Private Equity 2023 Comparisons

Private equity M&A transactions have reached record figures in recent years despite the uncertainty generated by the COVID-19 pandemic and the war in Ukraine.

Record Levels of PE Investment and VC Transactions

According to the Spanish Venture Capital and Private Equity Association (SPAINCAP), Spanish private equity (PE) capital investment in 2021 reached its second highest record ever, with a total invested volume of EUR7,572 million, in a total of 933 transactions. Venture capital (VC) transactions, in particular, have been especially intense, at two and a half times the peak reached in 2020. In terms of divestments, a volume of EUR2,667.9 million was recorded in 361 transactions, most of which were carried out by private national operators. 

Looking at the two main segments of the sector, PE investment reached EUR5,464.5 million spread across 160 investments, and VC investment reached a new all-time high of over EUR2,108 million (which represents an increase of 153% over 2020 figures) in 773 investments.

Regarding FY 2022, and as per the information in the monthly reports of TTR and Intralinks (available up to May 2022), there has been a 13% increase in the number of PE transactions and a 2% increase in the number of VC transactions. Pursuant to the information provided by SPAINCAP, FY 2022 saw an all-time record in investment in Spanish companies. PE  investment reached EUR7,113 million (a 30% increase compared to 2021) spread across 181 investments. VC transactions reached a new all-time high of over EUR2,124.6 million (a 1% increase compared to 2021), spread over 779 investments. 

According to TTR, as per the monthly reports (up to June 2023) there have been 1,338 transactions for a combined value of EEUR34.71 billion in Spain in the first two quarters of 2023.

Major Market Challenges

However, this upward tendency could be affected by major market challenges at European and national level, such as inflation, supply chain challenges, interest rate hikes, and environmental or social and governance (ESG) risks. It should be pointed out that PE funds now assess acquisitions much more carefully and with more thorough due diligence to avoid risk exposure after the transaction. Investment activity will continue in the coming months, albeit with some slowdown in deal closings: in Q1 2023 the PE and VC industry invested EUR2.172 billion (29% less than in the same period of 2022) in 219 investments.

W&I Insurance

In this context, the use of warranty and indemnity (W&I) insurance is likely to continue to grow in Spain, not only through PE funds but also through industrial players that seek to ensure a clean transaction.

W&I insurance has become widespread in Spain, not only in PE investment, but mainly in the context of PE fund divestments, to ensure a clean exit (95% of PE divestments have included the execution of a W&I insurance).

Technology in M&A Processes

It should also be noted that the use of technology in M&A processes has been consolidated, both at the negotiation level (Zoom or Teams negotiation meetings) and at the signing level, through electronic authentication platforms.

According to a recent SPAINCAP report, the following were the most active sectors in 2022: 

• Companies in the IT sector were once again the main recipients of financing in terms of both investment volume and number of investments, but with a slight decrease in market share. The IT sector received 24.5% of the total resources invested, thanks to the contribution of the following transactions: Seedtag, esPublico, Fever, Ekon, Ayesa and Civitatis, among others. 
• Consumer products, which received 21% of the total resources invested, had its most significant transactions with Esmalglass, Neolith, Uvesco and Natra, among others. 
• Industrial products and services received 13.8% of the total resources invested, with transactions involving ITP Aero, Grupo Garnica Plywood and Konecta. 

During FY 2022, PE investment maintained its focus on sectors such as digitalisation and healthcare, but also on sectors that are in the process of recovery, such as consumer products and industry.

It should also be noted that the war in Ukraine might lead to a decrease in Russian gas consumption in the short term, which opens up a great opportunity for the renewable energies sector as an alternative to gas. In this regard, price stabilisation formulas through power purchase agreements (PPAs) may materialise in significant M&A transactions.

Over the past twelve months, rising interest rates and other current macro-economic factors have had a notable impact on PE deal activity in Spain. As interest rates increased, borrowing costs for businesses and investors escalated, leading to tighter credit conditions and reduced access to cheap financing. This scenario has made it more challenging for PE firms to fund acquisitions, resulting in a slowdown in deal activity in the country.

Other macro-economic factors such as fluctuations in GDP growth, inflation rates, and geopolitical uncertainties have also contributed to a cautious approach from investors.

