Acquisition Finance 2019

Last Updated November 07, 2019

Austria

Law and Practice

Author



BINDER GRÖSSWANG Rechtsanwälte GmbH has been ranked among the leading commercial law firms in Austria for more than 50 years. Its activities focus on international M&A and financing transactions, major arbitration and litigation cases, and advice on matters of corporate, competition, tax, IP, insolvency, real estate and employment law. Binder Grösswang is regularly engaged by top-tier firms across the globe. Clients include domestic and international financial institutions and corporates as well as important Austrian infrastructure companies.

The positive macroeconomic indicators, including the current interest rate policy of the European Central Bank, continue to support investors’ and banks' willingness to provide financing, which is key to a prospering M&A market heavily relying on debt capital. However, after two consecutive record years, the Austrian transaction market cooled down in 2018. The number of takeovers with Austrian participation declined by approximately 6% to 324 deals in 2018. Transaction volumes also declined from EUR14.7 to 7.9 billion. The decisive factor here was the halving of mega-deals with a volume of more than EUR1 billion from four to two. In 2017, the purchase of the Austrian real estate developer BUWOG by Vonovia, Germany’s largest residential real estate company, constituted one of the largest M&A deals in recent Austrian history, valued at around EUR5.6 billion.

Despite the declining transaction volume and negative outlook due to political uncertainty on a global scale, M&A transactions are becoming increasingly important for domestic companies to grow their business and expand into new markets. In addition, the interest of foreign investors in domestic companies, especially in highly specialised hidden champions, is growing. For example, LG acquired ZKW Holding, an Austrian manufacturer of lighting systems and electronics for the automobile industry, for approximately EUR1.1 billion. Whereas ten years ago 36% of all deals on the Austrian market were concluded between domestic companies, in 2018 the number was only 18%.

Germans are the most active foreign investors in the Austrian M&A market, mainly due to close geographical and economic ties between the two countries. In 2018, German investors participated in 40 inbound transactions involving the acquisition of Austrian companies, followed by investors from the USA (nine), France (seven) and Switzerland (seven).

According to research conducted by Deloitte in 2018, foreign investors are mainly interested in the acquisition of small Austrian companies that are active in the technology, media and telecommunications sectors. In particular, software firms are highly sought-after. Austrian investors, on the other hand, have a more traditional approach and are mainly interested in investment in the industrial sector. Most buyers are large and well-established industrial enterprises that aim to secure their market standing by expanding their business abroad.

(Market data from EY M&A-Index Österreich 2018 and Deloitte M&A Monitor Austria 2018.)

Most Austrian businesses fall under the category of small and medium-sized enterprises (SMEs) and are often family-owned. Acquisition deals involving such companies are typically financed by domestic banks, especially if the buyer is also situated in Austria. ERSTE, Raiffeisen, UniCredit Bank Austria, BAWAG and Volksbank are among the largest institutions involved in the financing of acquisition deals on a domestic level. However, there are many smaller (mostly regional) institutions that are often favoured by smaller and more locally established companies. Depending on the volume of the transaction, the financing is either provided by a single bank or a banking syndicate. Major deals exceeding EUR100 million are in most cases financed by a banking syndicate due to regulatory standards concerning capital requirements and risk distribution.

Domestic transactions are mainly financed by Austrian banks. Foreign banks are predominant in transactions where large corporations are the targets. In addition, debt funds play a vital role in providing the necessary capital for substantial cross-border acquisitions.

There is no applicable information in this jurisdiction.

The documentation in most international acquisition financing transactions with a higher volume is typically governed by English or German law, whereas smaller transactions are usually governed by Austrian law. Austrian-related security interests are governed by Austrian law as well.

In line with other jurisdictions, Austrian finance transactions are regularly structured based on the documentation published by the Loan Market Association (LMA). However, there is an ongoing trend that local transactions are structured on the basis of a "light version" of the LMA standard.

As with the choice of the law governing the financing documents, the language of the documentation depends on the size of the transaction and whether the involved parties are operating on a domestic or a cross-border level. In cross-border transactions, English is the predominant documentation language. Large domestic transactions, in which the lending syndicate is often supported by international banks, are mainly based on English language documentation as well. On the other hand, small-cap transactions and transactions that involve smaller companies with less international exposure are regularly drafted in the German language.

Once the parties agree on a working language, it typically remains the same throughout the transaction, with one exception. Some security documents that have to be filed in order to be perfected have to be translated to German, since filings to official registers have to be made in the German language.

