Private Equity 2024 Comparisons

Austria has a traditionally debt financed economy. But the forecast in the private equity sector looks significantly more positive from year to year due to several factors.

One current decisive factor that will take on increasing importance will be the availability of outside capital and the overall economic situation. Private equity will significantly gain ground due to the current interest rate and financing environment, which has put a damper on companies obtaining debt financing. These companies will need to seek alternative funding sources.

In addition, Austria’s private equity, venture capital and start-up scenes have generally become much more established in recent years, partly due to an increase in publicly and privately organised interest groups and growing media attention that has highlighted several prominent Austrian success stories. In addition, increasing numbers of Austrian companies are active in the healthcare, pharmaceutical and tech sectors as well as in very new technologies such as artificial intelligence, all sectors not easily financed through classical debt financing.

The Introduction of the FlexCo

There also has been a major legal development that should make Austria a more attractive market for private equity and venture capital players. To make Austria more competitive in the start-up scene, the Austrian government introduced a new legal form of corporation – the flexible company (Flexible Kapitalgesellschaft or “FlexCo”) in 2024. The FlexCo forms part of the start-up package of the Austrian government, which was designed to support the needs of young companies. The FlexCo is similar in concept to the Austrian limited liability company (Gesellschaft mit beschränkter Haftung) but also contains elements of the Austrian stock company (Aktiengesellschaft) along with several new provisions.

A core element of the FlexCo is the newly established possibility of providing company value shares (Unternehmenswert-Anteile). These shares enable participation in the economic success of a company without providing full shareholder rights. Such shares are geared towards gaining the attraction of employees and investors. Furthermore, the acquisition of own shares by a company is possible and the minimum capital contribution per share only amounts to one euro. On the whole, the FlexCo aims to simplify the raising of capital for young companies.

In the first half of 2024, about 336 FlexCos were established in Austria. This equates to around one in twenty newly founded corporations being established as a FlexCo. The Austrian limited liability company thus far still remains the preferred corporate form in Austria, but the coming years will show how attractive the FlexCo is as a corporate form. As with many newly created legal regimes, the introduction of legislation on the FlexCo has come with some growing pains. One of the uncertainties that needs to be addressed is whether the company value shares are subject to the strict capital maintenance regulations that exist under Austria law.

Private Equity in Austria

As to specific sectors where private equity plays an increasingly important role, mention must be made of generational change and succession planning in family businesses. These still form the vast majority of all companies in Austria with more than 50,000 companies looking for a successor. The real estate sector will also drive demand for private equity, as its role in real estate financing and the refinancing of existing real estate financing is expected to increase significantly. Finally, it remains to be seen to what extent private equity will gain ground in the area of large (including municipal) infrastructure project financing due to the high demand that exists for this. Austria also remains an interesting jurisdiction for group structuring due to a favourable tax situation, high quality of living and highly educated staff. Currently, there are ongoing several legislative processes aimed at further improving the environment for private capital, as well as improving the options for private financing and employee participation. See also 2.1 Impact of Legal Developments on Funds and Transactions.

ESG

The ever-growing importance of ESG, especially of environmental, social and management standards in the private equity industry, undoubtedly will play a major role in the future.

The Austrian market is dominated by small and medium-sized privately held companies. Hence, Austria has less private equity deal activity compared to many other European and international markets. Historically, many of these small and medium-sized companies have relied upon strong bank financing available to them. This is now undergoing a transition. The current macroeconomic factors such as rising interest rates, high inflation and in particular growing regulation pose a threat to Austria’s classically debt financed system and may become the door-opener for increased private equity activity.

As in other jurisdictions, deal makers approach private equity and M&A projects in Austria cautiously given the uncertainty in macro-economic parameters. Generally, the market has shifted from a seller-side market to an increasingly buyer-side market with significantly less buyer-side competition and resulting interesting investment opportunities especially for those investors not heavily reliant on debt financing for their investment.

Due diligence generally has taken on a significantly greater role today than in the past. Especially in the fields of sustainability, business planning and strategy, the risk appetite of investors has gone down. In addition, the increasing availability of W&I insurance for mid-cap transactions has become a significant boost to risk reduction for investors. Obtaining a solid W&I insurance package requires the conducting of a sound and detailed due diligence.