However, despite such challenges, certain sectors have shown resilience and continue to attract private equity interest. IT, healthcare, and renewable energy have been among the bright spots, as these industries demonstrate potential growth and are less affected by interest rate fluctuations and macro-economic headwinds.

In response to the changing landscape, PE investors have become more selective in their decisions, focusing on businesses with stable cash flows, strong management teams, and solid growth prospects.

In conclusion, rising interest rates and macro-economic factors have created headwinds for private equity deal activity in Spain over the past year. However, certain sectors remain attractive, and firms have adapted their strategies to navigate the challenging economic conditions. The overall impact has been a slowdown in deal activity, with a greater emphasis on prudent investment choices.

One significant legal development in Spain that will have an impact on PE investments and transactions is the enactment of the Royal Decree-Law 5/2023, which introduced a series of measures in response to the economic and social consequences of the conflict in Ukraine, supporting the reconstruction of La Palma Island, addressing vulnerability situations, transposing EU Directives on corporate structural changes, work-life balance, and enforcing EU law.

The new law, in effect as of 29 July 2023, will introduce certain changes to the regime governing structural modifications,  which presumably will have an impact on PE investments. See the Spain Trends & Developments chapter in this guide for further discussion.

As a result of this law, the expert report, which is requested for leveraged mergers subsequent to the leveraged acquisition of a target company, will no longer have to address the "existence of financial assistance", thus simplifying the process and avoiding the controversies related to evaluating financial assistance in such transactions as it is difficult for experts to determine whether the financial assistance was fair and equitable.

Removing this requirement will have several benefits for PE funds engaging in leveraged mergers in Spain:

• allowing PE investors to execute leveraged mergers faster and more efficiently, without the need for extensive evaluation of financial assistance;
• reducing costs related to additional evaluations and advice, which will enhance the return on investment for PE and allocate resources to other strategic areas; and
• permitting greater flexibility in structuring leveraged mergers, aligning them with investment strategies and transaction-specific needs as well as with the requirements of the finance providers (as it is a common requirement under such financings to merge the target company and the acquiring vehicle).

In addition to the above, and among other measures, regulations regarding Spain's electric power supply have also been changed, mainly aiming to minimise the impact of the war in Ukraine, enhance the use of renewable sources and regulate the remuneration to the sector. PE funds have actively followed these new regulations, despite the uncertainty generated by continuous change.

Furthermore, new regulations have been introduced concerning foreign investments regulations which are explained in the relevant section (see 3.1 Primary Regulators and Regulatory Issues).

In general terms, M&A transactions are not subject to restrictions or regulatory filings in Spain, with the following exceptions.

Merger Control Regulations

These set out the need for the approval of the National Markets and Competition Commission (Comisión Nacional de los Mercados y la Competencia or CNMC) when certain thresholds in the target's market share and turnover are met. Transactions are suspended until this approval is issued. The CNMC may impose the fulfilment of certain actions as a condition to complete the relevant transaction (eg, carve-out of certain assets or business units).

Foreign Investment Regulations

These were issued in March 2020 and in 2023. A new Royal Decree on foreign investment will come into effect on 1 September 2023. This new Royal Decree has two crucial aspects: (i) the scope of investment operations to be reported to the Foreign Investment Registry is modified; and (ii) the regime for the suspension of liberalisation of foreign direct investments in Spain is clarified and developed, requiring administrative authorisation in certain cases. As a result of these regulations, any investment into Spain carried out by residents of countries outside the EU and the European Free Trade Association (EFTA), or carried out by residents of the EU or EFTA whose ultimate beneficiary owner lies outside the EU or EFTA, will need prior authorisation by the Spanish government if the investment meets the following conditions: 

• It implies that the foreign investor will hold a stake equal to or greater than 10% of the share capital of a Spanish company, or will effectively control a Spanish company. Pursuant to the new regulation, some types of operations, which were not covered by the previous Royal Decree, are now included in the notification obligation:
1. acquiring shares in closed-end investment schemes or collective investment schemes, resulting in a stake equal to or exceeding 10% of the entity's capital;
2. equity contributions that do not increase the share capital, provided the contributor holds a stake equal to or exceeding 10%;
3. intragroup financing to companies or branches exceeding EUR1 million with a repayment period longer than one year; and
4. real estate investments, although the new regulations set the thresholds at EUR3 million for Spanish investments executed in foreign countries and EUR500,000 for foreign investments in real estate assets in Spain.
• It is directed into a “strategic sector”.
• It is greater than EUR1 million.

