on foreign subsidies distorting the internal market

    On 23 December last, Regulation (EU) 2022/2560 of the European Parliament and of the Council of 14 December 2022 on foreign subsidies that distort the internal market was published in the Official Journal of the European Union. Known by its acronym FSR (Foreign Subsidies Regulation), its content is inspired by European regulations on state aid and merger control.

    The new regulation provides that any foreign subsidy to European companies may be subject to investigation by the European Commission. The Commission will have wide-ranging powers to carry out information requests, inspections and market investigations in specific sectors. For this reason, all companies receiving any such subsidies will have to collect information both for the five years prior to 12 July 2023 and on a recurring basis in the future.

    How the FSR affects mergers and acquisitions

    In this way, the EU wants to avoid distortions in the internal market and in the level playing field. This is particularly the case if these subsidies are subsequently used to finance M&A transactions in whole or in part.

    The FSR has a direct impact on M&A transactions for companies that have received foreign subsidies in the three years prior to 12 July 2023 and beyond.

    As of 12 October 2023, M&A transactions will be subject to the same merger control and FDI analysis as before. In addition, however, an analysis will have to be added as to whether the transaction must also be subject to the condition that the Commission authorises it under the foreign subsidies rules.

    Which operations are subject to notification

    • Those where one of the participating companies is established in the EU and generates a turnover of EUR 500 million or more in the EU.
    • Whether the following companies have obtained from third countries in the previous three financial years combined financial contributions of more than 50 million euros.

    Notification procedure

    For M&A contracts affected by the FSR, prior authorisation must be sought from the European Commission.

    This notification must be made by the parties involved:

    • In the case of a merger: jointly by the parties to the merger or acquisition of joint control.
    • In the case of an acquisition: the person or undertaking acquiring control of all or parts of one or more undertakings.

    The Commission has 25 working days from receipt of the complete notification to decide to initiate an in-depth investigation. It will do so if it sees indications of foreign subsidisation that distorts the internal market. This in-depth investigation can take up to 90 working days before the Commission takes a decision.

    The Commission can adopt three types of decisions:

    • With commitments, such as repayment of the subsidy, reduction of market presence, refraining from certain investments, etc.
    • No objections.
    • Prohibiting the concentration operation.

  • All the details of the new Solidarity Tax on the Great Fortunes

    On 28 December 2002, Law 38/2022 of 27 December 2002 was published in the Official State Gazette (BOE). Article 3 of this law regulates the new Temporary Solidarity Tax on the Great Fortunes (ITSGF). These are its main lines.

    Who should pay the wealth tax?

    This temporary tax is a direct tax, which supplements the Wealth Tax of individuals whose net wealth exceeds 3 million euros with an additional amount. Double taxation is avoided because taxpayers may deduct in the ITSGF the amount actually paid in Wealth Tax.

    Objectives of the wealth tax

    Its main objectives are twofold:

    • Revenue-raising purpose. In the current context of the energy crisis and rising prices, this instrument requires a greater effort from taxpayers with greater economic capacity.
    • Harmonising purpose. This is a state tax, which cannot be ceded to the autonomous communities. Because one of its objectives is to reduce the differences that exist in the taxation of wealth in the different autonomous regions.

    In which years the solidarity tax will have to be paid

    The Temporary Solidarity Tax on the Great Fortunes will in principle be applied in the first two financial years after its entry into force. That is, the years 2022 and 2023, since it came into force the day after its publication in the Official State Gazette, 29 December 2022.

    However, although the new tax is temporary for the time being, the regulation also specifies that it can be reviewed. Thus, at the end of its foreseen duration, the results may be evaluated and its continuation or abolition may be proposed.

    How the tax base will be calculated

    The tax base corresponds to the value of the taxable person’s net assets. This is determined by the difference between the value of the assets and rights held by the taxpayer:

    • Charges and encumbrances of a real nature, when they diminish the value of the respective assets or rights.
    • Personal debts or obligations for which the taxable person is liable.
    • The taxable base will be reduced, as an exempt minimum, by EUR 700,000.

