The key players on the lenders' side remain local or international banks granting funds to the buyers. However, there has been an increase in the number of international venture capital funds and debt funds taking the role of direct acquirers of companies in Portugal, which are typically self-funded.
Moreover, there is a recent regulatory change in Portugal that will have an impact on banking lending activities. On 18 July 2019, the Council of Ministers approved a decree-law that envisages, among other changes, the creation of loan funds as an alternative financing instrument, specially designed to accommodate the difficulties felt by small- and medium-sized enterprises (SMEs) in obtaining financing through banking loans. The purpose of these loan funds is to lend directly to debtors, to participate in loan syndicates or to acquire loans originated by banks or other entities, through credit assignments. The decree-law is still pending enactment but will come into force on 1 January 2020.
The financing of acquisitions can be made in many ways and structures, but the most common are banking loans, either through syndicated loans or a traditional loan secured with shares of the SPV and/or the future shares to be acquired in the target.
Other types of security or funding structures may be used, depending on the specific characteristics of the target and of its business sector and, naturally, of the acquirer. A relevant sector to take note of is the sector relating to tourism and the financing of hotels and other accommodation facilities, where either a traditional loan agreement format with a comprehensive security package or a bond issuance format also backed by a comprehensive security package combined with the appointment of trustee-like representative investors or lenders is used.
Portuguese law is usually the governing law of acquisition financing agreements, although English law may also be used in certain transactions in the market. Security packages tend to be governed by Portuguese law, due to specific legal provisions on security and to registration and formalisation requirements. Additionally, acquisition finance transactions governed by a foreign law require significant input from Portuguese lawyers in many critical areas, such as corporate law and insolvency regulation, among others.
Financing agreements in the Portuguese market do not typically follow an industry standard format, such as the Loan Market Association (LMA) documentation which is used in the UK market. However, many of the customary features of Portuguese acquisition financing documentation replicate LMA standards but are adapted to Portuguese law standards and requirements, especially in transactions of syndicated loans.
The majority of acquisition financing agreements are drafted in English, due to the international dimension of the transactions that are currently taking place in Portugal. This does not generally cause any issue, except for documentation that must be submitted to the Land or Commercial Registry Offices, in which case it is often necessary to provide translations into Portuguese.
The issuance of legal opinions in acquisition finance transactions is carried out by the lender's legal counsel on the legality, validity and enforceability of the financing agreements, whilst the borrower's legal counsel is required to issue a legal opinion on the capacity and non-insolvency of the borrower.
Senior loans comprise:
Mezzanine financing is also commonly used in Portugal as subordinated debt. However, this type of loan is secured.
PIK loans are not common in Portugal.
Bridge loans are not common in Portugal.
In recent years, the issuance of bonds with private placement and complex structures has become more common in M&A transactions in Portugal. This trend can be mainly explained as being for tax reasons.
Loan notes are not common in Portugal.
Inter-creditor arrangements aim to establish the rights and liabilities of each creditor and to determine priorities regarding payments or distributions in cash, enforcement of securities and proceeds of enforcement. These arrangements are sometimes entered into in acquisition finance deals in Portugal, especially in financing structures that involve numerous lenders and investors, and where an inter-creditor agent is responsible for taking actions on behalf of the creditors. Inter-creditor arrangements are usually subject either to Portuguese law or English law.
Contractual subordination provisions are usually included in inter-creditor arrangements entered into in Portugal. Under these provisions, certain (junior) creditors agree to rank behind other (senior) creditors in the priority for collecting repayment from the debtor.
In the case of default or insolvency of the debtor, credit claims must be ranked according to statutory rules (for example, secured claims rank above common and subordinated claims). However, the Portuguese Insolvency Law (Decree-Law No 53/2004 of 18 March 2004, as amended) allows parties to agree on the subordination of certain credit claims.
Structural subordination is not common in Portuguese acquisition transactions. Structural subordination refers to a financing structure where senior creditors lend funds directly to the target company and junior creditors lend to a holding of the target company, so that junior creditors only have access to the assets of the target after all the target's direct creditors (including senior creditors) have been paid, and the remaining assets have been distributed to the company as an equity holder.