“Strategic sectors” include, among others, critical physical or virtual infrastructures (energy, health, water, transport, communications, communications media, processing and data storage, aerospace, military, electoral and financial sectors); critical technology; essential commodities (such as energy or raw materials and “food safety”); sensitive data and the media.

The aforementioned investments will require prior authorisation from the Spanish government, otherwise they will have no legal effect whatsoever until legalised and will entail an infringement punishable by law. 

Data for Spain shows that foreign investment increased by 13.9% in FY 2022 compared to FY 2021, surpassing EUR34.178 billion. However, there has been some deceleration in recent quarters, aligning with global trends.

According to a report published by the Ministry of Industry, Consumption and Tourism, during FY 2022, 83 transactions were submitted for prior authorisation. Ten applications were closed as there was no need for approval and 63 applications out of the remaining 73 were approved without mitigation measures due to the absence of significant risks on security, health, or public order. In nine cases, the investments were approved with mitigation measures, while one application was not authorised as effective mitigation measures could not be established.

Other Tightly Regulated Sectors

Other tightly regulated sectors include banking, insurance and utilities, which are all subject to regulatory oversight from the relevant supervisory authority.

Due diligence is normally carried out through a virtual data room (VDR) into which the relevant requested documentation is uploaded. Due diligence procedures also imply a constant question-and-answer process with the management of the target company. It is usual for due diligence procedures to be co-ordinated by a corporate finance team.

The scope of due diligence usually depends on the size and industry of the target, as well as on the type of purchaser, who may demand a wide spectrum of due diligence, ranging from narrow-scoped to full and comprehensive. PE funds generally request the full scope of due diligence, including:

• financial due diligence;
• legal due diligence;
• tax due diligence; 
• labour due diligence; and
• technical due diligence (among others, when the target operates in the real estate or energy industry).

Due diligence areas which are not very common but are increasingly being included in the scope of due diligence are compliance, corporate social responsibility, ESG and cybersecurity.

Contingencies Identified in Financial, Tax and Labour Due Diligence

In so far as they typically include an estimated amount per contingency, these contingencies are typically addressed through:

• valuation/consideration adjustments;
• specific indemnities included in the share sale and purchase agreement (SPA); and/or 
• guarantee mechanisms (escrows, bank guarantees, etc).

Contingencies Identified in Legal Due Diligence

Contingencies in legal due diligence are often of a qualitative nature, for which remedies should be adopted before or after the transaction. They are therefore usually addressed through:

• remedies carried out by the seller before closing;
• remedy obligations for the seller included in the private share SPA, which must be carried out after closing or between signing and closing;
• general representations and warranties included in the SPA; and
• specific indemnities included in the SPA.

On top of the above, given the current situation of uncertainty generated by the pandemic and the war, PE funds are increasingly requesting the revision of material adverse change (MAC) clauses in certain contracts that are important for the target company.

Due Diligence Findings

Due diligence reports are frequently divided into an executive summary/red flag section, in which the contingencies identified are highlighted, and a descriptive section in which each contingency and other aspects of the target company are detailed.

Expert sessions between the purchaser’s and seller’s advisers are usually held during the due diligence process.

Contingencies identified will thereafter be discussed among the parties in order to determine the seller’s liability in the SPA. The purchaser’s knowledge of the target company acquired during the due diligence process is a frequent point of discussion among the parties (ie, whether the seller’s liability would have to be limited by such buyer’s knowledge).

The completion of a vendor due diligence report depends primarily on the size of the target company and whether the sale is made through an auction process. It is therefore more common in medium and large-cap targets.

In auction processes, regardless of whether a vendor due diligence report is to be prepared, it is common to provide the potential bidders at a preliminary stage with a fact book which highlights key aspects of the target and where certain contingencies can be identified.

If a vendor due diligence report is eventually prepared, it is typically provided to potential bidders, such as PE funds, so as to enable them, to assess the target company's strengths, risks, and growth prospects, ensuring informed decision-making during the transaction process.

