Etiqueta: m&a

The foreign direct investment (FDI) regime is essential in the context of mergers and acquisitions because it creates control and cooperation mechanisms between EU Member States. The recent Royal Decree 571/2023 creates a new regulatory framework for foreign investments in Spanish companies. Therefore, it has a determining weight in M&A operations.

What is foreing direct investment?

A foreign direct investment is an investment of any kind by a foreign investor for the purpose of creating or maintaining lasting and direct links between the foreign investor and the company to which the funds are allocated for the exercise of an economic activity in Spain. Also included in this classification are investments that allow an effective participation in the management or control of a company.

Royal Drecree 571/2023 on foreign investments

Royal Decree 571/2023 of 4 July on foreign investment, which came into force on 1 September 2023, has modified and developed the foreign direct investment (FDI) regime in Spain. These are some of its new features:

Reduces the resolution period

The time limit for deciding on applications for authorisation is reduced from 6 to 3 months.

Creates a new system of exemptions

It introduces new transactions exempt from the prior authorisation regime. Exceptions are made for investments of foreign origin in companies in strategic sectors whose turnover does not exceed 5,000,000 euros in the last financial year for which accounts have been closed.

Sets out investor profiles subject to ahthorisation

It delimits the activities included in certain strategic sectors subject to authorisation in the case of foreign direct investment. For example, inputs provided by companies that develop and modify software used in the operation of critical infrastructure in sectors such as energy or telecommunications and inputs that are indispensable and non-substitutable to ensure the integrity, security or continuity of activities affecting critical infrastructure are now considered essential. For example, water supply, energy, strategic raw materials, health services, food safety, financial and taxation systems…

Authorisation is also required, irrespective of the sector in which they invest, for all non-EU resident investors or those residents whose beneficial ownership is held by a non-resident, when they acquire a holding equal to or greater than 10% of the capital of a Spanish company or, when they acquire control of all or part of it in accordance with the criteria established in Article 7 of the Law on the Defence of Competition, if they are in any of these three situations:

1. It is controlled by the government of a third country.
2. It has previously intervened in sectors affecting public policy, public security or public health in another Member State.
3. There is a serious risk that the investor engages in criminal activities affecting public safety, public order or public health.

Implements new sanctions

It is considered a very serious infringement to carry out a transaction without prior authorisation. As a result, the minimum fine is €30,000 and may amount to up to the economic content of the transaction.

Conclusion

In short, Royal Decree 571/2023 of 4 July on foreign investments significantly changes the rules of the game as far as foreign investments in M&A are concerned. If your company is facing an operation of this type, you can count on the expert advice of the Confianz team specialised in mergers and acquisitions.

Large corporate transactions, such as mergers and acquisitions (M&A), are highly complex procedures that can be exploited by malicious actors for money laundering. This is why medium and large-scale M&A transactions need to comply with regulations, strategies and mechanisms. Both to prevent them from being used to integrate illicit funds into the legal financial system and to be able to demonstrate to the authorities that corporate structures have not been manipulated to hide the origin and ownership of funds.

Enhanced due diligence

Enhanced due diligence is a fundamental tool in the prevention of money laundering. In M&A transactions, this process consists of conducting a thorough and detailed investigation of both parties before closing a contractual agreement.

It not only assesses the financial viability of the operation, but also identifies potential red flags of illicit activities. To this end, it is essential to implement rigorous controls and assess the risk profiles of the parties involved and to verify both the provenance of funds and the integrity of the target companies’ financial records.

The objectives of enhanced due diligence are:

• Comply with regulatory requirements and standards.
• Identify and mitigate any red flags or risks that could affect reputation.
• Avoid association with entities or individuals who are involved in criminal or unethical activities.
• Verify the identity, background, financial and legal status of the parties.

Establishing a compliance culture that integrates artificial intelligence and blockchain to fight money laundering

Companies need to incorporate a strong compliance culture into their corporate culture to mitigate money laundering risks. Beyond the implementation of policies and procedures, it is also key to keep the organisation alert and prepared for any irregularities.

This requires ongoing staff training on the latest money laundering tactics and best practices in due diligence. In this regard, we should bear in mind how the use of artificial intelligence and blockchain is profoundly revolutionising the field of compliance. These new technologies offer new possibilities for real-time monitoring of transactions. They are also very useful in automating the processes of verifying the identity and origin of funds. Thanks to them, anti-money laundering programmes are more efficient and effective.

Adapting to the challenges of a changing global environment

The global transaction landscape is evolving rapidly. So too must the techniques used to prevent money laundering. For all companies, but especially for those facing M&A transactions, the challenges ahead will include:

• Adaptation to new regulations
• The rise of emerging markets with different legislation
• The response to technological innovations that can facilitate money laundering as well as its detection and prevention.

