Private Equity 2021 Comparisons

Last Updated September 14, 2021

Contributed By Wolf Theiss

Law and Practice

Authors



Wolf Theiss is one of the leading law firms in Central, Eastern and South-Eastern Europe (CEE/SEE), and has built its reputation on a combination of unrivalled local knowledge and strong international capability. The firm opened its first office in Vienna 60 years ago, and now brings together more than 340 lawyers from a diverse range of backgrounds, working in offices in 13 countries throughout the CEE/SEE region. More than 80% of the firm's work involves cross-border representation of international clients. The team works closely with clients, through the firm's international network of offices, to help them solve problems and create opportunities. The lawyers know how to leverage clients' private equity in Austria and CEE/SEE, and make it work for their future. From fund formation to limited partner and general partner agreements, regulatory compliance and governance, and portfolio M&A, M&A specialists facilitate and negotiate transactions, and execute other instruments such as complex financings, strategic partnerships, leveraged buyouts, cross-border M&A, carve-out transactions, IPOs and trade sale exits.

Globally, private equity deal volume pushed global M&A to all-time highs in the first half of 2021, and the M&A market is expected to remain robust in Austria in terms of volume and number of deals in the second half of 2021.

Private equity companies and strategics that have dry powder available are intensively seeking attractive targets, particularly in the technology, life sciences and infrastructure sectors and in sectors focusing on sustainability, such as renewable energy. As such targets are relatively rare, the Austrian market remains seller-friendly to a certain extent. Auction processes are typically very competitive and attract multiple bidders.

Emerging environmental, social and governance standards have led to increased security of business models and caused large corporates to use M&A as a means to reposition themselves in order to secure their long-term growth prospects. This trend will continue to further increase M&A activity.

Another strong trend is private equity buyers looking at carve-out opportunities, with an increase in carve-out transactions expected in the last quarter of 2021 and beyond.

Private equity deals at the top end were spread across sectors rather than focusing on any specific sector. However, in the mid-market, technology, life sciences, infrastructure and sustainability sectors (environment in particular) are expected to see the strongest interest in 2021.

In recent years, the most significant legal development impacting domestic private equity funds and transactions was the implementation by the Austrian legislator of the Austrian Alternative Investment Fund Manager Act (AIFMG), based on Directive 2011/61/EU on Alternative Investment Fund Managers. Typically, Austrian funds that do not comply with Directive 2009/65/EC (ie, the UCITS Directive) qualify as alternative investment funds (AIFs) after the introduction of the AIFMG. An AIF is defined as a collective investment undertaking that raises capital from a number of investors, in order to invest it in accordance with a defined investment policy that does not use the capital for direct operational purposes.

Generally, managers of Austrian private equity funds are subject to the ongoing supervision of the Austrian Financial Market Authority (FMA). Managers of such AIFs are required to obtain a licence from the FMA, pursuant to the AIFMG. Exceptions to this rule apply with respect to most of the Austrian funds that do not require a licence for managers, provided that the cumulative AIFs under management fall below a threshold of EUR100 million in cases where leverage is used, or below a threshold of EUR500 million in cases where no leverage is used. When it comes to investments of private equity funds in Austria, the restrictions on asset stripping and additional disclosure requirements as outlined in the AIFMG based on the AIFMD may be relevant.

The primary regulators that are or may be relevant to private equity funds and transactions are the FMA, the Federal Competition Authority (FCA), the Austrian Takeover Commission (ATC) and the Ministry of Digital and Economic Affairs (Bundesminister für Digitalisierung und Wirtschaftsstandort – MDEA).

Generally, there are no specific regulations that specifically address or discriminate against private equity transactions. However, certain areas of public interest (eg, in case of investments into sectors such as banking) impose restrictions, depending on the identity of the buyer.

Austrian Investment Control Act

On 15 July 2020, the Austrian Parliament adopted the Austrian Investment Control Act (Investitionskontrollgesetz – ICA), aiming to further tighten the regulatory framework for foreign direct investments (FDI).

Pursuant to the ICA, a mandatory filing requirement is fulfilled if at least one of the investors is a foreign person (ie, non-EU/EEA/Swiss individual/entity) and directly or indirectly intends to carry out an investment in an Austrian undertaking (ie, has its seat or central administration in Austria) that is active in a sector listed in an Annex to the ICA. Such investment encompasses the acquisition of the following:

  • shares in an Austrian company reaching or exceeding 10%, 25% or 50% (voting rights);
  • control in such company; or
  • material assets of an undertaking (asset deal).