Advisers typically rely on vendor due diligence reports, although it is common for buyers to perform a buy-side “confirmatory due diligence”, which “challenges” the contingencies identified in the vendor due diligence and covers additional matters.

Private Sale and Purchase Agreements

The vast majority of PE deals are carried out through private sale and purchase agreements between the seller and the purchaser. Court-approved schemes are reserved for liquidation procedures and tender offers are limited to listed companies, so they are not generally part of a PE transaction.

Private sale and purchase agreements are then notarised before Spanish notaries public, who, among other functions, attest the date and the capacity of the parties to execute the transaction documents. They also guarantee that transactions are carried out in accordance with the law and that the parties understand and agree to the terms of the transaction. In some deals their presence is mandatory (such as the acquisition of shares of limited liability companies) but, in any case, they are typically involved in a PE deal, as the legal certainty that they provide to the transaction benefits all the parties involved. After the closing of the transaction, the deeds granted before the notary acquire probative value, and the parties may request copies of said deeds at any time.

Bilateral and Auction Processes

PE funds take part both in bilateral and auction processes, depending on the specific transaction. Competitive auction processes are standard for medium and large-cap companies, while in the case of small-cap companies, the transaction usually entails a bilateral negotiation between the seller and the PE fund.

The terms of the transaction in the case of auction processes tend to slightly favour the seller, who seeks to get different purchasers to compete with each other to obtain a better price and contractual terms and conditions in the agreement, although this varies, depending on the characteristics of the transaction (industry, type of parties involved, etc).

Share Deals and Asset Deals

Share deals are far more frequent than asset deals. Whereas in share deals the acquisition of the shares of a company entails the indirect acquisition of all its assets and liabilities, in asset deals there is a need to:

• precisely detail in the asset purchase agreement each and every asset that is being transferred (assets which are not detailed will remain with the seller); and
• depending on the transfer regime of the specific asset, the consent of the counterparties to the agreements that are being transferred or the consent of the public authorities is likely to be required.

Ancillary Documentation

Typically, PE transactions involve the execution of an SPA in addition to a shareholders' agreement between the PE fund special purpose vehicle (SPV) and the shareholders that manage the company and retain a stake, regulating the relationships between the shareholders, and between the shareholders and the company.

A management incentive plan (MIP) is also very common in PE transactions. These plans aim to increase the value of the target company and its affiliates by providing an extraordinary incentive to the target’s managers (independent from and additional to their employment or mercantile relationship with the company), in exchange for maximising the value of the company in a liquidity/exit event. The amount of the extraordinary remuneration ("ratchet") usually depends on the return on investment (ROI) of the PE fund.

Acquisitions are typically carried out through SPVs incorporated in Spain as limited liability companies (“SL companies”). PE prefers such companies for the following reasons:

• capital requirements (EUR1 to incorporate an SL company); 
• the shareholders’ liability is limited to the amount of their contributions; and
• an SL company provides management flexibility and is less expensive than a public limited company (sociedad anónima or SA).

Usually, SPVs are directly controlled by a PE fund (if the fund is located in Spain) or by a foreign holding entity ultimately controlled by a fund located in a tax and investment-friendly country with which Spain has a favourable double-taxation treaty.

It is unusual for a PE fund to be a party to the transaction documents except for the equity commitment letter agreeing to fund the target.

Funding Structure of PE Transactions

Most PE transactions are financially leveraged, involving a combination of equity and debt (the proportion depends on the size of the transaction and the business involved). 

Funding structure normally consists of partial financing of the acquisition although the purpose of the financing could be to refinance existing debt or to partially finance investments in capital expenditure (capex). 

In those funding structures, banks usually act as lenders. It is customary for the due diligence report to be shared with and analysed by the lending banks as a condition precedent to the signing of the facility agreement. The lending banks may require reliance on the due diligence report.

Depending on the characteristics of the acquisition, lenders may require collateral or the establishment of the parent company as guarantor.

When the purchaser contemplates an SPV, the sellers might request an equity and debt commitment letter.

According to SPAINCAP, despite the change in monetary policy by central banks and the consequent rise in interest rates, leveraged transactions stood out from the rest of the categories and 64.5% of PE transactions were financed with debt in FY 2022, the second best record ever after 2019.