The legal opinion issued by lenders’ counsel usually covers enforceability of the Austrian security documentation and remedies statements in respect of the non-Austrian law transaction documents, while capacity of an Austrian obligor is usually covered in a separate capacity opinion issued by borrower’s Austrian counsel.

Financial investors regularly acquire a company via an acquisition vehicle established specifically for this purpose (SPV), which is provided with equity and debt capital in order to raise the purchase price. As additional security, the sponsors often provide downstream guarantees in favour of the lenders.

The purchase agreement and the financing documents are concluded with the SPV as the main obligor. It is not necessary that the SPV is established as an Austrian entity. However, most SPVs are established in the legal form of a limited liability company (Gesellschaft mit beschränkter Haftung, or GmbH). The sponsors usually hold the shares of the SPV that are pledged to the financing banks.

Sellers often require the buyer to secure financing prior to signing the commercial deal. In some cases, the potential buyers have to submit a confirmation from the lending banks that the funds are readily available for draw-down upon closing of the purchase agreement.

Buyers can rely on a wide range of possibilities to finance the acquisition of a company. The purchase price can either be raised from own funds, from borrowed capital or from hybrid forms of financing, also known as mezzanine capital.

Equity financing structures are rarely used as the sole financing vehicle in acquisition transactions, mainly because of readily available and cheap debt capital options fuelled by the persistent low interest rate environment in Europe. Nevertheless, in traditional acquisition transactions (apart from LBOs and MBOs), equity is often used in combination with debt capital. Depending on the overall composition of the transaction, equity financing can be structured in the form of an equity capital contribution or in the form of subordinated intercompany loans, or a combination thereof. In addition, if the finance documents are not governed by Austrian law, other forms of equity financing available under such law(s) can be used (eg, preferred equity certificates or convertible preferred equity certificates).

Senior

The most commonly used financing form in Austria is borrowed capital, which is very appealing to investors due to low interest rates and costs. Hence, credit agreements represent the most important instrument in terms of debt financing. In recent years, more and more diverse financing products have been developed and are used in the Austrian financing landscape, such as mezzanine debt financing and hybrid instruments.

Equity Kickers

In acquisition finance, interest and overall costs of a transaction can be kept lower by adding an incentive to the debt security in the form of an equity kicker. Generally, the equity kicker allows the creditor to participate in any increase of the value of the company.

Equity kickers can be structured as convertible bonds (Wandelanleihen), as a form of exit payment depending on the valuation of the company or as an option providing for the right to acquire shares of the company for a pre-arranged fixed price and date.

Since equity kickers are considered too risky for traditional creditors, their practical relevance is mostly limited to LBOs and MBOs. In addition, regulatory provisions stipulated in Austrian corporate law have to be considered when equity kickers are part of the financing structure. Depending on the legal form of the company to be acquired, the use of equity kickers could mandate prior approval of the current shareholders.

Mezzanine capital plays an ever-increasing role in the composition of acquisition financing structures in Austria. In recent years financing via mezzanine capital became a lot more attractive due to regulatory improvements introduced by the Austrian Alternative Finance Act 2015 (Alternativfinanzierungsgesetz).

In general, mezzanine capital is provided in the form of unsecured or subordinated loans combined with a high(er) interest rate. Subordinated loans combined with equity kickers can provide necessary leverage in order to raise the total amount financed by way of senior loans.

If the mezzanine capital is structured in the form of a subordinated loan, the mezzanine creditors’ claims have a lower ranking than the claims of other creditors. From a creditors’ point of view, this structure bears a higher risk in insolvency scenarios. If insolvency proceedings are opened over the assets of an obligor of mezzanine capital in the form of subordinated loans, creditors of such loans will only receive consideration after all creditors with higher ranking claims. In practice, this often leads to non-consideration of mezzanine loans in the case of insolvency.

The relation between mezzanine creditors and other creditors can be set out in an intercreditor agreement. Another option is to contractually subordinate the claims of mezzanine creditors in the security documentation.

Bridge loans are frequently entered into in acquisition-type financing transactions, whereby usually a less extensive documentation (such as the “LMA light” or a bilateral documentation) is chosen by the parties.

In contrast to mezzanine capital, (high-yield) bonds are not commonly used in Austrian acquisition finance.

Private placements (and German law governed Schuldschein loans) have become very popular among Austrian borrowers, although to a lesser extent when it comes to finance an acquisition or MBO/LBO transaction.