The mentioned Annex to the ICA distinguishes between particularly sensitive sectors, for which an additional materiality threshold of 10% applies, and other sectors, for which only the materiality thresholds of 25% and 50%, respectively, apply.

The highly sensitive sectors subject to the 10%, 25% and 50% thresholds (exhaustively) are as follows:

  • defence goods and technologies;
  • the operation of critical energy infrastructure;
  • the operation of critical digital infrastructure, especially 5G infrastructure;
  • water;
  • the operation of systems securing the data sovereignty of the Republic of Austria; and
  • research and development in the fields of medicinal products, vaccines, medicinal devices and personal protective equipment.

Other sectors subject to the 25% and 50% thresholds, in which a threat to security or public order might arise, are as follows:

  • critical infrastructure (ie, facilities, systems, plants, processes, networks or parts of them) in certain fields, such as energy, information technology, traffic and transport, health, finance, chemical industry, etc;
  • critical technologies and dual-use goods, such as AI, robotics, semi-conductors, nano technologies, etc;
  • security of supply with critical resources, such as energy supply, supply of raw materials, food, vaccines and other medicinal products, etc;
  • access to sensitive information or personal data, including the possibility to control such; and
  • freedom and plurality of the media.

An approval of the responsible member of the federal government (currently the MDEA) is not required with respect to investments in an undertaking that has fewer than ten employees and an annual turnover or balance sheet total of less than EUR2 million.

A foreign investor is advised to assess the compliance of the envisaged transaction with the ICA at an early stage, in order to avoid unexpected consequences.

The approval of the MDEA must be obtained prior to the signing of an applicable transaction. Generally, the MDEA has a one-month review period from the date of the delivery of the relevant notification, and the one-month Phase period only starts following a 35-day period within which the EU Commission and/or member states can comment on the transaction. A case is deemed cleared if the MDEA does not issue a decision within these periods.

Lastly, the ICA foresees the possibility of requesting a letter (Unbedenklichkeitsbescheinigung) confirming that an envisaged investment in an Austrian undertaking is not subject to an approval pursuant to the ICA.

Antitrust Regulations

The Austrian merger control rules apply to concentrations as defined in Section 7 of the Austrian Cartel Act (ACA). Each of the following events constitutes a concentration:

  • the acquisition by one undertaking of all, or a substantial part of, the assets of another undertaking, in particular by means of transformation or merger;
  • the acquisition of rights by one undertaking in the business of another undertaking by means of a management or lease agreement;
  • the direct or indirect acquisition of shares in one undertaking by another undertaking if, as a result, a participation of 25% or 50% (in terms of capital or voting rights) is reached or exceeded;
  • the establishment of interlocking directorates at the management or supervisory board level, if at least half of the management or supervisory board members of two or more undertakings are identical;
  • any other connection of undertakings conferring on one undertaking a direct or indirect controlling influence over another undertaking; and
  • the establishment of a full-function joint venture.

A concentration must be notified prior to its completion if any of the following has occurred in the last business year (first set of thresholds):

  • the combined worldwide turnover of the undertakings concerned exceeded EUR300 million;
  • the combined Austrian turnover of the undertakings concerned exceeded EUR30 million; and
  • the individual worldwide turnover of each of at least two of the undertakings concerned exceeded EUR5 million.

A draft amendment to the ACA is expected to apply with regard to concentrations notified as of 1 January 2022 and amends this first set of thresholds by adding the additional requirement that the individual Austrian turnover of each of at least two of the undertakings concerned exceeded EUR1 million in the last business year.

Pursuant to the de minimis exception, however, concentrations that meet this first set of thresholds are exempted from the notification requirement if the Austrian turnover of only one of the undertakings concerned exceeded EUR5 million and the worldwide combined turnover of the other undertakings concerned did not exceed EUR30 million.

A concentration that does not meet the first set of turnover thresholds mentioned above still has to be notified if any of the following has occurred in the last business year (second set of thresholds):

  • the combined worldwide turnover of the undertakings concerned exceeded EUR300 million;
  • the combined Austrian turnover of the undertakings concerned exceeded EUR15 million;
  • the value of consideration for the transaction exceeds EUR200 million; and
  • the undertaking to be acquired is active in Austria to a significant extent.

Special rules apply to the calculation of the turnover of banks and insurance companies, and in relation to "media concentrations".