Providing comfort to the purchaser regarding the debt-funded portion of the purchase price is crucial in Spain's PE transactions to ensure a successful and smooth transaction. The specific approach to secure debt financing may vary depending on the deal's complexity, parties involved, and prevailing market conditions. Purchasers can find comfort through mechanisms such as a commitment letter from lenders, presenting a detailed debt financing plan, having binding agreements with lenders, and including contingency provisions in the purchase agreement to adjust the price or terminate the deal if needed.

Acquired Stake

PE typically prefers to acquire a majority stake in the target company, with the key managers remaining as managers and minority shareholders. 

Deals involving a consortium of PE sponsors are not typical in Spain, except for transactions involving large-cap companies. Certain PE transactions involve other investors alongside the PE fund, but this does not happen very frequently (although it is common in VC deals), and it is normally driven by the modus operandi of the PE fund rather than being a general feature of PE transactions. 

External co-investors in such transactions will usually have very limited political rights in the target company, which will be governed by the fund.

In Spain, consortia with both PE funds and corporate investors are less prevalent compared to other investment structures. PE investors prioritise active ownership and value creation, while corporate investors focus on strategic investments related to their core business objectives.

In the PE market in Spain, completion and locked-box accounts are the predominant consideration mechanisms.

Completion Accounts Mechanism

The initial agreed price is subject to a post-closing adjustment. On the closing date, the seller's auditor determines the parameters that have been used to agree the equity value (mainly, net debt and working capital). The purchaser will have a period of time after the closing date (normally three months) to review those parameters and, where appropriate, challenge the calculation of the purchase price. 

Locked-Box Mechanism

In this mechanism, the parties agree on a fixed price based on the financial statements closed on a specific reference date. Usually, the parties agree that the financial statements must be audited or at least agreed between the parties.

The purchase price can then be adjusted in the case of leakages, that is, actions executed by the seller between the reference date and the closing date which are not within the ordinary course of business. 

Earn-Outs, Deferred Consideration or Roll-Over Structures

These mechanisms are relatively common features in PE transactions in Spain. PE funds focus on maximising returns within a specific investment period might lead to using mechanisms such as earn-outs or deferred consideration to bridge valuation gaps or incentivise future performance. These mechanisms are often used to incentivise sellers to remain involved in the business and increase the purchase price, contingent on achieving certain performance milestones or future financial results.

PE funds' involvement in a transaction may lead to more sophisticated contractual protections related to consideration mechanisms, such as earn-out provisions tied to measurable financial or operational targets, and detailed conditions for deferred consideration payments.

Where locked-box consideration structures are agreed, it is quite common for the seller to try to charge interest on the price after the date of opening of the locked-box account (ticking fee). However, such interest is heavily negotiated, and it is common for the parties to agree that no interest will apply.

As regards any interest charged on leakages, the usual provision negotiated would be to directly reduce the purchase price on a euro-for-euro basis when any such leakages arise prior to closing. If any leakages arise post-closing, interest could be charged on the leakage amount, although it is not a common practice in Spanish PE transactions.

In both the structures typically used in Spain (locked-box and completion accounts) it is common to establish a dispute resolution mechanism.   

Initially, the parties would agree to engage in good faith negotiations with the aim of reaching a mutually agreeable resolution. If this proves to be impossible, the parties agree to delay the decision, which will be made by an independent expert selected by both parties in accordance with the SPA’s conditions (usually an international audit company). The independent expert's opinion is usually binding for the parties, excluding the possibility of submitting the dispute to a court or arbitration unless the independent expert is grossly negligent. 

Applying the general dispute resolution system established by the parties and governing the SPA (court or arbitration) is very uncommon.

In transactions with complex consideration structures, parties may consider including more tailored and detailed dispute resolution provisions in the purchase agreement. This could involve appointing a dedicated expert or using other alternative dispute resolution methods to address any potential disagreements regarding the achievement of performance targets or the calculation of contingent payments.

The most common condition is notifying the CNMC, which is the Spanish antitrust authority. 

Other conditions consist of:

• the buyer’s financing of the acquisition;
• obtaining third parties’ consent for significant agreements containing change-of-control provisions of the target (termination of which would have a significant impact on the acquired business); and
• a carve-out or reorganisation that may need to occur before closing the transaction.