Currently, the EU’s new sustainability requirements are causing anxiety for many companies. The EU directive on CSR reporting, the Non-Financial Reporting Directive (NFRD), has been updated with the Corporate Sustainability Reporting Directive (CSRD), which extends the reporting obligations for most companies as follows: on 1 January 2024 for those already subject to the NFRD (first report 2025); on 1 January 2025 for large companies not yet subject to the NFRD (first report 2026); January 2025 for large companies not yet subject to the NFRD (first report 2026); on 1 January 2026 for listed SMEs as well as for small and non-complex credit institutions and captive insurance companies (first report 2027) with an opt-out until 2028.

The challenges will be:

• willingness and ability to apply the sustainability requirements;
• globally consistent and formalised basis for sustainability reporting;
• globally consistent data to effectively address climate-related financial risks; and
• implementation capacity in companies to apply the standards.

Against this background, the International Sustainability Standards Board (ISSB) decided to introduce explanatory guidance and transition relief to reduce the burden on these companies. A package of facilitations for SMEs was announced to support the use of the standards and allow companies to expand their approach to their use over time. For companies initially required to submit a sustainability report, the ISSB intends to introduce a program to support initial adoption while market infrastructure and capacity is built.

In addition to the regulatory developments, limited partners are increasingly demanding that private equity and venture capital firms incorporate ESG considerations and practices into their portfolio strategies. Limited partners (LPs) are seeking greater transparency on how ESG factors are considered in investment decisions and expect regular reporting on ESG performance, leading to a trend towards standardisation of ESG metrics and benchmarks. Initiatives such as the ESG Data Convergence Initiative, driven by large PE firms and LPs, aim to create a common set of ESG metrics to enable better comparison and analysis across portfolios.

An additional development is the adoption of the Venture Capital Funds Act (WKFG). The WKFG has been in force in Austria since July 2023 and enables venture capital funds to be established in the legal form of a stock corporation (abbreviation: WK-AG). The units are therefore issued as shares. The WKFG regulates the rights and obligations of these funds, for example how they may make investments and that the risk must be diversified.

The WK-AG must be externally managed by an alternative investment fund manager (AIFM), and the management board and the supervisory board of the WK-AG are appointed to monitor this.

The goal of the legislature is that numerous funds will be set up so that fresh capital flows into young Austrian companies. However, this will require the new framework conditions to be regarded as sufficiently attractive in comparison to other jurisdictions.

The responsible supervisory institutions in Austria are the Financial Market Authority (FMA), the Federal Competition Authority (BWB), the Federal Ministry for Digitalisation and the Takeover Commission (UeK). There are no regulations that specifically address or discriminate against private equity transactions. In order to protect the public interest, there are in fact certain restrictions regarding the transaction process.

The Austrian Investment Control Act (ICA)

The ICA provides that the acquisition (in part or in full) of Austrian companies by natural or legal persons from third countries (countries outside the EU, EEA and Switzerland) is subject to an authorisation requirement under certain conditions, with different threshold triggers applying to different types of infrastructure (10% and 25%). The ICA contains an extensive listing of sectors that are regarded as critical infrastructure and the view taken by the ICA authority is that if a target falls in the infrastructure sector, then approval needs to be sought independent of whether there is any danger to national security in the individual acquisition. For this reason, the ICA has come under criticism as being far too over-reaching. By way of example, “information technology” is regarded as a critical infrastructure, which essentially means that all targets focused on software activities trigger an ICA approval requirement if the relevant percentage threshold is met. The ICA authority will investigate whether the proposed transaction could lead to a threat to public security or public order.

As a result, there have been significantly more approval applications made in recent years, which has become a significant timing factor that cannot be underestimated for foreign investors.

Once the approval requirement is triggered, the parties cannot implement the transaction until there is approval under the ICA. Therefore, the investment agreement or SPA must contain a condition precedent of ICA approval. Transactions that are required to be filed with the ICA authority are regarded as not having been validly entered into until approval is obtained. The ICA authority can also order the unwinding of a transaction that has not been properly notified.

Austrian Merger Control Act (KartG)

Any trading party operating in Austria is bound by the antitrust rules in the exercise of its economic activity. These are directly linked to European competition law (Articles 101 and 102 TFEU) and to domestic legislation (in particular the Cartel Act and the Competition Act).