A concentration that meets the turnover thresholds of the EU Merger Regulation and requires a merger control filing with the European Commission is not subject to Austrian merger control (unless the transaction qualifies as a "media concentration", in which case parallel notifications to the European Commission and the FCA may be required).

The scope and depth of private equity buyers' legal due diligence are usually significant, covering all relevant legal aspects of the target, such as title, contracts, compliance with law, change of control, reorganisations, real estate, employment, regulatory, IP, financings, disputes and, increasingly, GDPR compliance (based on recent fines levied as a result of breaches of the GDPR).

The typical reporting format is a red-flag reporting standard, but based on a full-scope legal due diligence. Commonly, the legal due diligence is done within four to six weeks, depending on the size of the target and how well prepared and committed the seller is. In urgent cases, the due diligence can be conducted within two weeks, or an even shorter period.

There have been private equity deals where the due diligence is divided into two phases: in the first phase, the buyers focus more on the areas relevant to categorise the value of the target, followed by an in-depth due diligence in the second phase. Some auction sale processes are geared towards allowing bidders to do a limited due diligence in order to contain legal fees in the early phase of a transaction and prior to a more limited number of bidders committing to a full-scale process.

In the past few years, vendor due diligence or a fact book have been common features of private equity sellers. The seller usually prepares an information memorandum, conducts a vendor's due diligence, and prepares a legal fact book (instead of a vendor due diligence report) that will be shared with the bidders in the data room. Commonly, the advisers of the sellers request the signing of a non-reliance letter before the disclosure of the vendor due diligence report and/or the legal fact book. In the recent past, there has been a slight trend towards sellers offering reliance, predominantly with private equity sellers. Private equity buyers regularly offer reliance on buy-side due diligence to the banks financing the buyer.

Disposals by private equity funds are commonly carried out by auction sale, as such process is more stringent and seller-friendly, and allows the seller to maximise the sale proceeds. Typically, the auction process is handled by investment banks and/or other M&A advisers. No specific provisions apply with respect to an auction process – ie, the seller determines the rules and procedure of the auction by issuing detailed process letters. To a varying extent, the terms of an acquisition may differ between a privately negotiated transaction and an auction sale, depending on the overall circumstances of the transaction – eg, the size of the transaction, the percentage of the shareholding in the target, whether or not one of the parties is a listed company, etc. While set up as a broad auction process, in many cases bidders (particularly private equity entities) seek to shorten the transaction process by quickly proposing an agreement on key terms and by offering transaction certainty ahead of other bidders.

Generally, the acquisition structure is tax-driven, with financing requirements, liability and exit considerations, and specific transaction-related considerations all playing a role. Most typically, a non-Austrian TopCo (incorporated in a tax-favourable jurisdiction such as Luxembourg, the Cayman Islands or the Netherlands) holds an Austrian AcquiCo in the form of a limited liability company, which acquires the Austrian target; this also helps to ring-fence the investment. Private equity funds are closely involved in structuring the key deal terms and the liability regime but otherwise rely on their lawyers to reach market-standard deal terms. Also, when acting for private equity-owned portfolio companies on add-on acquisitions, the private equity owners will be involved in the transaction (though to a more limited degree).

It is more typical for private equity funds to hold a majority stake. Although larger private equity funds have held minority stakes in target companies with regulated revenue streams, minority stake private equity deals are rather an exception.

The type and structure of the financing of private equity deals depend, inter alia, on the contemplated acquisition structure, the relevant tax environment, the industry of the target group, the aggregate deal volume (including the refinancing/working capital requirements of the target group) and the standing of the relevant private equity fund in the market. Typically, acquisitions by private equity funds are highly leveraged – ie, to a large extent financed by various debt instruments that are available in the market from a variety of potential funders (eg, commercial banks, debt funds, insurance companies, pension funds, mezzanine lenders, etc) – whereas the residual financing portion is provided by the private equity funds in the form of equity, equity-like means and/or junior funds.

Senior Debt

Senior debt is provided by means of senior secured (and usually syndicated) loans (and may also take the form of senior secured bond instruments) and typically encompasses the following:

  • a facility applied towards partial financing of the purchase price;
  • a facility enabling the target companies to refinance existing debt; and
  • a facility to finance the working capital requirements of the target companies.

To the extent permitted by the applicable laws and as long as it is reasonable in light of the relevant tax environment, private equity funds may want senior debt to be pushed down to the target companies (in terms of debt service and security instruments).