In Austria, syndicated loans constitute a common way of financing large transaction volumes and are therefore widely used in acquisition finance and debt restructurings. Intercreditor agreements are usually governed by the law governing the underlying financing documents and, as with loan agreements, are primarily based on the drafts published by the Loan Market Association. However, these drafts cannot reflect all Austrian law-specific issues in relation to syndicated lending, which leads to deviating provisions mainly concerning security perfection and enforcement.

It is common practice to use English as the main contract language, even though some intercreditor agreements concluded in the context of domestic transactions are drafted in German.

The intercreditor agreement serves as the contractual basis between the lenders and stipulates the rules for the distribution of payments received by the agent. For both borrowers and lenders, it is essential to set out the conditions under which the principal is repaid, interest payments are made and fees are paid. In order to streamline the process, the parties typically appoint a bank to be the so-called agent of the syndicate and agree that only payments made to the agent shall be deemed as a discharge of obligations of the borrower. However, the repayment of principal, interest payments and the payment of fees are typically not regulated in Austrian intercreditor agreements, but in the loan agreement itself (please see above for further reference).

Under Austrian law, the binding force of the intercreditor agreement in the event of insolvency proceedings is rather questionable and has not yet been tested in court.

Furthermore, the strict accessory nature of the most important types of Austrian security (such as the pledge of shares, the assignment of receivables or personal guarantees) poses an issue for the provision of collateral under a financing agreement in favour of a security trustee/security agent. Hence, Austrian parallel debt structures are often governed by English law, under which such structure is permitted.

There is no applicable information in this jurisdiction.

There is no applicable information in this jurisdiction.

Austrian law provides for various forms of security that can be divided into two categories, security in personam and security in rem. Security in personam creates a contractual relationship between a third legal or natural person and the beneficiary of the security (ie, the lender) and contractually binds such person to pay for the debtor’s obligation under certain pre-agreed circumstances. On the other hand, security in rem is created over specific assets and extends its effectiveness beyond the contracting parties, which is important in the event of insolvency, whereby the enforcement of security in rem to recover claims is not only possible against the debtor, but also against third parties.

In general, collateral packages are agreed upon on a case-by-case basis taking into account the business parameters of the transaction and the costs of creation and administration of the collateral. Most Austrian acquisition finance transactions are secured by security in rem, out of which the pledge of shares in limited liability companies (Gesellschaft mit beschränkter Haftung, or GmbH) or joint stock corporations (Aktiengesellschaften, or AG) constitutes the most popular form of security.

In addition to the pledge of shares, the collateral package typically includes a pledge over receivables, bank accounts kept in Austria and intellectual property rights (including patents, trade marks or designs and internet domains).

Due to high costs of perfection, mortgages over real estate are only common in real estate transactions. In every other form of transaction finance, (perfected) mortgages are of minor importance. It is also uncommon to grant security over movable assets – such as machines, inventory or vehicles – due to the legal restraints in relation to the perfection of any such security interest (physical possession by the pledgee of the pledged property is required).

Another common form of security is the provision of guarantees by the shareholders. In contrast to guarantees, suretyships are subject to Austrian stamp duty and therefore not commonly used to secure financing transactions.

In recent years, security packages commonly consisted of security interests over assets (eg, shares, receivables and accounts) and guarantees. In line with international financing standards, it became very common that material subsidiaries of the borrower accede to the credit agreement as additional security providers and guarantors.

In Austria, the following types of security rights in rem are widely used to secure a financing transaction (for security types in personam, see 6 Guarantees):

  • pledges (Pfandrechte);
  • security assignments (Sicherungsabtretung); and
  • mortgages (Hypotheken).

The Austrian Civil Code stipulates a twofold procedure with respect to the acquisition and perfection of security rights in rem. Firstly, a contractual agreement on the provision of security has to be concluded between the debtor and the beneficiary of the security. In the next step, a public act of transfer (Publizitätsakt) has to be performed in order to perfect the acquisition of a security right in rem, depending on the asset involved.

Pledges constitute the most common form of security right in rem and can be granted over various types of assets. In general, the registration of pledges is not necessary in Austria, except in the case of intellectual property rights and mortgages, which have to be filed with the land register at the competent regional court.

Shares

The most common form of security granted in the context of acquisition financing transactions is the pledge of shares in limited liability companies or joint stock corporations.

The legal form of the entity of which the shares are to be pledged is important for the determination of the correct act of publicity.

Shares (Aktien) of a joint stock corporation are deemed as tangible assets. Hence, the pledge is perfected by either physical transfer of the shares (in the case of bearer shares) or by endorsement of the share certificate and physical transfer (in the case of registered shares).