In particular, merger control is a key element in private equity transactions. Mergers that exceed clearly defined turnover thresholds must be notified with the relevant competition authority (either the Austrian Competition Authority or the European Commission). Starting at a domestic turnover of EUR1 million, transactions may require prior clearance.

Due to the recent sharp rise in interest rates and high inflation, more stringent antitrust measures are expected soon. So far, however, there have been no tangible proposals from the government.

In EU merger control and in many Member States, the so-called SIEC test is used as a test criterion for a significant impediment to effective competition.

This criterion allows for a more comprehensive assessment than the market dominance criterion. According to the SIEC test, a concentration should be prohibited if it is likely to significantly impede competition, even if it is below the market dominance threshold. With a legislative amendment, the SIEC test was also introduced in Austrian law as an addition to the market dominance test.

The Red Flag reporting standard has now become typical for reporting. However, this is usually based on an in-depth legal due diligence with certain areas of special interest depending on the transaction and target. There is no general rule as to due diligence. It always needs to be tailored to the specific target and needs of the investor, which may include the obtaining of expansive W&I insurance coverage. In practice, due diligence is increasingly required to be carried out within a short timeframe of three weeks or even less. In private equity transactions, due diligence can be divided into two phases, the first of which always focuses on the value of the company. 

Legal due diligence for private equity buyers is typically very comprehensive and covers all relevant legal aspects of the target company, such as title, contracts, legal compliance, change of control, restructuring, real estate, employment, regulation, intellectual property, financing and litigation. Special areas of interest may be IT, other technology, authorisations, environmental or restitution.

Moreover, investors are increasingly embracing impact investing, driven by a desire to achieve more than just financial gains from their investments. These discerning investors actively seek opportunities that prioritise ESG considerations and therefore incorporate ESG criteria into their due diligence processes to evaluate potential investments. This involves assessing target companies’ environmental impact, social practices, and governance structures to identify risks and opportunities.

Vendor due diligence and a fact book are common components of larger private equity deals. The seller side usually prepares an information memorandum, conducts vendor due diligence and often has legal counsel prepare a legal fact book.

The fact book is now regularly made available to bidders in a standardised form in a data room. As a rule, a declaration of non-reliance is then issued prior to the disclosure of the vendor due diligence report and/or the legal fact book. This has become indispensable for most vendors. Such fact books also give the buyer’s legal counsel a solid information basis from which to start.

Private equity funds in Austria commonly use one of the two following structures to acquire targets: a privately negotiated sale or an auction process. In most cases the seller determines the modality of the process.

Some private equity parties, who are experienced in growth funding or turnaround scenarios, specialise in financially less sound or attractive targets. In these cases, the deal is negotiated privately to avoid attracting market attention. Targets with high innovation potential but less apparent business prospects (eg, start-ups) are also commonly purchased via private negotiated sale.

If the target is capable of attracting significant interest among multiples bidders, a popular choice among sellers is the auction process, as it enables them to push through more seller-friendly terms. The process is typically handled by investment banks and/or other M&A advisors, increasingly in conjunction with buyers obtaining W&I insurance.

Court-supervised reorganisations, in which the administrator sells the company, and the private equity investor competes to make the best offer, are more common than court-approved acquisition schemes. However, in situations where targets are in financial trouble, sellers and targets are occasionally willing to pre-align.

Purchases or sales of shares in listed companies, which are subject to takeover and securities regulation, must adhere to a stringent set of requirements, formalities and time constraints established by regulatory law and overseen by the Austrian Takeover Commission.

The purchase side structure is typically tax-driven, taking into account financing constraints, liability and exit considerations. Private equity funds rely on their attorneys to negotiate market-standard deal terms, although private equity funds are themselves involved in establishing the key agreement parameters and the liability regime. The Austrian target is normally acquired by an Austrian BidCo with limited liability (GmbH). In international deals, the BidCo is typically held through various layers by a non-Austrian TopCo (incorporated in a tax-favourable country).

Additionally, the private equity owners are involved in the deal (albeit to a lesser extent) when working for portfolio companies controlled by private equity.

Private equity transactions are frequently financed by third-party debt (which is subsequently pushed down to the acquisition vehicles via equity or debt instruments) in addition to equity provided by the private equity sponsor.

The most common forms of debt financing are senior debt, mezzanine debt and junior debt.