Mezzanine Debt

Mezzanine debt is a hybrid of senior and junior debt, and ranks junior to senior debt and senior to junior debt. Typically, mezzanine instruments have lighter covenants on the obligors and may be secured second ranking behind the senior security package. Consequently, mezzanine debt carries higher interest, reflecting the risk position of the mezzanine debt providers.

Junior Funds

Junior funds are usually provided in the form of shareholder loans, which are deeply subordinated and rank senior only to equity. Junior funds are, therefore, typically unsecured and will only be serviced if certain financial covenants are met and after senior and mezzanine debt service.

Deals involving a consortium of private equity sponsors and co-investments by other investors alongside the private equity fund are not very common in Austria, mostly because the target companies in Austria are not large; rather, such transactions are seen where Austrian players team up with international private equity funds and other investors, typically for big-ticket transactions. The so-called "club deals" in the private equity industry are seen on a global level, and allow each private equity participant to reduce its concentration, maintain the diversification of its portfolio of investments and allocate risks and costs. However, such club deals have certain downsides, including conflicts among the investment strategies of the various participants. An increase of club deals in Austria is not expected.

Generally, the parties agree on either a locked-box consideration structure or a closing accounts consideration structure, which may be combined with an earn-out element in private M&A transactions. In recent years, there has been an increase in the application of locked-box structures compared to previous years. Transaction speed and transaction certainty are increasingly key features for M&A transactions. Private equity funds prefer locked-box consideration structures, particularly when acting as sellers.

In connection with locked-box consideration structures, private equity sellers provide the following protection(s):

  • no leakage and anti-leakage protection on a euro-by-euro basis;
  • ordinary course of business covenants; and
  • dispute resolution mechanisms with respect to the leakage amount (see 6.3 Dispute Resolution for Consideration Structures).

Warranty insurance is widely used by private equity sellers in order to limit recourse against the seller.

Some buyers consider whether interest should accrue on the amount of leakage and/or whether leakage (exceeding a certain threshold) should lead to any walk-away right. However, there have not been many private equity deals where interest was in fact charged on a locked-box leakage or where a walk-away right was agreed in the case of leakage.

It is common to have a dispute resolution mechanism in place for locked-box consideration structures and completion accounts consideration structures in private equity transactions. In the case of completion accounts, the parties agree on expert determination proceedings and arbitration proceedings in the case of disagreement with respect to the adjustment of the purchase price. In many cases, the agreements provide for an expert determination in relation to the purchase price adjustment and additionally for a broad arbitration clause (as opposed to ordinary courts having jurisdiction). A similar dispute resolution mechanism is common with respect to locked-box consideration structures – ie, the parties agree on an expert determination in addition to arbitration proceedings in relation to the leakage (adjustment) amount.

The acquisition agreements of a private equity deal are usually subject to a very limited number of (regulatory) conditions. The typical level of conditionality in private equity transactions is limited to mandatory regulatory clearances, such as merger clearance. In particular, a private equity seller is unlikely to accept other conditions, such as a "no material adverse change" condition, a financing condition or any similar condition. Process letters of sellers in an auction scenario typically require binding bids to not be subject to conditions other than regulatory clearances. Depending on the target, private equity buyers take a more prudent approach by seeking strong sell-side protection in return for an attractive price offer. This includes material adverse effect or change of control protection.

Usually, a "hell or high water" provision describes an independent and absolute commitment of the buyer to undertake any obligation that is required to obtain antitrust or other regulatory approval. Whereas it is common for buyers to agree on prompt filing and consulting with the seller, it is not common for a private equity buyer to accept a "hell or high water" undertaking in deals where there is a regulatory condition.

Parties to a purchase agreement may agree on a "light hell or high water" undertaking with respect to merger control clearance by introducing thresholds or other criteria (eg, divestment of an entity with an EBITDA below a certain threshold) in order to quantify and allocate antitrust risks connected with the transaction between the parties.

In private acquisitions (see 7.5 Conditions in Takeovers), with respect to break fees in public M&A transactions, the parties frequently agree on (reverse) break fees in order to avoid damages, keep the cost risk low, and increase deal security. If the obliged party is a stock corporation, the permissibility of the amount of the break fee is based on the appropriateness of the break fee, considering all the individual circumstances on a case-by-case basis. In this context in particular, the type, scope and strategic importance of the particular transaction play an essential role and must be assessed on the basis of the obligations of the management resulting from the business judgement rule. No such limitations apply to the extent the obliged party is a limited liability company and the relevant corporate approvals are in place (eg, the approval of the supervisory board or shareholder, if necessary).