Unlike in the case of the shares of a joint stock corporation, the shares (Geschäftsanteile) in a limited liability company are not certificated but deemed solely as a right to a quota in the company. Hence, the rules in respect of the transfer of rights apply and the pledge is perfected by either notification of the company whose shares are pledged or by book-entry (Buchvermerk) in the pledgor’s accounting ledger.

As with shares in limited liability companies, interests in partnerships are also deemed a right rather than a tangible asset.

Inventory

Austrian civil law allows the creation of security over any types of assets, irrespective of whether they are tangible or intangible and movable or immovable. In general, inventory would be considered as movable property.

However, strict publicity and perfection rules typically prevent or complicate the creation and perfection of a security interest over inventory in Austria. The perfection mechanism for pledges over movable assets requires that such assets are handed over to the pledgee. The transfer of inventory to a third party, which holds possession in the pledged asset on behalf of the pledgee, would also be possible under Austrian law. Such transfer of possession is in many cases not commercially feasible for the pledgor since it needs to be able to use the pledged asset in order to continue its business operation. Hence, security packages created for securing the financing of an acquisition generally do not include tangible assets such as inventory.

Bank Accounts

Under Austrian law, security interest might be created over the balance of a bank account by way of pledge or assignment. In most cases, bank accounts are pledged to the secured creditor by an account pledge agreement between the debtor and such creditor.

The pledge over a bank account is perfected either by book-entry or notification of the account bank.

It should be noted that Austrian banks usually hold a pledge over bank accounts based on their general terms and conditions. Hence, it is recommended that a waiver of the account bank should be obtained to ensure that the account pledge ranks ahead of the account bank’s pledge.

The Austrian Act on Financial Collateral (Finanzsicherheitengesetz, or FinSG), as the implementation of Directive 2002/47/EC on financial collateral arrangements (Financial Collateral Arrangements Directive), sets out specific rules for the creation and enforcement of account pledges between financial market professionals (professionelle Finanzmarktteilnehmer) and traditional companies (legal entities, individual companies, partnerships). The Financial Collateral Arrangements Directive aims to limit the administrative burdens for parties using financial collateral (such as pledges over bank accounts) and reduce transaction costs. The FinSG is considered a lex specialis in relation to general Austrian civil law and therefore supersedes the perfection and enforcement rules set out by the Austrian Civil Code (Allgemein Bürgerliches Gesetzbuch, or ABGB). However, the explicit consent of the contracting parties on the applicability of the FinSG is required. Otherwise, the general rules of the ABGB apply.

Receivables

In legal terms, receivables are deemed as rights and can therefore be pledged or assigned for security. Under Austrian law, the assignment of all current and future receivables is permitted, provided that the receivables to be assigned are sufficiently defined and identifiable. Thus, it is possible to assign all current and future receivables by way of a global assignment agreement (Globalzessionsvertrag). Such agreements become binding and effective independently of the existence of any future receivables to be assigned by that agreement.

A pledge of receivables as well as an assignment of receivables is perfected by an act of publicity. The perfection mechanism is either concluded by notification of the third-party debtor or by setting a book entry in the pledgor’s or assignor’s respective books.

Usually, notifications are only made in relation to insurance companies, sellers (in the event of a pledge of rights under the acquisition agreement) and intra-group debtors, whereas book entries are made in relation to trade receivables from third-party debtors.

Intellectual Property Rights

In general, all forms of intellectual property rights can be pledged to creditors in order to secure loans, whereby a differentiation has to be made between IP rights that are registered (eg, trade marks, patents or designs) and unregistered (such as copyrights).

In order to perfect the pledge of registered IP rights, such pledge has to be registered with the respective public register at the Austrian Patent Office (Österreichisches Patentamt). On the other hand, the pledge over non-registered IP rights is perfected via book-entry in the books of the pledgor.

Real Property

Transfer of title regarding real property and the creation of any right in rem relating to real property requires registration in the Austrian land register (Grundbuch). Thus, security over real property is created by entering into a mortgage agreement and filing an application for registration together with a notarised deed of the mortgage with the competent district court (Bezirksgericht).

Two types of mortgages exist under Austrian civil law. The mortgage can either be registered to secure a fixed amount (Festbetragshypothek) or determined not to exceed a specific maximum amount (Höchstbetragshypothek). In any case, the registration will trigger fees of 1.2% of the amount actually registered in the land register (which can be lower than the amount of the mortgage).

Hence, mortgages are not commonly used as collateral in the context of acquisition finance (with the exception of transactions involving real estate companies) due to the high costs of perfection.