Senior debt is borrowed money that a company must repay first if it goes out of business. If a company goes bankrupt, the issuers of senior debt, which are often bondholders or banks that have issued revolving credit lines, are most likely to be repaid.

Mezzanine debt occurs when a hybrid debt issue is subordinated to another debt issue from the same issuer. Mezzanine debt has embedded equity instruments attached, often known as warrants, which increase the value of the subordinated debt and allow greater flexibility when dealing with bondholders.

Junior debt refers to bonds or other forms of debt issued with a lower priority for repayment than other, more senior debt claims in the case of default. Because of this, junior debt tends to be riskier for investors and thus carries higher interest rates than more senior debt from the same issuer.

Although control investments make up the bulk of Austrian PE deals, minority investments can be found as well, especially when the target’s current owners are searching for a reliable partner to help finance the future growth of the target’s business. In venture capital transactions, minority investments are common and are typically accomplished via the provision of funds directly to the target.

Private equity sponsors are not very widespread in Austria because of the rather small size of target companies. In most cases, Austrian players join forces with international investors to carry out transactions. The so-called “club deals” help private equity investors to estimate their costs and risks and to spread their investments as wide as possible in order to be able to make as much profit as possible. This type of business has a very high potential for conflict, as participants do not always share a common approach and strategy.

While co-investment with a lead investor is not common in private equity transactions where a majority of shares in the target is purchased, co-investment with a lead private equity fund is common in the venture capital area. Often the lead investor in such case – along with the target - will seek to garner the interest of other investors. These other investors also typically will receive a copy of the lead investor’s due diligence reports on a non-reliance basis.

The two predominant forms of basic consideration structures that occur in private equity transactions are locked-box and completion accounts.

Either can be combined with a performance-based (KPI) earn-out model if required. In fact, given that markets have become more uncertain, the use of earn-out models has been on the rise. Since the private equity market has become more buyer-friendly, locked-box structures have been a bit on the wane except in auction processes. Completion account structures currently have thus become more widely used in the latest shift to a buyer-market.

In a locked-box consideration, the parties usually agree to pay interest on the fixed purchase price in favour of the seller for the period between the economic transfer date and completion. The interest rate is often agreed independently of hard facts. Sometimes it is based on the cost of capital or it somehow resembles the estimated profit. The effect of high inflation on this mechanism is currently a specifically tricky issue.

Certainly, locked-box models should be and regularly are combined with adequate anti-leakage protection and corporate conduct clauses. Standard definitions of leakage are commonly used with some room for negotiations. If there is a leakage event and it is not a permitted leakage (eg, if it falls under a carve-out exemption), the seller usually must compensate the buyer on a euro-for-euro basis.

It is standard practice to establish an expert dispute resolution mechanism for completion account structures and earn-out disagreements in private equity transactions. This is less common for disputes relating to “locked box” consideration structures. In agreeing on an expert determination procedure, there are often different purchase price calculations and adjustments structures utilised. Procedurally, typically one party submits its calculation of the closing account adjustment (eg, working capital, net profit), and the other party has a right to review with full access to the books and records of the target. It is standard for the decision of the expert to be final and binding on the parties with respect to the disputed items. Also, in the case of leakage, an adjustment can also be verified by an expert determination.

In private equity transactions, the conditions are usually limited to mandatory regulatory approvals such as merger control clearance or foreign investment regulation. Often, the sellers’ process letters in auction scenarios do not provide for any other option than conditionality on regulatory approvals. Other conditions are usually resolved in the process up to the binding agreements. Nevertheless, sometimes there are other conditions, such as approvals by certain contracting partners of the target, the prolongation of certain rights or the waiving of termination rights (in cases of change of control clauses). Conditionality on internal approvals, such as supervisory board or shareholder approval, are very rare.

Material adverse change (MAC) clauses are common practice and have become increasingly important due to the recent experience with well-known uncertainty factors: COVID-19, war in Ukraine, high inflation, and the associated financing difficulties of the banks. The clauses are fairly standard but care needs to be taken to properly identify what does and what does not fall under the MAC.

A “hell or high water” provision usually means an independent and absolute commitment of the buyer to undertake any and all actions and obligations necessary to satisfy governmental regulatory requirements such as commitments to obtain merger control clearance.