Break fees are not very common in conditional deals with a private equity-backed buyer, as private equity deals are typically subject to a very limited number of conditions and there is limited space for deal security elements. The same applies to reverse break fees, which typically result in payment obligations for the buyer and are usually only agreed to with respect to the fulfilment of financing conditions.

Acquisition agreements usually exclude all rights provided by law to the parties to terminate the contract, to the fullest extent possible. Important exceptions are the right of both parties to terminate the agreement if closing cannot be brought about by a certain date ("long-stop date") or if regulatory approvals are subject to obligations that the purchaser is not prepared to accept (ie, in the absence of a "hell or high water" clause). Occasionally, purchase agreements also provide for a material adverse change clause, including instances where the business deteriorates dramatically prior to closing, which entitles the buyer to not proceed to closing and terminate the agreement; such arrangements do not tend to occur in situations with private equity sellers. However, the termination rights of a party upon a break fee payment event (ie, non-compliance with the obligation of the buyer or the seller in connection with the conditions precedent agreed in the acquisition agreements) are in evidence.

As in private equity transactions, the parties usually agree on locked-box consideration structures – the typical allocation of risk between the locked-box date and the closing date is the agreement on protection by way of ordinary course of business provisions and no leakage provisions and covenants. Private equity sellers typically seek to limit any legal recourse by the buyer to the maximum degree possible, so as to fully protect the availability of the transaction proceeds for their investors.

Private equity sellers typically provide a high level of disclosure by way of a well-prepared due diligence process and the possibility for bidders to conduct an extensive due diligence.

Matters so disclosed typically eliminate the warranty protection of a buyer that is deemed to have priced its offer based on information available to it on the basis of the due diligence. In addition, private equity sellers offer very limited contractual protection to buyers. This means that the quality of the due diligence process is very important for the buyer.

In addition, warranty insurance protection is widely used to protect the private equity seller against possible warranty claims by a buyer. The costs of warranty insurance have come down significantly over the last two years.

To the extent a buyer identifies a risk in the course of the due diligence, the parties either price such risk into the calculation of the purchase price or provide for an indemnity protection. Generally, indemnities are not subject to limitations other than with respect to amount and time limitations. Private equity sellers will not easily accept indemnification obligations for the reasons already stated.

Typically, the parties agree on further liability limitations of the seller, depending on the transaction, such as:

  • a time limitation for bringing claims;
  • financial limits (eg, caps, baskets, de minimis claim exclusions);
  • a limitation to direct loss (as opposed to indirect and consequential loss); and
  • mitigation obligations.

The parties usually agree on short periods upon the expiry of which the warranty or indemnity claims become time-barred, with claims on the basis of title warranties or no leakage obligations allowing for longer claim periods. The liability of the seller is usually capped at a certain percentage of the purchase price. The liability of the seller with respect to fundamental warranties such as claims for a breach of the title are usually capped at an amount corresponding to the purchase price amount.

Please see 6.8 Allocation of Risk with respect to warranty and indemnities in private equity deals. Generally, the private equity sellers seek to offer almost no warranties and indemnities in order to be able to allow for a clear financial exit for their investors. However, there are now more and more structures where either warranty insurance bridges the gap between the offered warranty/indemnity package and the requested protection needs of buyers, or private equity sellers accept a warranty/indemnity package to a certain extent (eg, a small portion of the purchase price is kept as an escrow hold-back).

Typically, the private equity seller provides exit warranties to a buyer on legal organisation, taxes, financial statements, employment, properties and assets, intellectual property, financing, commercial agreements, litigation and compliance. However, there is an increasing trend to limit operational warranties.

In some cases, the management team provides a buyer with statements that do not qualify as warranties but are aimed at providing comfort to the buyer on a non-recourse basis, mostly in relation to operational aspects (eg, that there is no pending or threatened litigation).

In recent years, warranty and indemnity insurance covering damages resulting from breaches of warranties and indemnities has become a key part of transactions, including transactions in the Austrian private equity market. Commonly known risks or statements where the due diligence exercise has been weak are excluded from the insurance package. Such warranty and indemnity insurance is increasingly used to cover the gap between the seller's interest in limiting its exposure and achieving a clean exit and the protection and recourse requirements of the buyer (please also see 6.9 Warranty Protection).

Litigation in connection with private equity transactions is common. The frequency of litigation is volatile, and generally depends to an extent on the performance of the private equity market and related transactions.

