The following article discusses session one in the IR Global Virtual Series on 'Steamlined Structures – A best practice approach to international deal structuring'
Germany – Urs Breitsprecher (UB) In my opinion, even
in a straightforward cross-border deal, it's very important that a buyer
consults local counsel. Last year we had an asset deal done under Italian law
and the local counsel was clear that the contract stipulated the assets were
transferred automatically. We only found out by coincidence when we discussed
it over the phone. This is a good example of why national laws are important.
The formality of transferring shares in share deals, is
often different, depending on the country. In Continental Europe, for example,
and some other countries, the agreement must be notarised. Last year we had a
deal from Ireland, where the Irish solicitor asked us for help, because the
client decided to switch to German law in the middle of the transaction. In the
end, the change of jurisdiction wasn't important because, no matter the choice
of jurisdiction, the transfer of shares is always governed by the national laws
applying to the company that is selling the shares.
The Irish company was buying the shares of two German
companies, but also the shares of companies in Hong Kong, Australia and the US.
We found out that the buyers thought they had already signed the share deal,
but under German law it must be notarised to be valid. They had signed the SPA,
but it was void because it was not notarised and therefore, they hadn´t met all
It is always advisable to take local counsel, even in a
small, straightforward deal.
Belgium – Steven De Schrijver (SDS) In Belgium, we
generally see less asset deals done than in other jurisdictions. Asset
purchases are almost always exempt from capital gains in Belgium, and often
foreign investors come in and want to do an asset deal because of the lower tax
liability. However, this often gets pushed back by the Belgian sellers, because
it's so much more interesting for them, from a tax point of view, to do a share
We really only see asset deals when there are a lot of
liabilities and it's very hard for the Belgian company to sell the shares. This
often happens when there have been large tax liabilities in the past and its
part of a global asset deal, with multiple assets acquired in different
countries. We might have a global asset purchase agreement and a local asset
purchase agreement covering Belgian assets.
More usually, when foreign investors come to us, we end up
doing a share deal. There are two different ways of doing this. The first
involves a legal procedure, which includes publishing the deal in the Belgium
official journal, followed by a waiting period of eight weeks before the shares
are automatically transferred. You don’t have to do an individual transfer of
contracts, but you will have less flexibility. You can also do an ad-hoc
transfer or purchase under civil law, which gives more flexibility on timing and
on what you include in the purchase.
US – Massachusetts – Florence Joffroy-Black (FJB) The
United States is quite different from Europe when it comes to rules and
regulations. For example, in most US-based companies, employees in the United
States are what is called ‘at will’.
Employees often don’t have contracts. In the case of an
acquisition, this means that employees have little to no rights unless a
specific clause is part of the transaction. Also the deal structure may end up
making the buyer liable for previous legal and unfinished matters. For example,
most stock acquisitions release the seller from all current and future tax
debts (unless otherwise stated in the sales contract). In addition, the
corporate stock can place heavy tax liabilities on the buyer.
When a US company does a transaction overseas it is
important for them to understand the difference in rules and regulations. We
have seen companies make a purchase in Europe with the intention of releasing
employees and getting rid of some assets. When they are told that their plans
cannot be implemented, it changes the strategy that helped them decide to go
forward with the initial transaction.
Netherlands – Shai Kuttner (SK) The Netherlands is
very similar to Belgium tax-wise. Most of the transactions are share deals,
because, in most cases, they qualify for tax exemption. We normally only see
asset deals in the real estate market, which is quite obvious. Share deals are
much more complex, with more issues to consider.
Many non-Europeans like to buy assets, thinking that, in the
process, they can get rid of some employees. The problem with that, is the law
in The Netherlands, which protects employees.
If you buy a business unit, the employees’ legal rights are
automatic transferred to the purchaser of the business. As a result, that is
not a way to circumvent employment rights, which are very strong and very
effective in The Netherlands.
We often have that kind of a discussion with Americans, who
think that's a way to get rid of employees, but it's not the way to do things.
There is protection.
Belgium – SDS This is implemented in one way or the
other in most European jurisdictions, and is based on European Union
India – Justin Bharucha (JB) We have a similar set of
stipulations to what everyone else has mentioned. There is an element of
employee protection, and you can't just get rid of employees because you're
buying the business.
Besides this, I think the most significant thing to bear in
mind when structuring a transaction in India, especially for a foreign
investor, is that the Indian rupee is not freely convertible.
For all practical purposes, there are several restrictions
on the way foreign investment comes into the country. I would say that, in real
terms, an asset deal or a business transfer doesn’t work unless the foreign
investor sets up a special purpose vehicle (SPV) in our country,
Even if it's a share deal and the foreign investor can
directly hold shares in the Indian company, there are pricing guidelines and
valuations which have to be respected. That’s actually the first test of
transaction structuring, when you're looking at foreign investment into the
country. It's easier for an Indian company to invest outside India. There are
still valuation guidelines, and restrictions, but not to the extent that we see
when it's foreign direct investment (FDI) coming in.