In order to avoid the registration fees triggered by the perfection mechanism, some lenders agree to receive only a notarised mortgage agreement, which fulfils the formal criteria to be filed with the land register (such agreement would only create a perfected mortgage upon registration of the mortgage in the land register). Another way of reducing the costs involved is to split up the mortgage amount and create two certificates that could be filed with the land register. At closing, the mortgage is only registered (and thus perfected) with one document. Thus, the fee of 1.2% will only be triggered based on the registered amount.

Movable Assets (Trucks, Trains, Etc)

The same rules apply and issues arise as with respect to inventory (see above, Inventory).

The signatures of pledges over IP rights and real estate need to be notarised. Other than that, there are no specific requirements as to the form of the security documents.

The granting of collateral by an entity to secure obligations of a direct or indirect shareholder or other affiliated entities could be considered as a prohibited repayment of capital to shareholders (see 5.4 Financial Assistance).

In theory, the invalidity of such collateral usually only affects the shareholder or affiliated entity and the entity providing the collateral, but not third parties, such as creditors. However, if the third party had knowledge or was negligently unaware of the violation of capital maintenance rules, such third party would also be affected by the invalidity of the security. Banks involved in the set-up of the financing structure are typically considered to have the relevant knowledge and therefore would be affected by the annulment of security provided in breach of Austrian capital maintenance rules.

Austrian courts and legal scholars have developed a threefold test to determine whether or not the intra-group provision of collateral constitutes a violation of the capital maintenance rules.

  • Adequate fee – the entity providing the upstream or sidestream security interests has to receive an adequate fee that has to reflect market standards.
  • Corporate benefit – the provision of security interests is generally not part of the business model of the security provider in question. Thus, the providing entity must derive certain corporate benefit from the transaction in addition to receiving an adequate fee. A corporate benefit can be argued, for example, if (and to the extent) funds drawn under the loan facility are made available to the Austrian entity.
  • Risk assessment – the members of the management board have to assess the risk that the debtor of the secured obligation suffers default and the creditor enforces the security interest. Hence, the upstream or sidestream provision of security interests has to be in line with the financial capabilities of the security provider and must not lead to an increased risk of insolvency.

If the described criteria are not met, the provision of security is considered void and the shareholder is liable for returning any undue benefit obtained. The members of the management board of the company providing the illegal security might be liable for damages incurred by the company as a result of the void transaction.

In general, Austrian corporate law prohibits the repayment of capital to shareholders of public or private companies – such as limited liability companies, stock corporations or partnerships – in which only such entities are unlimited partners. Shareholders are only entitled to receive (most importantly):

  • the net profits as determined in the financial statements of the respective company, subject to a shareholders' resolution resolving a payout (for example, declared dividends); and
  • payments in the course of a formal reduction of statutory capital and liquidation proceeds.

These so-called capital maintenance rules (Kapitalerhaltungsvorschriften) are mainly for the benefit of third-party creditors and extend to all dealings between the company and its (indirect) shareholders. In order to be valid, such dealings have to be at arm’s length. Any illegal repayment of share capital will lead to the invalidity of the legal transaction and could even trigger personal liability of the members of the management board approving such transaction.

There are no other restrictions.

In general, the pledgee is entitled to enforce and realise the pledge if the secured obligations are not paid in full at maturity. As an alternative to the realisation of the pledge, other security interests (eg, guarantees) or the personal liability of the debtor can be claimed by the secured creditor. Creditors are under no obligation to realise a pledge, with the exception of pledged assets, which might lose their value if not sold in a timely manner (eg, fresh produce). If an obligation is secured by several pledged assets, the pledgee may freely choose which pledge to realise first.

Austrian civil law stipulates two possibilities to enforce a pledge, either by court proceedings or out-of-court sale. In order to initiate out-of-court enforcement proceedings, a written notification of the intention to realise the pledge and a statement of the amount due have to be made to the pledgor. If the pledgor is an entrepreneur, the pledgee may realise the pledge as soon as one week after the pledgee has received the notification of the envisaged enforcement. Otherwise, the realisation may only be initiated after one month has passed.

In most cases, the out-of-court realisation of a pledge has to be carried out by a licensed professional. If the pledged assets have a stock or market price, these assets may also be sold directly by the pledgee for the minimum of such stock or market price (in the case of stock traded on a stock exchange in a liquid market, such direct sale is mandatory).

Alternatively, the secured creditor may enforce the pledge via court proceedings, which, however, is not commonly practised in Austria.