In transactions and especially in private equity transactions, with existing portfolio companies potentially at risk, it is common practice to agree on a certain set of behavioural or structural remedies that might be offered in case of competition concerns, but in most cases this decision remains with the buyer. Hard “hell or high water” clauses are rare.

Break fees are usually structured as contractual penalties and are often referred to as such in deals (under the law, the judge’s right of mitigation applies mandatorily under Austrian law). It is important to note that a potential plaintiff still has the option of seeking a remedy beyond this.

Break fees are not very common in conditional deals with a private equity-backed buyer, as private equity deals are usually subject to a very limited number of conditions and are often only triggered by a fault of the buyer. The same applies to reverse break fees, which usually lead to payment obligations on the part of the buyer and are usually only agreed upon if a financing condition is met. They are used only very rarely and play only a minor role in practice.

Regularly, both parties have the right to terminate the contract if the closing cannot take place by a certain longstop date or if the parties already stipulate in advance that the closing will not take place in a timely manner. In both cases, a party being responsible for the delay will not have such termination right. Apart from this, it is generally possible not to complete the transaction if the target’s business has deteriorated dramatically before the closing (MAC).

Typical longstop dates are the duration of merger control proceedings, with a differentiation on whether an in-depth-investigation (phase II) may also be possible. Typically, there are longstop dates of six months.

Any termination rights that exist typically expire automatically once closing is achieved. Apart from a MAC clause, a buyer often will try to seek a termination right if the seller’s representations and warranties have been breached materially between signing and closing. In some cases, though rare, termination rights of one party for a break fee payment are agreed.

Obviously, the primary objective of private equity sellers is to limit the buyer’s options as much as possible through legal recourse within shorter statute of limitation periods than is the case where the buyer is a corporate. The protection of proceeds for the respective investors is the driving force. Hence, in a private equity sale, the reps & warranties will be more limited than in other transactions and the caps, floors and baskets will be another substantially limiting factor. These limitations are usually negotiated individually, whereby in almost all cases the seller’s liability will be limited in percentage or amount.

On the other hand, private equity sellers usually act with a maximum of transparency in order to facilitate a comprehensive due diligence of the potential buyers. Together with the due diligence review already carried out by the seller itself, an attempt is made to eliminate the possibility of warranty claims by the buyer as far as possible. While every transaction is unique as to how much protection the buyer obtains in the end, W&I insurance is increasingly used to bridge the gap between the buyer’s expectation of full representation and warranty protection and the seller’s goal of limiting liability as far as possible.

In practice, the private equity seller grants warranties to the buyer in significant areas (eg, tax, financial statements, employment, real estate, intellectual property, financing, commercial contracts). Certainly, the private equity seller’s goal in transactions is to offer as little as possible in the way of guarantees and/or indemnities. However, in order to provide both parties with a more workable deal in the long run, there is an increasing number of structures where either a W&I insurance policy closes the gap between the guarantee or indemnity package offered and the buyer’s desired protection needs, or the private equity seller accepts a guarantee or indemnity package to some extent (eg, a small part of the purchase price is retained as escrow).

The management team sometimes offers additional guarantees. However, depending on their future role, the enforceability needs to be considered. Accordingly, such guarantees are regularly rather limited in their amounts and rather serve as an enforcement on diligent disclosure. Bring-down letters are rather uncommon in Austria.

The disclosure concept varies from full disclosure of the data room (with certain limitations as to the necessity to link documents) and disclosure letters attached to the SPA, with the first being the common standard in private equity transactions.

Best knowledge qualifiers are common and need a thorough definition of such best knowledge.

W&I insurance has taken some of the bite out of negotiations on representations and warranties, which dominated SPA negotiations in the past.

W&I insurance for damages arising from warranty breaches has become a central part of many transactions, especially on the Austrian private equity market. The insurance package normally excludes known risks or statements for which due diligence was weak. Such W&I insurance is increasingly being used to bridge the gap between the seller and buyer side on representations and warranties and indemnities.

W&I insurance typically will cover the vast majority of reps and warranties being sought as well as tax risks including coverage for the tax indemnity. This all presupposes that the buyer has undertaken substantive and extensive due diligence.

Other forms of protection are retained or deferred payments potentially secured through an escrow account or a bank guarantee, whereby bank guarantees are not commonly used.