Payment of Principal
Liabilities are typically categorised into senior and junior liabilities. Junior or subordinated liabilities are subordinate to senior credits and must be paid after all senior credits have been paid. Within these categories, liabilities can either rank pari passu without any preference, or according to priority rules agreed between the parties.
The rules are the same as for repayment of principal (see Payment of Principal above).
The rules are the same as for repayment of principal (see Payment of Principal above).
Claw-back arrangements are not common in Portugal.
Subordination of Equity/Quasi-equity
Equity or quasi-equity financing is not typically subject to contractual subordination in Portugal.
The intercreditor agreements are of major importance when there are different types of creditors, in particular when the acquisition is simultaneously financed by bank financing and bond issuance. As the latter usually has a longer maturity, the intercreditor agreement plays a crucial role setting forth priorities regarding payments or distributions in cash.
Typically, the hedging liabilities are treated as senior liabilities. Moreover, the hedging agreement typically provides hedging-termination rights, which are, however, limited to major events of default (eg, insolvency).
There are different types of security, with different formal requirements and execution processes depending on the assets to which they relate.
Under Portuguese company law, shares can refer both to:
a) nominative shares represented by certificates; and
b) dematerialised shares.
The shares above can be encumbered and granted as security by means of a pledge. Quotas of companies limited by quotas may be subject to transfer restrictions and are not regarded as transferable securities. Quotas are pledged by means of a written agreement and registration with the competent Commercial Registry Office.
The shares of joint-stock companies can be tendered as transferable securities.
To be valid and enforceable, pledges over nominative shares represented by certificates must be:
Pledges over dematerialised shares are normally valid and effective if they are registered in the securities account, which can be held by any of the following:
In any case, a written agreement outlining the terms of the pledge is always advisable.
Inventory can be granted as security for financing agreements by means of a pledge. To be valid, a pledge must meet the following conditions:
Specific requirements apply to financial pledges (penhores financeiros).
Bank accounts and receivables
Under Portuguese law, different types of security can be granted depending on the type of receivables in question. In most cases, receivables can be considered as credit rights to be paid off under specific agreements, in which case security can be granted by means of a pledge over the credits. A pledge over credit rights must comply with the two following formalities:
Bank accounts are pledged in a similar way. The credit institution where the account is domiciled must be notified to block the account and, in the case of execution of the pledge, to retain the specific pledged amount of funds. This process used to be burdensome, but the reform of the Portuguese Civil Procedure Code has simplified the formalities and requirements for enforceability of pledges over bank accounts.
Under Portuguese law, there are two other types of security that are usually used in facility agreements, and which take into account a different definition of the concept of "receivable". Receivables can also be considered as either:
Intellectual property rights
Intellectual property rights can be granted as security by means of a pledge. A pledge must be registered with the Portuguese National Intellectual Property Institute.
Real estate property can be encumbered by a mortgage. A mortgage is a special guarantee granted over an immovable asset. A mortgage must be granted in written agreement, which must be in the form of a public deed or a certified private document (documento particular autenticado).
After the parties enter into a valid mortgage agreement, the mortgage is only effective upon registration with the competent Land Registry Office. Once created, a mortgage is ancillary to the secured obligation and typically only ceases to exist on discharge of the secured obligation.
As for inventory, most movable assets (except those subject to registration) can be granted as security to financing agreements by means of a pledge. For movable assets subject to registration (such as boats, cars and aircraft), the adequate security instrument is a mortgage.
Financial collateral arrangements
Financial collateral arrangements are governed by Decree-Law No 105/2004 of 8 May 2004, as amended, which implemented Directive 2002/47/EC of European Parliament and the Council of 6 June 2002 on financial collateral arrangements. The collateral granted under financial collateral arrangements can relate to:
Financial collateral arrangements cannot be declared invalid, void or be reversed on the sole basis that those arrangements have come into existence on the date of opening of winding-up proceedings. In the event of the opening or continuation of winding-up proceedings or of the adoption of reorganisation measures in relation to the collateral-provider, the financial collateral agreements remain in force vis-à-vis third-parties, provided that the collateral-taker provides evidence that it was not and should not have been aware of the opening of the winding-up proceedings or adoption of reorganisation measures.