In any case, the proceeds of the realisation shall be used to satisfy the secured creditor’s claims, including accrued interest and procedural costs. Any amount realised in excess of the secured obligations (Hyperocha) has to be returned to the pledgor. If the proceeds are not sufficient to cover the secured obligations, the debtor remains liable for the remaining amount.

Under Austrian law, security interests in personam can be provided in the form of abstract guarantees (Garantien) and accessory suretyships (Bürgschaften). The main difference between a guarantee and a suretyship is that a guarantee establishes an abstract obligation not related to the underlying agreement, whereas a suretyship is legally connected to such underlying agreement and thus of accessory nature.

Guarantees are one of the major forms of security interests used in Austrian finance transactions and are generally provided intra-group for the benefit of the entity acting as borrower. Since a guarantor is obliged to pay the agreed amount upon the beneficiary’s formal request without reviewing the merits of the request, guarantees constitute so-called abstract security interests. A guarantee is independent of the validity of the underlying obligation and the legal relationship between the beneficiary of the guarantee as creditor and the debtor. Thus, a guarantor cannot raise objections that the debtor might have from the underlying commercial transaction. The guarantor may only allege an abuse of rights by the beneficiary (eg, illegal request for payment). Such defence has to be filed with the competent courts in order to obtain an interim court order preventing the calling of the guarantee by the beneficiary. In addition, it has to be noted that if the respective guarantee is not fully independent from the underlying agreement, the guarantor might refuse to honour a payment demand if the beneficiary does not have a corresponding claim against the third person.

On the other hand, a surety can be described as a personal guarantee, since the guarantor undertakes to pay certain obligations of a debtor in the event of the debtor’s default. Due to its accessory nature, a surety is dependent on the existence and the extent of the secured obligations. In contrast to a guarantor, the provider of a surety is able to raise all objections the debtor may have from the underlying obligation.

In the case of disputes, courts regularly have to determine whether the parties of an agreement intended to establish a guarantee or a suretyship because, in practice, the terms “suretyship” and “guarantee” are not used with a clear distinction or sometimes even synonymously. Furthermore, the substance-over-form principle applies when assessing whether a suretyship or a guarantee was concluded. In general, the stronger the protection of the beneficiary is from objections under the underlying agreement, the more likely such agreement qualifies as a guarantee.

Accordingly, the following elements, in particular, are essential for the qualification as a guarantee under Austrian law.

  • The guarantee agreement should only refer to the underlying agreement (eg, in the preamble) in order to determine which benefit/payment is guaranteed. References to the (secured) obligation should be confined to a minimum.
  • The guarantee agreement should contain wording that states that payment is made (i) “upon first demand”, (ii) “without verification of the legal grounds” and (iii) “without raising any defences and objections (such as set-off right)”.

Another important aspect to be considered is the differentiation in treatment of abstract guarantees and accessory sureties under the Austrian Stamp Duty Act. Whereas guarantees are exempt from stamp duty, the provision of a surety triggers fees of 1% of the surety amount. Therefore, it is standard market practice in Austria to include an interpretation clause that clarifies the qualification of a guarantee provided under a loan facility as such and thus mitigates the risk of triggering stamp duty based on the misinterpretation of a guarantee as a surety.

The same rules apply and issues arise as with respect to security rights in rem (see 5 Security).

Generally, an adequate guarantee fee needs to be paid by the entity to the guarantor to align the guarantee with transfer pricing principles (eg, avoiding that the provision of the guarantees is considered a hidden distribution of profits).

Whenever a provider of security rights in personam is required to make payments to a secured creditor under the security agreement, he is assigned by operation of law a claim of recourse against the debtor in the amount paid to the secured creditor.

The Austrian Equity Substitution Act (Eigenkapitalersatz-Gesetz, or EKEG) stipulates that a loan made to a debtor in a crisis is considered as equity subordinated to the claims of all secured and unsecured lenders of such debtor, if the lender is qualified as a major shareholder of the debtor.

In order to be considered as a major shareholder under the EKEG, a shareholder must hold at least 25% of the debtor’s shares. However, for the purposes of the EKEG, any other person, such as a lender in a financial transaction, might be considered as a major shareholder, if such person is granted extensive rights of control over the debtor, together with decisive influence on the debtor’s business.

