Austria: Private Equity

In Austria, the number and volume of transactions that involve a financial sponsor is below the European average. Strategic investors continue to play a predominant role. According to the M&A Index 2021 published by EY Austria strategic investors continue to play an important role in the Austrian market as 276 deals were strategic deals, which is an increase of 16 deals compared to the previous year. In contrast, private equity investors continue to play a subordinate role in the Austrian transaction market (which is in contrast to the global trend). Nevertheless, some start-ups in Austria recently have achieved substantial financing from private equity investors so that this area of potential M&A activity offers potential (e.g., Bitpanda, GoStudent).

Financial sponsors aim to limit or exclude representations and warranties as much as possible, unless the buyer takes out a warranty and indemnity insurance (“W&I insurance”). The differences of the Austrian financial sponsors are thus similar to international transactions.

In order to make the auction process more efficient, financial sponsors prefer locked-box pricing mechanisms. This has the advantage that fixed prices are offered, which simplifies bid comparison.

A distinction must be made between the legal forms of the company. Most of the Austrian companies are in the legal form of a limited liability company (Gesellschaft mit beschränkter Haftung) and besides there are stock corporations (Aktiengesellschaft).

For the effective transfer of shares in a limited liability company, both the contractual obligation as well as the transfer declaration must be executed in the form of a notarial deed. The transfer of the share must subsequently be registered in the commercial register. Such registration only has a declarative effect and only affects the relationship between the company and the shareholder(s).

The effective transfer of shares in a stock corporation depends on the type of shares issued by the respective stock corporation. In the case of bearer shares, the applicable principles of securities law apply, with the transfer of ownership in the share deed resulting in the transfer of membership. Registered shares are transferred by endorsement. In the case of registered shares, the new holder must be recorded in the share register and the transfer must therefore be reported to the Company.

It should be noted that for both types of companies, transfer restrictions are possible, which means that the transfer may be made subject to the approval of the company or (in the case of LLCs) its shareholders.

In principle, the transfer of shares in both types of companies is not subject to a transfer tax. However, if a company owns real property, the transfer of shares may be subject to real property transfer tax under certain conditions. Further, the proceeds from the sale of shares in a limited liability company are taxable and count as income from capital assets. Accordingly, shareholders who sell their shares in a limited liability company become liable to tax on the capital gain and are subject to a tax rate of 27.5%. Gains from the sale of shares, i.e. shares in the stock corporation, are also subject to the tax rate of 27.5%.

In case the purchasing entity is a special purpose vehicle with no or almost no substance, the seller in general will require the financial sponsor to provide, together with the binding offer, equity commitment letters with certain fund commitments. With such letters, the issuer of the letter, i.e. being not a special purpose vehicle itself, irrevocably undertakes to fund the bidding company in case the bid is successful. Alternatively, also bank guarantees are sometimes required.

At the beginning of 2022, the locked-box model still dominated, although it should be noted that at that time it was a rather seller-friendly market. It seems that due to the uncertain market environment influenced by the Covid-19 pandemic and the impact of the turmoil that has resulted on financial and other markets from Russia’s invasion of Ukraine, buyers are once again tending more towards the closing account mechanism.

From the seller’s point of view, the locked-box model is certainly advisable, because it means that there is already agreement and certainty about the purchase price at the time the purchase agreement is concluded, so that the buyer subsequently bears the risk. The same applies if it is to be expected that the target company will experience seasonal sales fluctuations which will have an impact on liquidity.