Today, legal disputes in connection with private equity transactions are common. They are a result of the development of the market, which is why there have been more and more disputes in recent years (due to the many crises that affected the market, banking and interest rates in particular, with reality being well behind expectation). The most commonly litigated items are completion accounts, tax and balance sheet warranties.

It has become common practice to include arbitration clauses in private equity deals in order to offer a certain degree of legal certainty for the parties. The main advantage of arbitration is that, compared to court proceedings, the arbitral tribunal has experience of international transactions and knowledge of the underlying economics of such deals and can conduct the arbitration in Austria in the English language, which is much different than litigating issues before Austrian courts, which must be done in the German language with extensive translation of documents.

In addition, disputes about the financial aspects of a private equity transaction may be subject to an arbitration procedure when it comes to accounting principles, calculation aspects or audit processes.

While the cost factor of an arbitration process should always be considered beforehand, practice shows that involving the regular courts in Austria can lead to substantial delays also given the multiple levels of appeal so that the traditional argument that arbitration is more expensive is certainly not always the case.

Public-to-private transactions are uncommon in the Austrian market as there are only a few Austrian stock listed corporations with many shares in free float. In public-to-private transactions, the private equity buyer would have to make a voluntary takeover bid with the aim of gaining control. The acceptance threshold should be at least 90% of the target company in order to squeeze out the remaining minority shareholders. In Austria, no increase in such transactions by private equity is expected.

Shareholders of public companies are required to publicly disclose their shareholdings to the FMA, the Stock Exchange and the issuer, if they reach, exceed or fall below 4%, 5%, 10%, 15%, 20%, 25%, 30%, 35%, 40%, 45%, 50%, 75% or 90% of the voting rights. The articles of association may contain an additional disclosure threshold at 3% which will need to be published on the website of the issuer; additionally, the FMA will need to be notified.

A shareholder is required to make such disclosure immediately and within two trading days at the latest. If a shareholder does not comply with the above disclosure requirements, the voting rights associated with the undisclosed shares are automatically suspended. The company’s articles of association may provide for the suspension of voting rights to be extended to all voting rights of the shareholder should the shareholder violate the reporting obligation.

The objective of the Austrian Takeover Act is to raise capital on the securities markets for Austrian companies to facilitate business. To achieve this goal, a number of principles have been laid down in the law:

• principle of equal treatment;
• investor protection in the event of a change of control;
• transparency requirement;
• objectivity requirement (prevention prohibition);
• ban on market distortions; and
• acceleration principle.

Even though we have most of the crisis behind us, the market has changed permanently. Every transaction requires an even more detailed due diligence check. Merger agreements require the approval of the general meeting of shareholders. There are now multiple opportunities during the ongoing process of being outbid by other bidders while trying to reach an agreement.

For this reason, pronounced exclusivity clauses (“deal protection provisions”) can be found in almost all current contracts to secure planned corporate transactions.

Amendments to the Austrian Takeover Act came into force on 1 July 2022. The amendment to the Takeover Act was mainly triggered by a ruling of the European Court of Justice and newly regulates the appeal procedure against decisions of the Takeover Commission. With the amendment, the provisions on creeping-in were also partly changed or adapted, which has caused a lot of criticism in the industry.

“Creeping-in” means that a core shareholder, who has control over a listed company but does not hold the majority of voting rights in the company, takes advantage of favourable market situations to gradually increase its control over the company without, however, ever allowing the remaining shareholders to leave the company.

Cash transactions are most common in public mergers and acquisitions. The bidder is entitled to offer cash, shares or a combination of cash and shares. However, in the case of a mandatory offer and a voluntary control offer, the bidder must make a cash payment and can only offer shares as an alternative. In such a case, the cash consideration offered must be at least higher than the average share price of the target shares during the last six months prior to the publication of the offer or the highest price paid or offered by the company for the target share bidders in the 12 months prior to the submission of the offer.

There are two types of offers: mandatory offers and voluntary offers. Usually, none of these come with conditions attached. Any voluntary offers are conditional if they are aimed at gaining control, the conditions are objectively justified and the fulfilment of which is not at the sole discretion of the bidder. The Austrian Takeover Commission may declare an offer unlawful if the terms are unjustified, arbitrary or not objectively determinable. As a result, the Commission may ban the launch. Therefore, before submitting an offer, one needs to check carefully whether it contains conditions that are unusual or not sufficiently precise or the reason for which is not clear and, if in doubt, contact the competent authority. In practice, this not only means high costs, but an appropriate time frame should also be created in order to analyse and evaluate the takeover bid in individual cases.