MAC provisions are rarely used as a condition precedent but have become more relevant due to the COVID-19 pandemic.

Approval of the seller or the purchaser by the general shareholders’ meeting is likely to be a requirement to execute the transaction (especially when the transferred assets represent 25% of the purchaser's or seller's assets, according to applicable Spanish law) but is not included as a condition precedent to executing the agreement.

Due to their nature, PE funds typically adopt a very aggressive negotiating position and PE purchasers are usually very reluctant to accept any “hell or high water” undertakings. It is not, therefore, very common to include such undertakings in PE transactions, although a trend towards sellers trying to push the execution risk onto the purchaser through such clauses is becoming apparent. These provisions usually apply to antitrust and foreign investment authorisations conditions precedent and require the purchaser to adopt the required measures, including the execution of divestments, to be able to close the transaction. 

Traditionally, in Spain, break fees or reverse break fees have been very rare in PE transactions. In sale and purchase agreements, sellers were hesitant to accept any walk-out rights other than the conditions precedent previously negotiated and agreed by the parties. Notwithstanding this, there has been a recent growing trend in the use of break fees provisions in PE transactions, which have been included in 30% of the transactions with deferred closing in 2022. The penalty is typically linked to the purchase price and varies depending on the particularities of the transaction, from under 1% to 15% of the purchase price. 

As a general rule, SPAs exclude the application of Spanish law and are governed by their provisions. An acquisition agreement could not therefore be terminated by a legal cause other than the provisions agreed therein, except for wilful misconduct, the application of which cannot be excluded by the parties. Common provisions of termination of a SPA usually include the following. 

• Lack of fulfilment of the conditions precedent (CPs) set out in the SPA prior to the relevant long-stop date. However, in such a scenario, the parties would usually find an amicable way to proceed with closing and, given that such conditions precedent (if not regulatory) can be waived by the parties, it is very uncommon for either party to terminate or walk away from a signed SPA. As an exception to the foregoing, in energy (greenfield) sale-and-purchase PE deals, if the ready-to-build status condition precedent is not met, the parties would normally walk away from the agreement. The terms of the long-stop dates foreseen in the SPAs depend on the type of CPs included therein, typically a few months in the case of antitrust CPs or foreign direct investment notifications; or weeks in the case of specific pre-closing covenants (depending on the nature of such covenants). Conversely, in the case of the sale and purchase of renewable energy projects where the acquisition is conditioned upon the project reaching the ready-to-build status, the long-stop date can be extended up to two years as from signing date.
• MAC clauses, which are not very common in Spain. PE sellers are very reluctant to accept any MAC clauses, as these significantly reduce the certainty of the deal. However, “soft” MAC clauses (which refer to macroeconomic situations which are unlikely to materialise) have been introduced in some SPAs as a consequence of the impact of COVID-19 and the conflict in Ukraine. 

Risk allocation varies and would need to be analysed on a case-by-case basis. In general terms, risk allocation favours the seller.

In competitive auction processes, especially where a PE seller is involved, SPAs are drafted in a seller-friendly manner, meaning that the scope of representations and warranties (R&W) insurance is narrowed, and the quantum is also limited.

In the case of a PE seller, R&W insurance would basically refer to capacity, title to the shares being sold and the absence of liens or encumbrances over the shares. It is common that the management team is the one that gives the R&W in the SPA. In the case of a trade seller, a more complete set of R&W is usually agreed (including business-related R&W). 

The most common limitation on liability for a seller would include full disclosure of the data room. On some occasions, known issues as a consequence of the due diligence exercise also limit the liability of the seller. 

Warranty Protection to a Purchaser

Warranties under a SPA include the following.

• Fundamental R&W, which mainly refer to the valid existence of a target, title to the shares, capacity of the parties, absence of conflict, lack of insolvency and the absence of lines or encumbrances over the shares being sold. For these fundamental R&W, liability would only be capped at the purchase price. 
• Business R&W, which refer to all kinds of aspects of the business of the target (including those relating to the accounts, main contracts or agreements to which the target is a party; compliance with tax obligations; litigation; employees or the conducting of business). PE funds are reluctant to grant these business R&W, and in some cases, these are granted by the management team. 