It is standard market practice in international private equity transactions to agree on arbitration clauses. The main advantages of arbitration are that the tribunal has experience in international transactions and knowledge of the underlying economic aspects of such deals, compared with court litigation. In particular, failure to complete the transaction, price adjustment, leakage amounts, leakage adjustments, earn-outs and breaches of warranties are the subject of share purchase agreement-related arbitration. Disputes over the financial aspects of a private equity transaction (such as leakage adjustment disputes) may alternatively or additionally be subjected to arbitral expert (Schiedsgutachter) procedures if accounting principles, calculation aspects or auditing processes are concerned.

Public-to-private transactions are uncommon in the Austrian market, particularly with respect to private equity transactions, as there are only a few Austrian public companies with a large number of free-float shareholders. In public-to-private deals, the private equity fund would have to launch a voluntary takeover offer aiming for control, typically combined with the condition of reaching the acceptance threshold of at least 90% of the shares of the target company. Upon reaching such threshold, the private equity fund can squeeze out the remaining minority shareholders. While public takeovers by private equity are on the rise globally, an increase of such transactions is not expected in Austria.

A shareholder of a public company is required to publicly disclose its shareholdings to the FMA, the Stock Exchange and the issuer if it – directly, indirectly or through financial instruments or derivatives – reaches, exceeds or falls 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% (rarely seen in practice in Austria), which will need to be published on the website of the issuer; the FMA will also need to be informed. A shareholder is required to disclose immediately – and in any event within two trading days – each time a relevant threshold falls below or exceeds any of the threshold amounts.

If a shareholder does not comply with the above-mentioned disclosure obligations, the voting rights attached to the shares that are not disclosed will be automatically suspended. The articles of association of the company may also extend the suspension of voting rights to all voting rights of the shareholder breaching the required disclosure obligation.

A bidder who acquires a direct or indirect controlling interest in a public company must launch a mandatory offer in relation to all shares, pursuant to Section 22 et seq of the Takeover Act (TA). The initial acquisition of a controlling interest and any change of control are encompassed by this provision, and each trigger the obligation to launch an offer. However, the acquisition of up to 30% of the voting rights does not trigger any obligation to launch a mandatory offer (safe harbour). A shareholding between 26% and 30% must be notified to the ATC. Consequently, the acquisition of voting rights of more than 30% triggers the obligation to launch a mandatory bid for all shares.

Cash considerations are commonly used in public M&A transactions. The bidder is entitled to offer cash, shares or a combination of cash and shares. There are generally no minimum pricing rules or cash requirements. However, in a mandatory offer and a voluntary offer aimed at control, the bidder must offer a cash consideration, and can only offer shares as an alternative to such cash offer. In such a case, the cash consideration offered must comply with the minimum price requirements – ie, the cash offer must be at least the average share price of the target shares during the six months prior to the publication of the offer, or the highest price paid or offered for the target shares by the bidder in the 12 months prior to filing the offer, whichever is higher.

Pursuant to Section 8 of the TA, voluntary offers and voluntary offers to acquire control can be conditional on the fulfilment of conditions. Generally, conditions are permissible pursuant to the TA to the extent the conditions are objectively justified. In practice, this means that each relevant condition with respect to a takeover offer must be analysed and assessed on a case-by-case basis. Generally, conditions are not permitted to the extent their fulfilment is at the discretion of the bidder. Pursuant to Section 25b of the TA, mandatory offers can only be subject to conditions that are required by law, such as approval from the antitrust authorities.

The agreement of break fees is generally not prohibited in public M&A transactions, but break fees are fairly uncommon in practice. Depending on the amount of break fees, such agreement may hinder competing offers and thereby violate the provisions of the TA. An agreement with respect to break fees must be explicitly contained in the offer document.

If a private equity bidder does not seek or obtain 100% ownership of a listed target, the governance rights with respect to the target outside of its shareholdings very much depend on the rights connected with the shareholding of such bidder by law and under the existing by-laws of the target. Therefore, the investor should first analyse the details of the rights available to it by law, based on the level of its shareholding, and in the existing governance documents prior to developing a strategy on optimising corporate governance.

Shareholders holding more than 25% of a company's share capital present at a shareholders’ meeting may object to the amendments of the articles of the company (including capital measures) and measures excluding shareholder subscription rights. Shareholders holding at least 30% of a company's share capital have the right to elect an additional supervisory board member if three or more members of the supervisory board are elected in one shareholders’ meeting and one candidate received at least one-third of the votes in all prior elections without being successfully elected. In that case, the unsuccessful candidate who received the one-third vote in prior elections will be declared as elected without any further votes.