The ability of each company to adapt quickly to all these changes will be crucial to maintain the effectiveness of anti-money laundering prevention programmes. Also to avoid legal problems after the merger or acquisition contract. At Confianz we are specialists in M&A compliance and we can help you neutralise the risks faced by any company in an operation of this magnitude. Our legal team continuously monitors changes in regulations to ensure that your company complies with the highest international standards in its M&A operations.

MAC clauses are a legal concept whose purpose is to cover the parties to a contract against the risk of a material adverse change that could frustrate the purpose of the contract or render it meaningless. In fact, their acronym corresponds to the English expression «material adverse change».

The inclusion of MAC clauses is common in different types of contracts: financing transactions, leasing contracts, supply contracts. However, in this article we will focus on their usefulness in M&A transactions.

A clause against negative circumstantial changes

MAC clauses come from Anglo-Saxon law. They are included in mergers and acquisitions contracts to make the completion of the operation or transaction conditional upon the non-occurrence of certain negative and relevant events or circumstances that entail a substantial change with respect to the situation existing at the time of signing the contract. A classic example would be the drastic and unexpected loss of value of the target company in the context of a share deal.

There are various possibilities. Most commonly, MAC clauses give one party the right to terminate the contract in the event of the material change adverse to its interests. But an MAC clause may also simply grant the right to modify the initial contractual terms. Or it may act as a suspensive clause so that the transaction is never consummated.

When to include MAC clauses in mergers and acquisitions

MAC clauses are particularly advisable when there is a long time delay between the signing of the contract (perfection) and the closing of the transaction (consummation). This delay may be due to a lack of necessary consent or because the buyer is waiting for the necessary financing.

In these cases, MAC clauses serve to ensure the buyer a contractual exit without incurring a breach of contract. Because the longer the time between completion and consummation, the greater the chances that unforeseen events will occur and frustrate the deal.

Even if there is no long time deferral. The inclusion of MAC clauses is also advisable in any contract of a complex nature. Also in those that are framed in volatile or highly uncertain markets.

The limitations of the rebus sic statingus doctrine

MAC clauses share similar features with the so-called rebus sic stantibus doctrine. This is a figure that applies when, in the face of unforeseeable circumstances not attributable to either of the parties, there is a rupture or an absolute disproportion of the equilibrium that causes the performance of the contract under the conditions initially agreed to be excessively burdensome for one of the parties.

However, Spanish courts have traditionally applied the rebus sic stantibus jurisprudential doctrine in an extremely restrictive manner. For this reason, the subscription of a MAC clause is always the best alternative. Because it constitutes an express and binding contractual agreement between the parties.

How to draft a MAC clause

In order to provide MAC clauses with maximum legal certainty and avoid disputes over their interpretation, it is essential to define in the greatest detail which circumstances are to be considered as substantial or material. For this reason, it is essential to have a team of lawyers who are experts in negotiating and drafting M&A contracts and who are able to foresee all the possibilities that may arise in each case without leaving any loose ends.

The pharmaceutical industry has a number of particularities that set it apart from other sectors. Pharmaceutical companies operate in a market that is highly regulated by the authorities. They require administrative authorisation to launch any medicine. Distribution, promotion, dispensing and administration are also subject to exhaustive state control.

All these differential facts condition any M&A operation involving companies dedicated to the development, manufacture or marketing of medicines. In fact, due to the strategic status of the pharmaceutical industry, the EU has specific control mechanisms for the sector.

Due diligence and representations and warranties

Both in the due diligence phase and in the representations and warranties, all information and documentation must be requested, analysed and taken into account in order to identify the greatest risks potentially faced by the company:

• What is the status of the company’s assets?

The main asset of pharmaceutical companies is intangible: the patent of the product, the know-how associated with the manufacturing process, the data resulting from the clinical trial, etc. Therefore, the acquirer has to check whether the intangible asset belongs to the target company, whether it is the sole owner, whether it is an asset licensed by a third party, whether it is duly registered with the Spanish Patent and Trademark Office or the European Union Intellectual Property Office… When the rights are formalised in contracts (licensing contracts, co-development contracts, etc.) it will be necessary to analyse whether the licence or co-ownership is subject to a change of control clause or expiry of its term.

• Have there been any recalls? 

Any withdrawal from the market entails significant administrative and financial costs, as well as a huge reputational cost. 

• Have there been any judicial or extradjudicial actions for tort or strict product liability?

This is a particularly big risk in markets such as the US, where there is a risk of collective actions.

• Does the target company have robust compliance procedures?