For purposes of the EKEG, a company is in crisis in the case of (i) illiquidity (ie, inability to meet its financial obligations when due), (ii) overindebtedness (negative equity; ie, if accumulated losses exceed nominal capital and capital reserves, and the company has a negative forecast of survival (negative Fortbestehensprognose)), or (iii) thin capitalisation (ie, an equity ratio of less than 8% in connection with a fictional debt redemption period of more than 15 years), except if no reorganisation of the company pursuant to the Austrian Reorganisation Act (Unternehmensreorganisationsgesetz) is required.

A loan within the meaning of the EKEG does not have to be a money loan in the sense of Austrian civil law. In addition to classic money loans, the provision of any type of security by an entity for the benefit of its subsidiary is also qualified as a "loan" under the EKEG. Non-acceleration during a “crisis” of a loan granted before a “crisis” is not considered a loan “made” in such “crisis”.

A shareholder may only reclaim a loan qualified as equity under the EKEG, including the interest accruing thereon, if the company has successfully been restructured and the crisis has been resolved. A struggling company is not restructured as long as it is insolvent, overindebted or in need of reorganisation, or one of these circumstances would occur through repayment of the loan qualified as equity. Payments effected during the lock-down period of a crisis may be considered an illegal repayment of capital (for more details on Austrian capital maintenance rules, see 5 Security) and are subject to claw-back claims of the struggling company against the respective lender.

In general, debt buy-backs, such as the purchase of a share in a syndicated loan by a borrower or a financial sponsor, are permitted. However, the underlying financing agreements usually include provisions with the aim to contractually restrict such a debt buy-back by the obligors. In addition, it should be noted that under certain circumstances the buyer’s claim might be categorised as quasi-equity and therefore be subject to subordination in relation to the rights of other creditors.

Stamp duty pursuant to the Austrian Stamp Duty Act (Gebührengesetz, or GebG) can apply to certain transactions. The GebG includes an exhaustive list of the relevant types of transactions, including suretyships and assignments. However, in general, abstract guarantees and security rights in rem are not subject to the GebG.

Under Austrian law, stamp duty generally only becomes due if a document evidencing the concerned dutiable transaction is:

  • established in Austria;
  • established outside Austria, but all parties to the agreement are Austrian residents for stamp duty purposes (ie, having a place of management, a representative office, a permanent establishment, or a branch in Austria) and either (i) the transaction concerns an asset located in Austria or (ii) one or more of the parties is entitled or obliged to fulfil its obligations in Austria (eg, payment of the purchase price, notification of an Austrian debtor); or
  • established outside Austria, but the document is brought into Austria and (i) the transaction concerns an asset located in Austria, or (ii) one or more of the parties is entitled or obliged to fulfil its obligations in Austria (eg, payment of the purchase price, notification of an Austrian debtor), or (iii) on the basis of the agreement, legally relevant acts are undertaken, or (iv) it is used before a public authority.

A stamp duty sensitive document evidencing a stamp duty sensitive transaction is not only the agreement itself, but any documentation – eg, written confirmations, notifications, reports, protocols, correspondence (including emails or facsimile messages), notices – that contains certain information about the stamp duty sensitive transaction, potentially even if it is only signed by one of the parties to such transaction. Austrian stamp duty can thus, in particular, be triggered by sending original documents, certified copies or other documents making reference to the transaction (including via emails or facsimile messages) to Austria.

Interest payments made by an Austrian borrower to an Austrian or foreign lender are generally not subject to withholding tax (WHT) in Austria, except for:

  • interest payments on bank deposits or on other non-securitised receivables against banks; and
  • interest payments on publicly offered debt instruments (bonds).

In these cases, the Austrian domestic WHT rate would generally be 27.5% (which may be reduced to 25% for interest paid to corporations). However, no such WHT applies if the interest is paid to:

  • foreign resident corporate taxpayers (without permanent establishment in Austria to which the income is attributable);
  • foreign resident individual taxpayers (without permanent establishment in Austria) if an automatic exchange of information mechanism is in place between Austria and their jurisdiction of residence and if they provide a qualifying tax residence certificate (IS-QU1); or
  • Austrian corporate taxpayers who provide a qualifying declaration of exemption (Befreiungserklärung).

Further exemptions or reductions from WHT on interest may be available under tax treaties. If, for any reason, WHT has been withheld, the taxpayer must file a refund application with the Austrian tax office and must submit the relevant justification. The WHT will then either be refunded completely or partially (if only a reduction under a tax treaty is available). It can also be noted that no specific rule exists under Austrian law that would impose WHT on interest on loans secured by real estate located in Austria.

Capital gains realised on an alienation of loans or bonds can generally only then be subject to WHT in Austria if an Austrian custodian or paying agent is involved in such alienation, with the exemptions or reductions from Austrian WHT on interest payments described above generally being applicable.