A mortgage over a real estate property will be granted by means of a written agreement, in the form of a public deed, and must be registered before the land registry office.
The form requirements for the creation of a shares pledge depend on the type of securities. A pledge over shares represented by certificates must be registered in the share certificates and the company’s share registry book, while a pledge over shares represented by certificates deposited with credit institution or shares represented by book entries must be registered in the individual ownership account where the securities are deposited. Quotas are pledged by means of a written agreement and registration before the commercial registry office.
In respect of the financial collateral arrangements, the only form requirement is that the security document must be evidenced in writing.
In acquisition finance transactions, the major restriction on the provision of upstream securities is that relating to the financial assistance rule, as explained below. Furthermore, the justifiable corporate benefit criteria shall also be assessed, especially when the company which provides the security has minority shareholders.
Joint-stock companies (sociedades anónimas) cannot grant loans or by any other means grant funding or security to a third party to acquire or by any other means subscribe to its own shares (Article 322, Portuguese Companies Code, which implements Article 23 of Directive 77/91/EEC of 13 December 1976, as amended). Additionally, joint-stock companies cannot grant financial assistance to third parties for the acquisition of the shares of a company within the same group of companies. Any actions that fall within the scope of the restrictions on financial assistance must be deemed null and void. These restrictions aim to:
However, and as in most jurisdictions, exceptions apply in the case of financial assistance provided either:
Some Portuguese scholars argue that financial assistance prohibition rules only apply to joint-stock companies and not to companies limited by quotas (sociedades por quotas), as there is no specific prohibition of financial assistance for this type of company, but the matter remains debatable.
As a result of these rules, leveraged acquisitions of joint-stock companies (sociedades anónimas) are generally not permitted. Specifically, and similarly to other European countries, there is some debate between scholars on whether leveraged buy-out (LBO) transactions qualify as financial assistance. Some argue that LBOs qualify as financial assistance, since the special purpose vehicle has typically no significant activity that can provide an economic justification for the merger. Other scholars state that, due to the complex corporate procedure required in the case of a merger in order to safeguard the positions of minority shareholders and creditors (for example, creditors have a period of opposition before the merger is completed), an LBO transaction would not qualify as financial assistance. There are no relevant court decisions on this matter that can help to resolve this issue.
To avoid the problems related with financial assistance rules, the following structures may be implemented:
All parties must take into consideration the rules on financial assistance. Buyers that intend to conduct leveraged acquisitions and LBO-type transactions cannot rule out the risk of application of these rules.
The directors of commercial companies are bound to a duty of loyalty, under which they must act for the exclusive benefit of the company, taking into account the long-term interests of the shareholders and other stakeholders who are relevant for the company's sustainability, such as employees, clients and creditors.
This duty of loyalty notably comprises:
According to Portuguese law, the enforcement of security would depend on the relevant contractual arrangements. However, in general, the secured party (beneficiary) must file a court procedure to enforce security due to default.
In order to avoid judicial procedures, it is common that the secured parties (beneficiaries) try to establish contractual arrangements, to the extent permitted by law, to try to sell the assets granted as security to a third party and set off the amount of debt with the proceeds of the sale. This sale to third parties requires the consent of the owner of the asset (which in certain cases may be previously established under the security agreement).
If a debtor fails to comply with a payment obligation, the creditor may declare an event of default and bring enforcement proceedings against the former, to be paid against its assets. Moreover, the parties may agree to other events of default and acceleration events in the loan agreement.
As a general rule, creditors need to hold an enforceable title (título executivo) to bring judicial enforcement proceedings against a debtor. In order to be granted enforceability before the court in the case of judicial enforcement proceedings, loan agreements should be entered into in the form of a public deed, or a private certified document (documento particular autenticado).