As we said, the pharmaceutical industry is one of the most regulated.  Administrative authorisation is essential to market a drug in each of the autonomous communities, set the price, promote it… Therefore, in the due diligence phase, it is advisable to analyse the consistency of compliance processes and procedures. It is also important to check whether the company adheres to any industry self-regulation code, such as the Farmaindustria Code of Good Practices or the EFPIA Transparency Code.

• Have there been any judicial or extrajudicial actions for nullity of infrigement of industrial property rights?

It is necessary to analyse whether there is any risk, existing or potential, that the target company will be sued for patent infringement.

• Are there any incompatibilities between the target and the acquiring company?

In these cases the acquiring company is usually also a pharmaceutical company. It is therefore necessary to analyse whether the target company’s business might conflict with its existing exclusivity, sole-source or non-compete obligations.

Specific steps to complete a merger or acquisition in the pharmaceutical industry

In order to close the M&A transaction, it is necessary to formalise the deed of transfer of the marketing authorisations of the acquired medicines. In the case of Spain, the transfer must be authorised by the Spanish Medicines and Health Products Agency (AEMPS).

It is also often advisable to sign a transitional support services agreement until the acquirer has integrated the new quality, medical and pharmacovigilance departments into its structure. This ensures the smooth fulfilment of contracts for the manufacture or marketing of medicines without interruption.

At Confianz, we have the experience and expertise to guide your company through every stage of an M&A transaction in the pharmaceutical industry. To ensure the success and regulatory compliance of your transaction, do not hesitate to contact us.

A recent Constitutional Court ruling has reopened the debate on whether the criminal liability of companies can be transferred after a merger or acquisition. Let’s take a closer look at the state of play.

Banco Santander receives a sanction for a violation by Banco Popular

The story goes back a few years. In 2018 Banco Santander took over Banco Popular. Shortly afterwards, in January 2019, Banco Santander was indicted for allegedly criminal acts that took place years earlier at Banco Popular. In this case, the case concerns a failure to comply with the regulations on the prevention of money laundering and the financing of terrorism.

In May 2019, Banco Santander was sentenced to pay an administrative fine of one million euros. However, the Criminal Division of the National High Court overturned the indictment of Banco Santander, citing, among other criteria, the absence of typical behaviour in the resulting entity.

Everything has now changed with the ruling of the Constitutional Court no. 179/2023 of 11 December, which resolves an appeal for protection in a contentious-administrative case and concludes that the transfer of the administrative sanction to the successor does not violate the principle of culpability. It therefore upheld the financial penalty imposed on Banco Santander for an infringement that would have been committed by Banco Popular prior to its takeover.

The criminal liability of the company being acquired is transferred to the acquiring company

The debate focuses on whether in cases of succession between legal persons, criminal liability for acts committed by the absorbed company is transmitted to the absorbing company. In this respect, the Constitutional Court points to the principle set out in Article 130.2 of the Criminal Code: «to admit that the dissolution of the legal person entails the extinction of all liability for offences, as happens with the death of natural persons (Art. 130.1.1 CP), would be tantamount – as the State Attorney and the Public Prosecutor argue – to allowing liability to be evaded by continuing under another legal form the same activity in the exercise of which the typical conduct was committed«. However, in order to be able to declare the transfer of liability from one company to another, there must be «substantial economic identity» between the activity carried out by the absorbed entity and that carried out by the new legal owner.

In any case, it should be noted that this judgment is pronounced in relation to an administrative sanction and with respect to the challenge of that sanction before the Contentious-Administrative Chamber of the Supreme Court. In other words, it cannot be automatically extrapolated to penal sanctions of a criminal nature.

How this ruling affects mergers and acquisitions

This ruling highlights the risk assumed by company purchasers. Because the wording of Art. 130.2 PC opens the door to an automatic transfer of criminal liability. Following this ruling, the importance of the due diligence phase in M&A transactions is more evident than ever. Because it is essential to determine with the greatest possible certainty:

• What criminal liabilities may have arisen in the acquired, merged or acquired company;
• Whether there is «substantial economic identity» between the activities of the acquiring and acquired companies;
• Whether there are other circumstances that mitigate the potential criminal liability of the acquiring company.

At Confianz we have a team of M&A specialists capable of foreseeing all these possible complications. Our extensive experience in this type of operations allows us to carry out the entire process with maximum guarantees.

Mergers and acquisitions are very complex transactions that are sometimes concluded too hastily due to the risk of a competitor coming along with a better offer. For this reason, it is inevitable that disputes between the parties sometimes arise after the closing of the transaction. E.g. for non-compliance with declarations and warranties, insurance coverage of risks… In these cases, initiating arbitration is always less aggressive and quicker than resorting to litigation, which is a process that can take a long time and will force the disputing parties to make provisions for possible adverse results in their accounts during the time it takes to resolve the dispute. Between the first and second instance, in the ordinary courts, we can easily be talking about years. And we know that in today’s fast-moving environment, companies need to act fast and cannot afford to waste time. Because that means money and lost opportunities.