Private equity funds are expected to seek the right to nominate board members and to request veto rights (although there is no Austrian practice in relation to private equity targeting listed companies).

Pursuant to the Squeeze-Out Act, a majority shareholder that directly or indirectly owns 90% of the share capital of a target is entitled to squeeze out the remaining minority shareholders. The minority shareholders cannot stop the squeeze-out but can generally request the compensation granted to them to be reviewed by a court. This squeeze-out process applies to public and private companies. Therefore, a voluntary offer aimed at control often contains a minimum acceptance threshold of 90% in order to ensure the possibility of a squeeze-out and the acquisition of all the shares in the target following a successful tender offer.

Irrevocable commitments are usually only concluded with the principal shareholder of the target, and are promises by security holders of the target to tender their shares to the bidder in the course of a takeover offer. This way, the bidder tries to secure securities in the target company prior to the announcement of its decision to make an offer. In particular, the agreement of irrevocable commitments makes it easier for the bidder to determine an offer price for the envisaged transaction (the value arrived at during the negotiations for the acquisition of a controlling stake – please see 7.4 Consideration).

Irrevocables are not prohibited under the TA and there are good arguments as to why they are permitted. Generally, principal shareholders are entitled to freely dispose of their shares and, in particular, to agree on the sale of their shares to the bidder. However, the literature points out that irrevocables may discourage competing offers and not comply with the duty of confidentiality, and should therefore be cleared with the ATC in advance.

Hostile takeover offers (ie, offers that are not supported by the management board and supervisory board of the target) are permitted, but are uncommon in Austria. The TA does not differentiate between hostile and friendly takeovers – the same rules apply to both types of takeover offer. Private equity-backed buyers have not yet engaged in hostile takeover offers in Austria. In the case of a hostile takeover, the management and supervisory board of a public company are not entitled to implement defensive measures, and are required to remain neutral pursuant to Section 12 of the TA in consideration of the interest of the shareholders.

Equity incentivisation of the management team is a common feature of private equity transactions in Austria, in order to ensure the team's commitment following the change of the ownership in the target. Therefore, the management usually has the opportunity to acquire an interest in the target company. The level of equity ownership for the management team depends on the specific circumstances of a transaction, but a shareholding corresponding to up to 10% is often granted to the management team; in smaller deals, an even higher shareholding may be granted, corresponding to up to 20%.

Commonly, the management team of the target has the opportunity to acquire shares in the target company, and sometimes such participation and commitment are required by the buyer. The structure of the management participation is also tax-driven. There are also deals where the management team is offered the opportunity to invest in the same instruments ("institutional strip") acquired by the private equity buyer, to ensure that the interests of the management and such buyer are fully aligned. To the extent the management is invested on a target level, different structures have been used, such as share options, profit participation rights without any voting rights, and phantom stock options.

Typically, shares held by the management are pooled (ie, the investor has one de facto co-investor). Commonly, restrictions encompass a drag right of the private equity fund and other obligations to transfer the shares to the extent the management and employment agreements are terminated. The pricing formula that is to apply to the transfer of shares following termination depends on the reason for such termination.

Leaver provisions for management shareholders are the so-called "good leaver" and "bad leaver" provisions, which particularly affect the price for their shares to be transferred following the termination of their management agreement, vesting provisions and the option for the investor to purchase the shareholding of the management team in the case of termination.

Typically, good leaver provisions are more favourable to management and apply in the case of the termination of a management agreement without cause, or due to the illness of the manager or the expiry of the term, whereas other termination causes usually qualify as bad leaver events, which provide for less favourable sale terms for the management.

The customary restrictive covenants agreed to by the management shareholders are usually non-compete and non-solicitation undertakings. To the extent the management shareholders are employees of the target (assuming the target is either a limited liability or a stock corporation), such managing directors are required by law to fulfil non-compete and non-solicitation obligations throughout the period of their management position.

Generally, non-compete and non-solicitation provisions are enforceable for a period of two to three years after completion of the transaction. To the extent the shareholder is an employee of the company, the enforceability of the above-mentioned non-compete and non-solicitation provisions is generally limited to one year from the termination of the employment agreement, provided the above-mentioned undertakings do not limit the shareholders' future professional opportunities.

Please see 10.3 Tag Rights.

Management shareholders sometimes enjoy tag rights, particularly in start-up companies and companies with considerable upside potential. Anti-dilution protection mechanisms in favour of the management owning target shares are also seen.