When the relevant requirements are fulfilled, the sale of seized assets within a judicial enforcement proceeding may be performed by means of a private sale and purchase agreement. Furthermore, a secured creditor is generally not entitled to appropriate the secured asset.
Two exceptions should be highlighted:
The enforcement of security interests may be made through (judicial) declaratory or enforcement proceedings.
There are two main categories of special guarantees:
Personal guarantees involve the allocation of a third party's assets as a guarantee for compliance with obligations under a facility agreement. The lenders can have their credit rights guaranteed by an additional set of assets that is different from the debtor's assets.
In rem guarantees are normally provided by both the debtor and a third party, and entitle the beneficiary to be paid out of the proceeds generated by the sale of the encumbered asset.
There are different types of security/guarantee, with different formal requirements and execution processes depending on the assets to which they relate.
Portuguese Law places restrictions on companies for granting guarantees for the repayment of debts other than their own. The granting of personal or in rem guarantees to secure debts of other companies is considered to be against the interests of the company unless either (Article 6, Portuguese Companies Code):
Portuguese scholars usually differentiate between:
A guarantee or security is deemed to be null and void if neither the "corporate benefit" nor the "control or group relationship" criterion is fulfilled.
Practical solutions include:
Portuguese law does not require the provision of guarantee fees. However, the granting of guarantees to secure debts of other companies should not be deemed “for no consideration" provided that there is a justifiable corporate benefit for the company granting the guarantee.
Before an acquisition, the lender should confirm that the borrower has no outstanding debts towards the Social Security or the tax authorities, or it will become jointly and severally liable with the borrower for these debts.
The lender can also become liable for any damages caused to the borrower as a result of a failure to provide funds to finance the acquisition (if it has previously agreed to assume this obligation towards the borrower).
Contractual subordination provisions are usually included in inter-creditor arrangements. Under these provisions, certain (junior) creditors agree to rank behind other (senior) creditors in the priority for collecting repayment from the debtor.
In the case of the default or insolvency of the debtor, credit claims must be ranked according to statutory rules. However, the Portuguese Insolvency Code allows parties to agree on the subordination of certain credit claims.
However, structural subordination is not common in Portugal. This is the process whereby senior creditors lend directly to a company, and junior creditors lend to a holding of the company, so that junior creditors only have access to the assets of the company after all the target’s direct creditors (including senior creditors) have been paid, and the remaining assets have been distributed to the company as an equity-holder.
Under Portuguese law, as a general rule, any acts detrimental to the insolvency estate carried out within two years prior to the declaration of insolvency can be clawed back, provided that the third party had fraudulent intention. Any act or transaction will be presumed to be detrimental, notably if it has been executed without consideration.
Therefore, in the context of acquisition finance, the granting of upstream and cross-stream securities are likely to trigger the application of the claw-back rule, taking into account that the existence of a corporate benefit may be harder to demonstrate, and, as such, the security may be deemed a detrimental act.
Under Portuguese law, a borrower or a financial sponsor can engage in a debt buy-back, which is typically a management decision (as it relates to an investment). In any case, when engaging in a debt buy-back, the directors must comply with their duties towards the company and its stakeholders.
By buying back its own debt, the company will become both creditor and debtor. Under Portuguese law, this will lead to a cancellation of the credit/debt in accordance with the doctrine of confusion (confusão) (Article 868, Portuguese Civil Code).
According to the Portuguese Stamp Tax Code, and as a general rule, the granting of loans is subject to stamp tax if it is considered to take place in Portugal, which is deemed to occur if the relevant agreements are executed in Portugal or if the relevant loan is granted to or by a resident entity, as well as if the relevant agreements are presented in Portugal for any legal purposes. A borrower is resident in Portugal for this purpose if it has its registered office, or is acting through a branch or other permanent establishment, in Portugal.
Stamp tax is due on loans made to a borrower resident in Portugal as well as on loans made by a lender resident in Portugal, unless the specific loan is exempt and it can be a significant cost in financings in the Portuguese market. Stamp tax is levied on the value of the loans at a rate of up to 0.6% depending on the loan maturity and should be borne by the borrower. Additionally, interest and fees charged by financial institutions are also subject to stamp tax at a rate of 4% (reduced to 3% for fees due for the granting of guarantees).