For this reason, arbitration is becoming increasingly popular in the resolution of all types of disputes, including those arising from the sale and purchase of companies. Some sources already suggest that up to 25% of post-M&A disputes already resort to arbitration in Spain.

Advantages of arbitration in M&A disputes

The arbitration institution currently enjoys prestige and recognition because:

• As we have seen, it ensures shorter timeframes and prevents disputes from stagnating for fear of litigation.
• It grants confidentiality to the parties and makes it possible to avoid publicising the terms of the contract or even the very existence of the dispute. In ordinary justice, on the other hand, judgments are always public.
• A specialist arbitration tribunal makes a final decision on the dispute.
• It is an amicable procedure that makes it possible to save the relationship between the parties in dispute because initiating arbitration is less aggressive than initiating a lawsuit. Litigation often leads to an irretrievable breakdown of relations. Arbitration is more like seeking a neutral expert opinion to resolve a dispute and the relationship between the parties can be restored.
• For investment funds, it provides certainty, reduces the uncertainties of the transaction and ensures that a possible divestment is not penalised by the risk involved in any conflict.
• Arbitration is less formally rigid than litigation. Its flexibility allows it to be adapted to the interests of the parties.

When it is best to use the arbitration process

Arbitration is particularly advisable in two types of M&A transactions:

• In international transactions. Because it overcomes possible discussions about the jurisdiction to be applied and facilitates the enforcement of the award in different countries. In addition, it allows the natural use of other languages in the process.
• In transactions of particular technical complexity. If the subject of the transaction is a company in a particularly complex sector, such as pharmaceuticals or banking, arbitration provides valuable external expertise to resolve the dispute.

Incorporating the arbitration clause into contracts

To facilitate the resolution of possible disputes in an agile and amicable manner, at Confianz we always recommend including the arbitration clause in all contracts that form part of the purchase-sale transaction (shareholders’ agreement, articles of association, investment agreement…).

But the most important thing is always to conduct a thorough pre-assessment to mitigate the risks intrinsic to all M&A transactions. Because sometimes the best way to avoid conflict is to withdraw from the transaction. A favourable award is of no use if the other party does not have sufficient resources to mitigate the damage caused.

M&A transactions involving start-ups and emerging businesses of all types offer advantages for both start-ups and investors.

Why it is in the interest of an established company to invest in the merger or acquisition of a startup

Both to grow and to diversify the product portfolio. Acquiring an emerging business is an excellent way to stay competitive and stimulate a company’s growth quickly and efficiently. For example, acquiring startups can enable them to offer new solutions and services to their customers. This can quickly increase sales while saving on product development costs.

Established companies are looking to stay at the cutting edge of innovation. And acquiring a startup is a way of both acquiring new technologies and knowledge and keeping in touch with emerging trends.

For startups, it is a way to recoup invested capital and make a profit

Mergers and acquisitions (M&A) are one of the ways for startup founders and investors to materialise their divestment process in order to recoup their invested capital and make a profit. The other common way of harvesting or exiting is by selling shares in an initial public offering (IPO) or IPO. In this article, we will focus on M&A transactions, which in the case of emerging companies are usually carried out when their value has increased due to their growth.

Other reasons why a startup may undertake an M&A strategy are: to reduce costs, boost its commercial activity, diversify its product portfolio, improve its market share, increase its bargaining power, access new countries or sectors… In any case, these operations can be carried out between companies in the same sector or between companies operating in different markets.

Advantages 

One of the advantages of this strategy from the startup investors’ point of view is that it avoids the risk of going public and not finding a buyer for the shares. A merger or acquisition is a sure way to get rid of the shares.

Disadvantages

From the point of view of the founders of a start-up company, entering into an M&A transaction means losing control of the company.

In addition, during the integration process the company faces a thorough investigation by potential buyers. This includes conducting at least one due diligence. In this process it is essential to provide sensitive data, which can result in a leakage of information that poses a fatal risk. To prevent any leakage of information, we recommend always signing a confidentiality agreement between both parties.

Due diligence is an audit of the company’s financial records. Its purpose is to corroborate that there are no errors or incidents in the accounts and to recognise possible contingencies and opportunities. This is an analysis that usually lasts for a month and is generally carried out by independent external consultants.

The importance of being decisive

After reaching an agreement, it is vital that the changes and restructuring necessary to implement the merger or takeover are implemented as soon as possible. In this way, the benefits of the agreement can begin to be reaped as soon as possible.

In the M&A process of a startup, it is advisable to have the support of a specialist advisor. At Confianz we are prepared to accompany and advise you throughout this process.