The distribution of risks in M&A deals in Austria takes place in particular through the determination of catalogs of guarantees and warranties. Almost all acquisition agreements contain guarantees by the seller. Typical standard warranties include a guarantee that the target has kept accurate accounts, that the target complied with the law, and that the seller made full and accurate due diligence disclosures. The seller’s liability under the warranties is usually subject to an exception that states that the seller is not liable for damages based on facts disclosed to the buyer. In practice, this often involves the definition of a disclosure schedule. These are attached to the acquisition agreements as an appendix and usually list in a taxative manner those circumstances (thus disclosed to the buyer) for which the seller is not to be liable to the buyer – even if there are corresponding warranty promises. Liability for other circumstances disclosed (especially in the data room) is usually not excluded in such a case. Although this approach means more effort, especially for the seller, it provides both parties with much greater clarity about potential (disclosed) defects. Also time-limits (usually 2 years) for the assertion of a claim against the seller as well as liability caps up to a certain percentage of the enterprise value, in addition to de minimis clauses and thresholds are typical methods to limit or allocate the risk between seller and buyer. Special indemnification mechanisms are usually applied for tax, environmental contamination and litigation risks, or risks identified during the due diligence review.

Frequently, the risk is also distributed by agreeing MAC (Material Adverse Change) clauses, in which the buyer is usually granted the right to withdraw from the transaction under certain conditions (especially in the case of “material adverse change”). The clauses are used in particular for the period between the conclusion of the purchase agreement (signing) and the effectiveness of the transfer of the business (closing). Depending on their form, the relevant negative changes may be, for example, a drop in sales, an economic crisis or the consequences of natural disasters.

Also due to the uncertainties triggered by the Covid-19 pandemic, the use of “W&I insurance” is now getting a more frequently used tool; although compared to other countries, Austria still remains a jurisdiction with significant M&A deals that are not using insurance. The advantage of such insurance is that buyers who need increased contract protection and sellers who are not ready to provide this can still be helped to conclude a contract. W&I insurance is used in particular in mid- and large-cap M&A deals, both in share and asset transactions.

In Austria, financial sponsors are more focused on the private market and are less active in the publicly listed companies. More recent takeover practice has seen the use of business combination agreements (eg, Vonovia/BUWOG and, with the bidder AMS as the Austrian involved party, AMS/Osram). Under the Austrian Takeover Act (Übernahmegesetz), the target’s board must refrain from any action that could impair the shareholders’ uninfluenced and informed decision on, and that may prevent the success of an offer. A search for a white knight is allowed.

On 25 July 2020 a new Investment Control Act (ICA) (Investitionskontrollgesetz – InvKG) came into force, which aims to prevent the “sell-out” of the Austrian economy in strategic areas. The ICA implements the FDI Screening Regulation (Regulation (EU) 2019/452 establishing a framework for the screening of foreign direct investments, ie, non-EU/EEA/Swiss, individuals or corporations into the Union) and significantly expands the control over foreign investments both in terms of scope and procedure, and in particular via a more comprehensive, EU-wide coordinated control of third country investments in system-relevant Austrian companies.

A “foreign direct investment” is subject to the approval of the Federal Minister for Digital and Business Affairs (Bundesminister für Digitalisierung und Wirtschaftsstandort) if the following requirements are met (a) the target company is active in one of the sensitive or system-relevant areas (examples are listed in the Annex to the ICA); and (b) certain voting right thresholds are reached or exceeded or otherwise a controlling influence is acquired or a controlling influence on parts of the company is acquired through the acquisition of significant assets.

Examples of “sensitive or system-relevant areas” are defence equipment and technologies, the operation of critical energy infrastructure and critical digital infrastructure, water, research and development in the fields of pharmaceuticals, vaccines, medical devices and personal protective equipment (particularly sensitive sectors) as well as areas in which a threat to security or public order may arise (other areas). With regard to the “particularly sensitive sectors”, the voting right thresholds are 10%, 25% and 50%, whereas for the other areas 25% and 50% apply.

Our first experiences with the competent authority indicate, that the requirement of a “sensitive or system-relevant area” is interpreted by the authority broadly and, therefore the scope of the ICA’s application is much larger than with previous investment control legislation. A cautious approach is, therefore, recommended when considering an application for approval.

The application for approval must be submitted immediately after the conclusion of the agreement (signing/commitment to the transaction) or, in the case of a public offer, immediately after the announcement of the intention to acquire. The obligation to submit an application generally applies to the acquirer(s). Information on the acquirer (including the beneficial owner), the target company and the transaction structure, as well as information on the business activities of the acquirer and the target company (including a description of the market and competitors) must be set out.