The exemptions from stamp tax on loans are very limited and mostly relate to loans between financial institutions or by certain multilateral development banks, as well as to direct shareholder loans, provided that certain conditions are complied with.
However, neither bonds nor interest paid thereon are subject to stamp tax. As such, in addition to the matter of withholding tax payment, the use of bond-loan structures may also be more tax-efficient from a stamp tax perspective, unless they involve Portuguese security or guarantees.
As a general rule, stamp tax is due on guarantees and security granted in Portugal, which is deemed to occur if the relevant agreements are executed in Portugal or the guarantees are granted in favour of Portuguese resident entities, as well as on guarantees presented in Portugal for any legal purpose.
However, no stamp tax is due on guarantees/security whenever they are ancillary to a contract specifically taxed under the Stamp Tax General Table, and granted simultaneously to the secured obligation. Therefore, if a guarantee or security interest is granted to secure a loan in relation to which stamp tax is payable, and provided the documents whereby the relevant guarantee or security are granted are executed on the same day as the relevant loan documentation, no stamp tax is payable on that guarantee or security.
Stamp tax on guarantees/security is levied on the maximum secured value at a rate of up to 0.6%, depending on the term of guarantees/security, and should be borne by the entity that is responsible for the presenting the relevant guarantee (usually, the borrower).
Even if no stamp tax is initially due because a guarantee or security interest is deemed granted outside Portuguese territory, stamp tax may be due later on if the relevant guarantee or security interest is enforced in Portugal or the documentation for that guarantee or security is presented in Portugal for any legal purposes, such as, for example, registration.
As a matter of law, resident lenders, guarantors and security-providers are generally primarily liable for delivering the Stamp Tax due to tax authorities, even though the economic burden falls on the borrower.
In cases of loans granted to Portuguese resident entities by non-resident entities and interest and fees charged by non-resident financial institutions to Portuguese resident entities (in both cases, where the operations are not intermediated by Portuguese resident financial entities), stamp tax should be assessed and borne by the borrower.
Withholding Tax/Qualifying Lender Concept
According to the Corporate Income Tax Code (CIT Code), interest due by a resident in Portugal to a non-resident entity is, as a general rule, subject to withholding tax at a final rate of 25% or 35% (if the income is obtained by non-resident entities located in a country, territory or region in the “blacklist” issued by the Portuguese Ministry of Finance (Tax Haven) or to bank accounts of which the beneficial owner is not disclosed).
However, the withholding tax may be reduced under a Double Tax Treaty (DTT), if, prior to the interest payment, the beneficiary of the interest provides the paying entity with a specific form, duly certified by the tax authorities of his or her country of residence. The reduced DTT withholding tax rates usually vary between 10% and 15%.
Additionally, there are certain withholding tax exemptions that may apply to the payment of interest, provided that certain conditions are met, the most important of which are the following:
held in more than 25% by Portuguese resident entities; and
resident in a tax haven.
The interest payments made through Interbolsa to non-resident investors regarding bonds and securitisations transactions (when integrated in Interbolsa, Clearstream or Euroclear) are exempt from withholding tax under Decree-Law No 193/2005 of 7 November 2005, as amended.
The concept of “qualifying lender” is usually contractually construed on the basis of the above-mentioned reductions of withholding tax rate/exemptions, which are relatively limited.
Currently, the most common solution used in the Portuguese market to try to avoid the withholding tax issue is the bond-loan structure, whereby the loan is made by way of a bond issuance, which is subscribed for by the original lenders. Instead of using the terms and conditions common in capital markets transactions, the terms and conditions of these bonds will typically include provisions that are akin to standard loans, particularly those concerning covenants and events of default.
Nonetheless, adaptations are required to the language used in various provisions and there are certain limitations as to how far it is possible to emulate in a bond issuance the terms and conditions applicable to standard loans, in view of the fundamental conceptual differences between contracts and securities. Moreover, the use of a bond-loan structure gives rise to certain additional transactional costs, such as the fees charged by the clearing system and by the paying agent appointed by the borrower.
