International Deal Making – Assisting Acquirers

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QUESTION ONE – In your experience, what are the key considerations that international clients should have the front of mind when assessing a target company for acquisition in your jurisdiction?

Check the history of the company since the beginning of the operation, including who and what entities were involved in the company. It is also important to verify whether the company’s business profile has changed radically over the years. Changes may mean that the company has some ‘interesting secrets.’

It is advantageous to carefully read financial statements for the company. It will provide a view on the financial condition of the company and the approach of its shareholders. A lack of regular reporting is generally a bad sign.

It’s worth verifying any existing agreements and the status of their performance while ensuring there are no civil or criminal proceeding pending towards the com­pany or their management board.

It should not be forgotten that, at the preliminary conclusion of the agreements, parties should clearly understand the confidentiality of the information disclosed. They should also have expressed mutual interest in executing the deal and defining the most important items of the transaction. The rules of cooperation and the steps to be taken should also be set out, such as non-disclosure agreements and letters of intent.

QUESTION TWO – How would you, as a professional advisor, approach the due diligence process to ensure all bases are covered prior to a sale price being agreed?

There are no specific rules for determining a price. It is set by the contracting parties in accordance with the principle of freedom of contract. However, the pur­chase price should correspond with the market price of the shares or assets being acquired, otherwise, there is a risk of a potential dispute with the tax authorities.

The essence is to prepare the complete checklist of documents and matters needed to be verified, taking into consideration the business environment the company is operating in.

Sometimes the sellers are not aware of the importance of providing complete information, so it is important to get to know the business environment in which the company operates, identify as many risks as possible and then strive to verify them. There is no such thing as too much knowledge.

It is essential that, in addition to the information provided by the company, you check all publicly available records. The due diligence process takes time, so we recommend double-checking the publicly available records before a final decision is taken.

QUESTION THREE – Once an acquisition is agreed, what are the key clauses or warranties and indemnities you would recommend for inclusion in the sales contract?

The agreement should include the warranties on ownership of shares of the com­pany and on the company conditions such as:

  1. full title to the shares and capacity to sell them;
  2. no encumbrances and no third parties’ rights to the shares;
  3. no infringement of any provisions of law, agreements or administrative decisions by which the seller is bound through the execution and performance of the transactional documentation;
  4. fair presentation of the financial condition of the company and the results of its operations in such financial statements;
  5. no material adverse change in the general affairs, management, financial site;
  6. employment relations such as employee pension programs, collective bargain­ing agreements, payment of social security contributions;
  7. taxes such as due payment of any taxes, timely submission of all tax notices; returns, computations, documentation, declarations and registrations.

In accordance with the above warranties, the parties should determine liability for any loss incurred by the buyer as a result of false representations and warranties. In transactional practice, there are situations when a party’s liability for submitted representations and warranties is limited, for example up to the price.

From the other side of the transaction, we recommend payment securities, such as obtaining bank guarantees, deposits or the use of an escrow account.

Tips for completing a successful cross-border acquisition

Preparation of solid and complete due diligence – the analysis of the company should be mul­ti-levelled and take into account the specificity of the company’s activity and local legal reality.

Getting to know the legal aspects of the busi­ness operation in the jurisdiction of the acquired company is important. It minimises business risk and gives the buyer a wider perspective. They can then set realistic targets for the trans­action.

Put together a team of people from the involved jurisdiction with skills and experience in cross-border transactions. The goal is to integrate the whole process and prepare com­panies to operate as one.

This excerpt was taken from the IR Global Guide: International Deal Making: Assisting Acquirers. To view the full publication, please click here.