Furthermore, the application for approval must contain information on the financing of the transaction and the origin of the financial sources, as well as – if foreseeable – information on whether effects on “programs of European interest” are to be expected (see Section 6, paragraph 4 cif 1 to cif 10 of the ICA).

A viable alternative to making an application for approval after signing can be the possibility of obtaining a clearance certificate (Unbedenklichkeitsbescheinigung). Within two months of receipt of the complete application for a clearance certificate, either a clearance certificate is issued or a notification is given that the application will be treated as an application for approval. If no decision is issued or notification is given within this two-month period, the clearance certificate is deemed to have been granted. This clearance certificate alternative opens up the possibility to achieve clarity at an early stage.

In most medium and large sized transactions, the closing of a transaction will be subject to the issuance of merger clearances by the relevant competent authorities. However, financial investors will generally refuse any provisions pursuant to which they may be under the obligation to take constraining actions, or impose undertakings on their portfolio companies.

Since the involvement of financial sponsors in Austria is rather insignificant, as already described, we have not observed a radical increase in the number of sponsors so far. Due to Austrian capital maintenance regulations, a debt-to-equity swap is rather impractical. We therefore see either equity or debt investments. In some cases, however, a private equity sponsor first grants a loan to the company, which is then converted into an equity investment in a further step (e.g. if certain conditions are met) in the course of a capital increase (so-called “convertible loan”). However, the regulations on capital increases pursuant to Section 149 et seq. of the Austria stock corporation Act (Aktiengesetz) and Section 52 et seq of the Austrian Act on Limited Liability Companies (GmbH-Gesetz) must still be complied with.

Incentive schemes for management are becoming increasingly important in M&A transactions in Austria. This applies in particular to shareholdings in the company or the acquirer. Shares in the acquirer – regardless of whether they were used as the transaction currency – are often offered to key employees as an incentive to stay on board after the transaction. Management incentive packages are usually structured through share options, equity participation rights, profit participation rights or phantom shares.

Both income from the transfer of capital and income from the realized appreciation of capital assets are subject to capital gains tax. Income from the transfer of capital is primarily interest and profit shares (dividends) or other payments from company shares (e.g. shares, limited liability company participations). Income from realized increases in the value of capital assets are so-called “capital gains” and “capital losses,” i.e., all positive and negative income from the sale, redemption and other stripping of share rights, such as gains from the sale of GmbH shares or stocks, as well as securities evidencing a claim right. Income from capital assets is usually subject to a special tax rate of 27.5% or 25% and not to the standard income tax rate. In many cases, tax is paid by way of capital gains tax (KESt deduction).

Pursuant to section 79 of the Austria stock corporation Act (Aktiengesetz), members of the management board of an Austrian stock corporation may not operate a business or accept supervisory board mandates in companies which are not affiliated with the company or in which the company does not hold an entrepreneurial interest (Section 189a no. 2 of the Austrian Commercial Code (UGB)), nor may they conduct business in the company’s line of business for their own account or for the account of third parties. They may also not participate in another entrepreneurially active company as personally liable partners. The non-competition clause shall apply from the effective date of appointment until termination, in particular by lapse of time. The Supervisory Board may release management board members from the non-competition obligation in whole or in part. A non-competition clause going beyond the law cannot be imposed unilaterally by the supervisory board but requires an agreement with the management board member. A non-competition clause relating to the period after the termination of the management board function (competition clause) is permissible within the framework of good morals. If the stock corporation and the management board member agree on a non-competition clause for the period after termination of the management board function, this is generally permissible for a period of one year.