In addition to the domestic Indian tax structure, the
jurisdiction from which the foreign investment is coming into the country and
the relevant double taxation treaty avoidance treaty, are crucial to these
conversations. Before we even get into structuring a transaction in India, in
terms of the nuts and bolts of things, we run two effective paradigm tests,
which are the FDI test and the double taxation avoidance test.
Increasingly, we're seeing a lot of investment coming into
the country from Singapore, which is perhaps the most favourable jurisdiction
through which to root investment. We have seen a fair amount of stuff coming in
through Belgium and The Netherlands as well.
Belgium – SDS We do not have any requirement for
share deals to be notarised in Belgium, which is maybe one more reason why we
see fewer asset deals.
Netherlands – SK That's an important issue, and the
big difference between The Netherlands or Germany and most common law
countries. Notaries have a very important role to notarise transactions, especially
for the transfer of assets or the transfer of shares.
There's a certain cost involved, and an added formality to
the transaction, but it’s all doable obviously.
Belgium – SDS In Belgium the notary will only get
involved in a real estate deal and generally not in an asset deal, unlike The
Germany – UB In Germany, a deal has to be notarised,
so I would always look for formalities when closing a cross-border deal. In
some countries you have to file a share deal and pay stamp duty.
Every country is unique. We always recommend that foreign
investors use a German company as a vehicle to buy German assets. It is much
easier to deal with, because if you use a foreign structure, say, for instance,
an Indian company with a trust from Dubai, the ultimate beneficial owner (UBO)
becomes hard to identify. This can be an issue for notaries, or accepting the
purchase price due to money laundering regulations.
Belgium – SDS In Belgium, we only use a shareholders’
register. There is no stamp duty. If foreign companies invest, it might be
necessary to establish a Belgian company, but that’s for tax reasons. When
natural persons who own more than 25 per cent of a business sell to a non-EU
company, they might be subject to capital gain tax. That's why we sometimes
need to establish a new company to buy Belgian shares.
Germany – UB The other issue to consider is
warranties and guarantees. Certain warranties that can be excluded in countries
such as the US, or China, can’t be excluded in Germany. There are certain
rights in German law which can't be excluded by contract, not only employment
issues. It is often hard to explain this to foreign buyers.
Italy – Lorenzo Bacciardi (LB) There are substantial
differences to consider when structuring an Italian asset deal, in comparison
to a share deal. Such differences may imply advantages or disadvantages from
either the seller’s or the buyer’s perspective.
Under Italian law, the transfer of a going concern as part
of an asset deal is subject to pre-closing and post-closing formalities.
Pre-closing formalities include giving prior notice to trade unions, where the
business has more than 15 employees. Post-closing formalities include the
assignment or endorsement of the authorisation or licenses, necessary to allow
the buyer to operate the going concern.
Article 2555 of the Italian Civil Code defines a going
concern as an articulated set of assets that may be jointly used to carry out a
business. This includes tangible and intangible assets, as well as employees
and contractual relations.
Article 2558 of the code states that any commercial
agreement, not having an intuitu personae component, is transferred to the
buyer by operation of law, unless the contracting parties agree otherwise. Any
commercial agreement having an intuitu personae component, instead, requires an
express consent by the third-party contractor, in order to be validly
transferred to the buyer.
Article 2560 of the code states that the seller remains
jointly liable with the buyer for all liabilities related to the transferred
going concern, that existed before the transfer. The buyer also becomes jointly
liable, with the seller, for all liabilities related to the transferred going
concern, up to the value of the purchase.
Article 2557 of the code provides for a mandatory
non-compete obligation on the accounts of the seller of a going concern, who
will be compelled not to start, in the following five years, a new business
activity in competition with the transferred going concern.
As far as formalities are concerned, the asset purchase
agreement shall be executed in the form of a private deed with signatures
confirmed by an Italian notary public.
None of the peculiarities mentioned under the asset deal
apply to the purchase of shares of an Italian company. However, pursuant to
Italian case law, the non-compete obligation, provided for by article 2557, may
also apply in case of sale of a majority stake in the share capital of an
In a share deal, the share purchase agreement must be
constructed in such a way that provision is made for specific and express
representations, warranties and indemnities by the seller.
As far as formalities are concerned, the main framework
agreement, whereby seller and buyer set forth all the terms and conditions of
the transfer and of the ancillary arrangements, is usually executed in the form
of a private deed.
With respect to the closing formalities, necessary to
perfect the transfer of the shares, the parties execute a specific transfer
deed in the form of a private deed with signatures confirmed by an Italian
Justin Bharucha (JB) Bharucha Singh Mundkur (B&P) –
Florence Joffroy-Black (FJB) MedWorld Advisors – U.S –
Shai Kuttner (SK) Synergy Business Lawyers – Netherlands www.irglobal.com/advisor/shai-kuttner
Lorenzo Bacciardi (LB) Bacciardi and Partners – Italy www.irglobal.com/advisor/lorenzo-bacciardi
Urs Breitsprecher (UB) AQUAN Rechtsanwälte – Germany www.irglobal.com/advisor/urs-breitsprecher-new
Steven De Schrijver (SDS) Astrea – Belgium www.irglobal.com/advisor/steven-de-schrijver