    For the rest, the rules of Chapter IV of the Wealth Tax Law apply. Thus, for example, the following are exempt from tax: assets belonging to the Spanish Historical Heritage or to the Autonomous Communities, objects of art and antiques that do not exceed certain amounts, the habitual residence up to a maximum amount of 300,000 euros, economic rights corresponding to certain social welfare systems, assets and rights necessary for the development of the taxpayer’s business or professional activity, etc.

    What is the applicable scale of fees?

    • Assets between 3,000,000 and 5,347,998.03 euros are taxed at a rate of 1.7%.
    • Those between 5,347,998.03 and 10,695,996.06 euros are taxed at a rate of 2.1%.
    • Those exceeding 10,695,996.06 euros are taxed at a rate of 3.5%.

    The full amount of the ITSGF, together with the amount of personal income tax and wealth tax, may not exceed 60% of the sum of the taxable bases of the former. Once again, the rules on the limit of the full amount of wealth tax apply here.

    If the sum of the contributions of the three taxes exceeds 60%, the amount of this tax shall be reduced up to the limit indicated, without the reduction exceeding 80%.

  • Secondary buyouts (SBOs) soar in Spain

    Secondary buyouts among private equity funds have skyrocketed in the last year in Spain. In other words, more and more Spanish private equity funds are leveraging on other international funds to sell their best assets.

    A secondary buyout (SBO) is an M&A transaction in which a private equity fund buys from another private equity fund its stake in a company previously acquired by the latter.

    Also known as secondary leveraged buyouts, these mega-buyouts between private equity funds last year moved more than €7 billion in Spain. Some of the main deals were Altadia, acquired by Carlyle from Lone Star for more than €1.9 billion; the telecoms company Adamo, acquired by Ardian from the Swedish fund manager EQT for more than €1 billion; and the slates company Cupa, acquired by Brookfield from Carlyle for €900 million.

    Why there are more and more secondary buyouts in Spain

    There are several reasons why large buyouts of Spanish companies are increasingly taking place between national and international private equity funds.

    • Historic levels of liquidity in private equity thanks to the capital raising processes of the last few years.
    • The firm commitment of international investors to Spain. Numerous foreign venture capital funds are landing in the Spanish market, many even opening local offices.
    • Increasing competition for quality assets has created a strong appetite in the market, providing owners with juicy capital gains. There are more buyers and sellers in the market and the gap between the terms demanded by different parties has narrowed.
    • Global uncertainty encourages investment in more established companies. Because, in theory, companies that have already had a private equity partner have higher quality standards and have experienced two or more stages of growth and internationalisation.

    Characteristics of secondary buyouts

    The speed 

    Secondary buyouts are M&A transactions that are often concluded particularly quickly. Several private equity funds and even other companies are often interested in these deals. For this reason, the acquiring party often faces strong pressure not only in terms of price, but also in terms of timing.

    The use of the manifestation and warranty insurance policy

    The selling private equity fund makes it a priority to ensure that it has no potential future liability in connection with the sale of the company. To achieve this clean exit, it usually obliges the buyer to take out a warranty and indemnity insurance (W&I) policy. In this way the buying fund is covered against unknown contingencies and the insurer covers the risk of non-compliance with the seller’s representations and warranties.

    Locked box pricing

    In secondary buyouts the price is usually fixed by the locked box system. In other words, the price is fixed on the basis of accounts closed prior to the signing of the purchase contract. From that date onwards, the economic risk/benefit of the business is transferred to the buyer. For his part, the seller assumes certain obligations during the interim period.

    Future prospects

    In markets such as France and the UK, secondary buyouts account for almost 30% of total M&A transactions. In Spain we are still far from this percentage, so we should think that secondary leveraged buyouts still have a long way to go in terms of growth in the coming years.