As a general rule, fees paid by Portuguese resident companies for services rendered by non-resident companies are subject to Portuguese withholding tax at a rate of 25%.
However, whenever the beneficiary of the income is resident in a country with a DTT with Portugal, no Portuguese withholding tax should be due if, prior to the date on which the relevant fees are paid, the services' supplier provides the paying company with
The above notwithstanding, please note that as a general rule, under Portuguese law, fees due by resident entities for the rendering of financial services by non-resident entities are not subject to Portuguese withholding tax.
According to the CIT Code, there are no rules on thin capitalisation. However, interest-stripping rules apply and transfer-pricing rules may affect the deductibility of financing expenses whenever arm's-length conditions are not duly observed.
As a general rule, the CIT Code specifically provides that only interest on loans incurred in order to generate or guarantee income subject to CIT are tax-deductible. This means, for example, that the interest paid on financing obtained in order to refund equity or proceed with dividend distributions tends to be considered as not being related to the activity of the company (ie, not incurred to generate or guarantee income) and therefore as not deductible for tax purposes.
Furthermore, net financing expenses are only deductible for CIT purposes up to the highest of the following amounts:
For the purposes of the above-mentioned limits, net financing expenses are defined as the difference between the financial expenses and the income derived from financing in a given tax year.
This limitation to the deductibility of financial expenses is applicable to all companies subject to CIT, except companies subject to the Bank of Portugal and Portuguese Insurance Institute supervision, Portuguese branches of credit institutions, other financial institutions or insurance undertaking, and securitisation companies, formed pursuant to the Decree-Law No 453/99, of 5 November 1999.
The amount of net financing expenses which is not deductible as it exceeds the maximum limit for the relevant tax year can be carried forward and deducted in the following five years (after the deduction of the net financing expenses incurred in the respective year and always subject to the limit applicable in each year).
If, during a given year, the amount of the net financing expenses is lower than the limit of 30% of the Tax EBITDA of that year, the excess amount within this limit (ie, the difference between 30% of the Tax EBITDA and the net financing expenses) may be offset against the net financing expenses of the following five years.
The acquisition of a target does not usually require any regulatory consents or licences under Portuguese law. However, there are special supervision rules and licensing requirements if the target operates in certain regulated sectors, such as:
Effects on the Transaction
The main effect on the transaction is that it must be structured and documented so that all authorisations and licences required are obtained before closing (this is usually set out as a condition precedent).
Specific Regulatory Rules
Listed companies can only be acquired through a tender offer, made publicly and in accordance with the Portuguese Securities Code (Código de Valores Mobiliários) (CdVM), which imposes specific legal requirements for tender offers, especially with regard to transparency and publicity.
The legal obligations applicable in the case of tender offers include the following:
Methods of acquisition
There are two main methods of acquisition of a listed company, mandatory tender offers and voluntary tender offers (Article 187 of the CdVM). Voluntary offers are legally defined as offers that are not mandatory. Mandatory tender offers must take place when a shareholder acquires either:
The relevant shareholder can present adequate evidence to the CMVM that, despite holding more than one third of the voting rights of the company, it does not exercise effective control over the company and is therefore exempt from the obligation to submit a tender offer.
The consideration to be offered for the acquisition of the target must be either deposited in a bank account or secured through the use of proper guarantees.
Additionally, in the case of a mandatory tender offer, Portuguese law provides for certain minimum requirements regarding the consideration offered. The consideration of a mandatory tender offer must not be lower than either of the following (Article 188 of the CdVM):
Under Portuguese law, the acquisition of more than 90% of a target grants the right to acquire the remaining shares in the company and to squeeze out the remaining minority shareholders, who are legally forced to sell. Conversely, once a 90% stake is acquired, the remaining minority shareholders can demand the purchase of their shares.
Edifício Rodrigo Uría
Praça Marquês de Pombal, 12
+351 21 030 86 00
+351 21 030 86 01Ferreira.Malaquias@uria.com; email@example.com www.uria.com