Typically, the management team does not have a right to control or influence the exit. However, a strong management team will have de facto influence on the process through the bidders seeking to incentivise such a team to stay on.

The level of control for a private equity fund shareholder over its portfolio companies depends in particular on the legal form of the portfolio companies. Most typically, a non-Austrian entity holds an Austrian entity in the form of a limited liability company, which acquires the Austrian target (please see 5.2 Structure of the Buyer). The private equity fund is usually the sole or majority shareholder of each portfolio company that is organised as a limited liability company in Austria. The majority shareholder of a limited liability has far-reaching control rights and instruction rights vis-à-vis the management. In particular, the shareholders can:

  • instruct the managing directors to implement certain measures, whereby the managing directors are bound to such instructions; and
  • remove the managing directors without cause at any time.

Typically, the management board is required to comply with pre-defined rules of procedure setting out the requirement of shareholder consent or the consent of an advisory board with respect to important measures of the company. These rules of procedure and the instalment of an advisory board that has information and consent rights – together with the shareholder right to dismiss and appoint the management board – are essential shareholder rights enabling the private equity shareholder to exercise tight control over its portfolio companies.

Generally, a private equity fund majority shareholder cannot be held liable for the actions of its portfolio companies. However, certain exceptions to this general rule apply, particularly in the following cases:

  • if the private equity fund majority shareholder causes the insolvency of a portfolio company;
  • if the private equity fund majority shareholder de facto manages the portfolio company (faktische Geschäftsführung), in which case the actual managing director has de facto no managing function, and such action brings about adverse consequences for the company and its creditors; and
  • if the assets of the private equity fund majority shareholder and the portfolio company cannot be separated (Sphärenvermischung).

Private equity fund shareholders typically impose their stringent compliance policies on the portfolio companies to the extent such compliance policies do not violate Austrian law. In most cases, this is required by the investors in the private equity fund in order to meet investment criteria. It is also an important element in preparing the company for a future sale.

The typical holding period for private equity transactions before the investment is sold or disposed of is about four to five years, and private equity sellers typically reinvest upon exit. As a result of the 2008 financial crisis, longer holding periods have been seen, particularly in relation to financial institutions owned by private equity entities. The most common forms of private equity exit thus far are trade sales (ie, sales to a strategic investor) and secondary transactions (ie, sales to a financial investor). Some of the recent exits in Austria were run as dual-track processes and finally did take the IPO route (financial institutions in both cases).

Shareholder agreements typically include a transfer obligation of the shares of a limited liability company, such as drag rights; private equity sellers have been seen utilising the drag mechanism. To the extent an agreement contains drag rights, tag rights or other option rights (such as put or call options), for a limited liability company said agreement must be executed in the form of an Austrian notarial deed (Notariatsakt) in order to be enforceable.

Please see 10.2 Drag Rights.

Management shareholders sometimes enjoy tag rights, depending on the deal; such rights are rather prevalent in start-up companies and firms with considerable growth potential.

Generally, an IPO may provide for certain advantages compared to other disinvestment types; on average, higher prices for the participation are achieved when going public. In addition, in the case of a sale, the private equity investor remains flexible and does not have to bind itself to one contractual partner. Moreover, the investor can usually profit from the increase in value of its unsold shares.

Typically, the underwriting banks request the lock-up of the private equity seller to a certain extent – ie, with respect to a limited portion of the shares and subject to time limitations (usually between three and six months following the IPO).

Wolf Theiss

Schubertring 6
1010 Vienna
Austria

+43 1 51510 5100

+43 1 51510 665100

horst.ebhardt@wolftheiss.com www.wolftheiss.com
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Law and Practice in Austria

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Wolf Theiss is one of the leading law firms in Central, Eastern and South-Eastern Europe (CEE/SEE), and has built its reputation on a combination of unrivalled local knowledge and strong international capability. The firm opened its first office in Vienna 60 years ago, and now brings together more than 340 lawyers from a diverse range of backgrounds, working in offices in 13 countries throughout the CEE/SEE region. More than 80% of the firm's work involves cross-border representation of international clients. The team works closely with clients, through the firm's international network of offices, to help them solve problems and create opportunities. The lawyers know how to leverage clients' private equity in Austria and CEE/SEE, and make it work for their future. From fund formation to limited partner and general partner agreements, regulatory compliance and governance, and portfolio M&A, M&A specialists facilitate and negotiate transactions, and execute other instruments such as complex financings, strategic partnerships, leveraged buyouts, cross-border M&A, carve-out transactions, IPOs and trade sale exits.