Pursuant to section 24 of the Austrian Act on Limited Liability Companies (GmbH-Gesetz), management board members may not, without the consent of the company, conduct business in the company’s lines of business for their own account or for the account of third parties, nor may they participate in a company in the same line of business as a personally liable partner or hold a position on the management board or supervisory board or as managing director. The non-competition clause may be restricted or excluded by the articles of association. It is also possible to consent to a specific competitive activity by means of a shareholders’ resolution requiring notification. The statutory non-competition clause is dispositive and can therefore be reduced or tightened. Tightening of the non-competition clause, such as a subsequent non-competition clause, is only permissible within the general limits of Section 879 of the Austrian Civil Code (Allgemeines Bürgerliches Gesetzbuch), both in terms of the facts and the legal consequences. A guideline for post-contractual non-competition clauses is approximately 1 year.

If the company is run in the form of a stock corporation, the financial investor will demand that he be allowed to fill one or more supervisory board positions. This can be done by means of delegation or nomination rights. Significant, extraordinary decisions in a stock corporation require the approval of the supervisory board. Through the members of the supervisory board delegated or nominated by him, the financial investor can maintain his influence on the company. Furthermore, any financial investor will require that it has certain information rights and that the management board make regular reports to it on the course of business.

If the company is run in the form of a limited liability company, in practice there is often no supervisory board; such a board is only mandatory in a limited liability company above a certain size. As long as no supervisory board is installed, there are essentially two ways to secure the financial investor’s influence. Either an advisory board is installed, in which the investor has delegation or nomination rights. In this case, extraordinary transactions are subject to the approval of the advisory board. Through the members of the advisory board members delegated or nominated by him, the financial investor can maintain his influence on the company. The second alternative is that no advisory board is installed and the general meeting of shareholders has to approve extraordinary management measures. If the investor only holds a minority share, he will require certain veto rights.

These rights of the financial investor are mostly laid down in shareholders’ agreements.

Financial sponsors usually demand a right to take the management shares with them in the event of an exit and frequently insist on the bundling of the management shares in a pooling vehicle, which is often structured in the form of a partnership.

Credit agreements represent the most important instrument in terms of debt financing. However, new and more diverse financing products have been developed and are used in financing transactions with an Austrian background, such as mezzanine debt financing (“subordinated debt”), including equity kickers, as well as hybrid instruments.

The sources of debt financing for private equity transactions differ significantly between domestic private equity funds and international private equity funds. The first mainly finance themselves through loans granted by domestic banks, while international private equity funds also seek financing through international capital markets. The debt-to-equity ratio also varies depending on the size of the transaction and is around 50% for large-cap transactions involving international private equity funds and around 40% for mid-cap transactions. In mid- and small-cap transactions, there is usually only senior and institutional debt. In large-cap transactions, it is a matter of pricing whether mezzanine debt is used. High yield bonds are typically only considered for post-closing refinancing, not for financing the transaction. Recent transactions have seen a significant increase in financing from debt funds.

Austrian law provides for a very narrow scope for the acquisition of own shares. Thus, a stock corporation may only acquire a maximum of 10% of its total shares. For a limited liability company, the acquisition of its own shares is in principle only legally permissible in very special exceptional cases and therefore does not occur in practice. In addition, section 66a of the Austria stock corporation Act (Aktiengesetz) rules out the granting of an advance or a loan or the provision of security by the target company to another person for the purposes of acquiring shares in the target company or shares in the top holding company. This prohibition in principle does not apply to legal transactions in the ordinary course of business of credit institutions, such as banks, if the target company could itself acquire the shares it is financing from free funds.

On this legal basis, we see very few transactions in practice in which the financing of the acquisition by the target plays a significant role.

Loan Market Association (LMA) standard credit agreements are regularly used in Austria in case of international financing transactions. In recent years it has become more and more common to base domestic transactions on “light versions” of the LMA-standard credit agreements.

Although the extent of negotiations varies greatly from transaction to transaction, most negotiations focus on general covenants, financial covenants (especially equity covenants) and financial reporting.

Austria only has a relatively small private equity industry, therefore the influence of private equity credit funds as sources of debt capital is rather low. However, the influence of specialist debt funds has increased over the years – not only in the large-cap segment. Additionally, the covid-19 pandemic lead to a boost in equity financing, which also increased the number of private equity credit funds as sources of debt capital.