There is no applicable information in this jurisdiction.

The effects of a target being regulated in a transaction generally depend on the kind of transaction. While in asset deals a business licence (Gewerbeberechtigung) often has to be obtained, there are usually no consent requirements in share deals. If certain turnover thresholds of the involved companies are met, a transaction may be subject to merger control approval.

Furthermore, an investment control approval might be required if the target company is, in particular, active in the following industries:

  • military defence;
  • security services;
  • energy supply;
  • water supply;
  • telecommunications;
  • traffic infrastructure;
  • education; and
  • healthcare.

In addition, the acquisition of target companies in regulated industries may require prior approval of the competent regulatory body or may be subject to certain notification requirements. Furthermore, the creation and/or realisation of security interests over a regulated target may also require approval or notifications. If a required notification is not made, the voting rights associated with all the shares of the acquirer (not only the additionally acquired shares) are suspended. Additional measures (such as the prohibition of the distribution of profits) are available to the regulator.

With regards to Austrian credit institutions, it should be noted that according to the Austrian Banking Act (Bankwesengesetz), the decision to acquire or increase a direct/indirect qualifying holding in a credit institution has to be notified to the Austrian Financial Market Authority (Finanzmarktaufsicht). A participation in a credit institution is a qualifying holding if it represents 10% or more of the capital and/or voting rights in such credit institution or reaches the other relevant thresholds (20%, 30% or 50%). The notification requirements also apply to persons acting jointly who would acquire or reach a qualifying holding together. In addition, obtaining rights to appoint the (majority of) the management board or other means of providing significant influence over the management of the credit institution is also considered as a "qualifying holding". In this respect, it should be noted that it is the European Central Bank, and not the national authority, that assesses the acquisition of qualifying holdings in credit institutions. Such assessment is to ensure that the proposed acquirer meets certain criteria (eg, financial soundness). Otherwise, the acquisition might be prohibited or subject to certain conditions.

Furthermore, if the regulated target is a listed company, there are significant shareholder notification requirements pursuant to Section 130 et seq of the Austrian Stock Exchange Act (Börsegesetz). In particular, if a person, directly or indirectly, acquires or sells shares of such company, it is obliged to notify the Austrian Financial Market Authority, the Austrian Stock Exchange and the target company itself if, as a result of such acquisition, the holding in the target company reaches, exceeds or falls below certain thresholds between 4% and 90%. In its articles of association, the target company can set a lower threshold at 3%. The Austrian Takeover Act (Übernahmegesetz) also provides for the possibility of the target company to lower the takeover threshold that triggers the notification obligations in its articles of association. Such notifications must be made immediately, or at the latest within two trading days. Additionally, notification requirements can apply when certain financial instruments are held in the target company or when the person can exercise or influence the exercise of voting rights without being the owner.

Besides general civil law, certain regulatory provisions that aim to reduce asymmetric information between the issuer and the investors have to be considered in relation to listed target companies (eg, ad hoc publicity, significant shareholding notifications). According to the Austrian Takeover Act, amongst others, a mandatory public offering has to be made to all shareholders regarding the direct or indirect acquisition of a controlling interest (which is a holding that involves more than 30% of the permanent voting rights) in a listed company (mandatory bid). However, prior to such mandatory bid, the bidder has to ensure sufficient financing for the complete cash consideration offered. In this respect, it should be noted that the offer should also include the conditions of such financing. The mandatory bid pursuant to the Austrian Takeover Act may affect the realisation of a pledge over shares in a listed company or the granting of voting rights to a pledgee.

In the event of an initial public offering, the initial shareholders are usually prohibited by contract from selling their shares for a certain period ("lock-up period"). Such lock-up agreements should therefore always include a carve-out for the sale of shares by a pledgee in case of an event of default.

BINDER GRÖSSWANG Rechtsanwälte GmbH

Sterngasse 13
1010 Wien

+43 (1) 534 80 0

+43 (1) 534 80 8

vienna@bindergroesswang.at www.bindergroesswang.at
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BINDER GRÖSSWANG Rechtsanwälte GmbH has been ranked among the leading commercial law firms in Austria for more than 50 years. Its activities focus on international M&A and financing transactions, major arbitration and litigation cases, and advice on matters of corporate, competition, tax, IP, insolvency, real estate and employment law. Binder Grösswang is regularly engaged by top-tier firms across the globe. Clients include domestic and international financial institutions and corporates as well as important Austrian infrastructure companies.

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