Alessandro Madau of MM & Associati FinaRota participated in The Art of Deal Making: Using External Expertise Effectively
Foreword by Andrew Chilvers
For ambitious companies eager to expand into overseas markets, often the conventional route of organic business development is simply not fast enough. The other option to invest in or buy a business outright is far quicker but often fraught with unforeseen dangers. And even the biggest, most experienced players can get it badly wrong if they go into an M&A with their eyes wide shut.
If you search for good and bad M&As online the Daimler-Benz merger/acquisition with Chrysler back in 1998 is generally at the top of most search engines on how NOT to undertake a big international merger. Despite carrying out all the necessary financial and legal measures to ensure a relatively smooth deal, the merger quickly unravelled because of cultural and organisational differences. Something that neither side had foreseen when both parties had first sat down at the negotiating table.
These days the failed merger of the two car manufacturers is held up as a classic example of the failure of two distinctly different corporate cultures. Daimler-Benz was typically German; reliably conservative, efficient, and safe, while Chrysler was typically American; known to be daring, diverse and creative. Daimler-Benz was hierarchical and authoritarian with a distinct chain of command, while Chrysler was egalitarian and advocated a dynamic team approach. One company put its value in tradition and quality, while the other with innovative designs and competitive pricing.
Alessandro Madau discussed The Art of Deal Making: Using External Expertise Effectively as part of the Tax chapter.
Describe a typically tax-efficient deal structure in your jurisdiction? Any examples.
One of the typical tax efficient deal/structures in our jurisdic- tion is the LBO. The term Leveraged Buyout indicates that an operation of corporate acquisition is made using a large capital injection of debt with respect to risk capital, leveraging on debt capacity of the “target” company (ie the “target” company to be acquired), in particular using the assets and the income capacity of the same as a guarantee for the debt repayment. Specifically, the word “leveraged” refers to the effect and the centrality that the contribution of the debt has on the structure of the operation.
The main phases of a typical LBO operation:
1. a group of investors, or an institutional investor depending on cases (such as a Private Equity fund), constitutes a new one “vehicle” company, also known as SPV (“Special Purpose Vehicle”) or “NewCo”;
2. the same investors, shareholders of the NewCo, negotiate and finance the latter with a large amount of debt, sufficient to proceed to the acquisition of the shareholding (wholly or controlling) of the company “Target” (i.e. the target company of the acquisition)
3. the NewCo proceeds with the acquisition of the target com- pany by exploiting the minimum contribution of shareholders’ equity and third-party financing. To the latter guarantees the shares of the target company or its own asset;
4. after the acquisition in most cases the two companies merge. The merger is not a must, but it is the “natural” epilogue of the operation.
Further alternative structures to the typical LBO operation can be:
• LBO carried out with a non-proportional spin-off operation, internally of which the target splits a particular branch (per- forms a so-called “Carve out”), which is then incorporated by the NewCo.
What elements of a structure or deal could prevent a client from implementing your recommendations? For example, holding companies, trusts, exemptions, withholding tax.
The LBO operation is presented as a high-risk operation, so much so that it is framed as a structured finance event for which high and specific skills are required.
This degree of risk is not given by the modest size of the Newco, relegated to the role of vehicle company, but by the size and duration of the financial intervention and the future outcome of the industrial project, on which the expectations of those who hold the role of entrepreneur and who holds that of lender. Furthermore, the most delicate aspect of these operations, which also represents their peculiar trait, is the translation of the purchase cost on the assets of the acquired company. The acquisition, therefore, is possible through resources and potential, including borrowing capacity, of the target.
While being aware that the transaction in question represents a high level of risk, it must be said that it also has significant advantages.
Much has been discussed on the purposes and, above all, on the opportunities offered by the implementation of an LBO operation. First, it was pointed out that they put back into circulation available funds intended to finance obviously more attractive investments from the point of view of the shareholders who are preparing to sell (second factor … are the shareholders ready to sell?). On the other hand, the company remains with those who believe they can make the most of it. This means that these operations make it pos- sible to reallocate resources according to an efficiency criterion, i.e. in favour of those subjects who value them.
Another possible advantage consists in the fact that these operations contribute to fluidize the corporate control market, as they facilitate the organizational renewal and the turnover of the managerial team when this is found to be inadequate for their duties.
How would you minimise the tax risks on a deal, including historic tax liabilities and ongoing tax optimisation?
The task of any tax/lawyer consultant who supports the poten- tial buyer as part of the negotiation process is first of all to verify the existing tax risks, or, potentially deriving from the transaction, but also to insert those institutions that allow the client to reduce or cancel any type of tax risk, which it could respond to in the post-acquisition period.
The working practice has allowed the advisors to develop many tax guarantee instruments. The main minimal institutes that can be used, are the following:
1. insertion of an arbitration clause;
2. execution of the tax due diligence;
3. modification of the negotiating scheme;
4. request for the certificate of pending tax charges;
5. institution of tax amnesty;
6. alternative institutions to the direct or indirect acquisition of the business
On a residual basis and for the sole purpose of verifying the existence of any tax credits expressed in the financial state- ments of the target company, the institution of the new “tax credit certificate” – introduced by art. 10, of the legislative decree n. 269/2003 – which allows you to verify the certainty of the amount of any credits claimed by the company from the tax authorities
The list of the aforementioned cases does not pretend to be exhaustive but allows to avoid certain tax risks related to the acquisition process.
Besides the instruments limiting the tax liability of the purchaser, there is, in the course of the acquisition process, including a business or legal function, which provides for the inclusion in the contract to acquire specific warranty clauses.
Finally, the importance of the inclusion of arbitration clauses that can protect both the interests of the buyer and those of the sellers during the acquisition process should not be underestimated.
Top Tips – Tax Traps To Be Avoided In Your Jurisdiction
Here are examples that could induce the buyer to abandon the negotiation:
• failure to keep stock accounts with the correlated risk of inductive assessment by the Tax Administration on all tax periods still open for review;
• a purchase contractual scheme based on a purchase of shareholdings, with full tax risk of the potential buyer;
• the existence of potential tax liabilities to limit the intervention to the tax years/periods still subject to potential assessment by the Italian tax authorities;
The verification of the tax periods subject to potential assessment takes into account these variables: a) limitation periods established by current tax legislation; b) acts put in place by the tax authorities that may have interrupted the limitation period; c) access of the company to entities that have allowed the par- tial or total definition of the single tax period; d) the company’s access to operations of an extraordinary nature which led to the latter’s joint tax obligation for other tax periods.