A private equity bidder’s governance rights in relation to a target company in which it does not seek 100% ownership depend largely on the rights attached to that bidder’s interest by law and under the target company’s existing articles of incorporation. Before planning to optimise corporate governance, the investor should first analyse in detail the rights to which it is legally entitled based on the size of its investment and the existing governance documents.

The amount of the company’s share capital determines how comprehensive the shareholder’s possible rights are. As an example: shareholders holding more than 25 % of the share capital of a company and who are present at the general meeting generally may object to any measures to exclude shareholders’ subscription rights.

A majority shareholder who directly or indirectly owns 90% of the share capital of a target company may squeeze out the remaining minority shareholders (“squeeze-out”). The minority shareholders cannot prevent the squeeze-out but can usually demand a judicial review of the compensation granted to them. As a result, a voluntary offer aimed at control often contains a minimum acceptance threshold of 90% to ensure the possibility of a squeeze-out and the acquisition of all shares in the target company after a successful offer.

Irrevocable commitments are usually only concluded with the major shareholders of the target company. They are commitments by security holders of the target company to tender their shares to the bidder in the course of a takeover bid. The bidder attempts to obtain guarantees over the target company even before the announcement of its decision to launch a bid. The agreement of irrevocable undertakings makes it easier for the bidder to determine an offer price for the proposed transaction. Irrevocable commitments are not prohibited under the Takeover Act, and there are arguments, both from practice and from the literature, to allow irrevocable commitments. In general, major shareholders are entitled to freely dispose of their shares and, in particular, to agree to sell their shares to the bidder. Nevertheless, in case of doubt, irrevocable commitments should be agreed with the Austrian Takeover Commission in advance so that the transaction is not unnecessarily endangered.

Equity incentives for the management team are a common feature of private equity transactions in Austria to secure their commitment after the target company changes ownership. For this reason, the management team usually has the option to acquire an equity stake in the target company. This gives a future shareholder the opportunity to influence the management team in such a way that it will ultimately bring it benefits (eg, financial rewards). The size of the management team’s stake depends on the specific circumstances of a transaction. Often, the management team is granted a share of 10%, but not more than 20% (larger shares are unusual). 

Management participation is common in private equity transactions. The structure of the management participation is often tax motivated. There are also transactions where the management team is offered the opportunity to invest in the same instruments that the private equity buyer acquires to ensure that the interests of management and the buyer are fully aligned. To the extent that management has invested at the target level, there are different structures. Usually, the shares held by management are pooled. This means that the investor is effectively a co-investor. Common restrictions include the right of the private equity fund to take over the shares and other obligations to transfer the shares when the management and employment contracts are terminated. The pricing formula for the transfer of shares after termination depends on the reason for termination. The use of good leaver and bad leaver provisions for founders of a target is common.

The use of ordinary and preference shares is becoming increasingly popular in the market and is common for management participation schemes. In the case of preference shares, managers and other top-level employees often receive phantom shares, which do not carry voting rights but do carry the right to a share of the profits and exit proceeds. The use of preference shares is even more common for venture capital transactions.

Vesting provisions for management equity are commonly used in Austria. The “good leaver” and “bad leaver” clauses will directly impact whether and under what circumstances compensation will be owed as well as the price for the transfer of their shares after termination of the management agreement. The vesting provisions will frequently foresee that in case of a bad leaver event the other shareholders will have the ability to exercise a call option on the shares of the management shareholders.

In some cases, there is a “grey leaver” with intermediate conditions for the company, though this is not common in Austria.

Obviously, “good leaver” provisions are more favourable to management (eg, termination of a management contract without cause, upon illness of the manager or upon expiry of the contract term). Often negotiations take place on where precisely the dividing line is between good leaver and bad leaver.

Restrictive covenants agreed by management shareholders are usually non-competition and non-solicitation covenants. Non-competition and non-solicitation agreements are normally enforceable for a period of two years after the termination of the relationship with the company in connection with the disposal of shares. For employees of the company, the enforceability of the above-mentioned prohibitions is usually limited to one year after termination of employment. Employees are legally bound to non-competition, non-solicitation and non-disparagement restrictions during the term of their employment. This is usually only to the extent that the above obligations do not unduly restrict their future professional opportunities.

Minority rights of shareholders are in principle regulated by law. They can only be increased by a shareholders’ agreement, but not reduced. In the case of phantom shares, these are often not protected from dilution where new investors come on board as otherwise such new investors would be disincentivised from investing. Manager shareholders often do not receive contractual veto rights on company activities, nor do they have rights on the appointment of directors. However, shareholders have the ability to indirectly influence and control the exit due to their position in the company. This is often used in transaction processes to keep managers of the target company in the company. In a target company with multiple investors, drag-along and tag-along rights are common, which can force a sale of shares held by manager shareholders.

Private equity shareholders usually choose between a limited liability company or a stock company for their portfolio companies. The rights of control resulting from this exercise are governed by the legal system or by the articles of association of the company. A non-Austrian entity often holds an Austrian entity in the form of a limited liability company acquiring the Austrian target company. The private equity firm is almost always the sole or majority shareholder of each portfolio company. Individually, there are also cooperations between private equity groups. The majority shareholder of a limited liability company has extensive control and direction rights over the management. The shareholders may issue instructions to the managers and instruct them to implement certain measures, and the managers are legally bound by such instructions. Similarly, the majority shareholders have the possibility to remove or install new managing directors at any time without giving reasons.

In practice, the majority shareholders provide for a narrow and tailor-made set of rules of procedure that allows them to exercise full control. In order to safeguard these established rules of procedure, the shareholders’ approval requirements are usually included in the articles of the target or by-laws for the management. Sometimes an advisory board is established to consider important measures taken by the company.

The management of a portfolio company by means of a stock corporation (AG) usually plays only a minor role, since the shareholders have only an indirect option of controlling or directing the company's management. Therefore, this model is unappealing in the Austrian private equity market.

In principle, a majority shareholder backed by a private equity fund cannot be held liable for the actions of its portfolio companies. In rare cases, certain exceptions to this general rule exist. In summary, these concern facts that may harm the company or the persons involved in it, such as:

• the assets of the majority shareholder and the portfolio company cannot be separated;
• the majority shareholder received money from the portfolio company other than by way of distribution of profits and thus in violation of capital maintenance rules;
• the majority shareholder causes the insolvency of the portfolio company; or
• the majority shareholder of the private equity fund conducts de facto management, whereby in these cases the actual managing director has no de facto management function and such action has adverse consequences for the company and its creditors.

The typical holding period for private equity transactions before the investment is sold or disposed of is about four to five years. Under current market conditions, this average is increasing. By far the most common form of private equity exits are trade sales. There have been a few attempts of dual-track processes, but all of which ultimately resulted in a trade sale. Only a small number of dual-track processes finally did take the IPO route.

Private equity sellers do not often roll over or reinvest upon exit.

Typically, shareholder agreements in private equity transactions include drag-along rights. The right to drag along is specifically provided to the majority shareholder or a group of majority shareholders. The right to drag along allows the majority shareholder(s) to sell their shares and compel the minority shareholder (eg, management) to deliver the shares at the same price and terms to a third party. This right warrants the flexibility and liquidity to the majority shareholder(s). In recent years private equity sellers increasingly have utilised the drag mechanism. With drag-along rights the minority shareholders lose their prospective future gains. Hence, the rights are sometimes restricted to a certain minimum drag price.

The right to tag along is very common, especially where a drag-along right is agreed, and allows shareholders to sell their shares at the same price and conditions as the other shareholder, sometimes subject to certain share thresholds being met.

An IPO primarily requires the cooperation of the company. Any new shares issued in the IPO will limit the number of shares the private equity seller can sell into the IPO. In addition, the underwriting agreement will usually provide for lock-up restrictions that limit the private equity seller’s ability to sell any shares it has retained following the IPO. The underwriting banks will usually expect some of the private equity seller’s shares to be locked up for a period of about six months after the IPO. In addition, lock-up requirements may already be included in the shareholders’ agreement, but this is the exception.

In this process the private equity seller surely tries to limit warranties to matters relating to the private equity fund and the shares it sells into the IPO. Sometimes, director nominees are also required to give warranties in the underwriting agreement.