As the granting of business R&W is an essential requirement for the purchaser to enter into a SPA, the uptake of warranty and indemnity (W&I) insurance has increased in recent years, as detailed in the subsequent section. 

Limitation Provisions

Fundamental R&W are in all, or almost all, cases limited to the purchase price. On the contrary, business R&W are normally subject to certain time and quantitative limitations. Time limitations usually range from 12 to 24 months after the closing of the transaction (except for any tax, employment and environmental warranties, which are usually limited to the relevant statutory limitation period). Quantitative limitations could include the following. 

• A cap: the seller's maximum aggregate liability to the purchaser may not exceed a certain amount. 
• De minimis: by virtue of this limitation, only those damages which, individually considered, exceed a certain amount can be claimed by the purchaser.
• Basket/deductible: the seller’s obligation to compensate the purchaser is not enforceable until the damages exceed a certain amount. Exceeding such amount, the seller could be liable for the excess (deductible) or from the first euro (basket).

In auction processes, liability for known issues is normally excluded and general disclosure of the data room against the R&W is also very common. Specific indemnities are usually included in the SPA or in a side letter signed by the seller and the purchaser, to ensure specific protection of the known issues arising from the due diligence exercise. 

Escrow or deferred prices are only common when the purchaser is a PE fund. These are remedies typically used for contingencies whose statute of limitations and, thus, the date on which the relevant contingency/risk disappears, is clearly determined in the applicable law, such as labour or tax liabilities. PE sellers are usually unwilling to accept escrow or any sort of price retentions.

W&I insurance is becoming increasingly common in PE transactions as it is the most used remedy in these transactions, having been included in more than 50% of the deals, although it still has certain drawbacks, such as the additional costs of the transaction and the exclusion of certain known issues. The W&I insurance is typically used in relation to the business warranties (including the tax warranties) and, in some cases, also in relation to the fundamental warranties.

Litigation provisions are always introduced in the SPA, although PE purchasers and sellers usually prefer to settle any situations amicably and try to avoid initiating any litigation proceedings. Those disputes which are not solved amicably may be solved by the courts, which is the most used dispute resolution mechanism, or by an arbitrator.

As regards any consideration mechanisms or earn-out discussions, PE transactions usually agree to refer these to an external expert to be appointed by the parties in accordance with the provisions previously set out in the SPA. 

Apart from those referring to consideration mechanisms or earn-outs, the most commonly litigated provisions refer to liability for breach of R&W granted by the sellers.

Public-to-private (P2P) transactions are not very common in Spain since the number of listed companies is relatively low in comparison with other jurisdictions such as the UK or the USA.

P2P transactions in Spain are mainly carried out by:

• private investors holding large equity stakes in a listed company as a result of consecutive acquisitions over time; and 
• in what seems to be a future trend in the market, PE investors (acting both individually and as a pool of different PE investors).

The rationale behind these P2P transactions is usually: 

• lowering the management costs of the listed company by not having to comply with all the obligations imposed on listed companies by the law and market regulations; and
• valuation reasons (when the prices of unlisted companies begin to surpass those of listed ones).

The Spanish legislation on takeover bids states that the governing bodies and the management of the target company; as well as any delegated or empowered body thereof; their respective members; as well as the companies belonging to the group of the target company and anyone who might act jointly with the foregoing shall (i) remain passive during the execution of the takeover bid and (ii) shall obtain the prior approval of the general shareholders’ meeting before taking any action that may prevent the success of the bid, with the exception of seeking other bids, and in particular before initiating any issue of securities that may prevent the offeror from obtaining control of the offeree company.

Notwithstanding this, companies may not apply the provisions described above when they are the subject of a takeover bid made by an entity that does not have its registered office in Spain and is not subject to such rules or equivalent rules.

Any transaction by virtue of which a shareholder reaches, exceeds or falls below a voting right stake threshold of 3%, 5%, 10%, 15%, 20%, 25%, 30%, 35%, 40%, 45%, 50%, 60%, 70%, 75%, 80% and 90% in a listed company, must be notified to the listed company and the market regulator (CNMV).

When the shareholder is a tax-haven resident, the above-mentioned percentages are lowered to multiples of 1% (eg, 1%, 2%, 3%, etc).

In the case of mandatory tender offers, the person acquiring control of any public company shall communicate it to the market to submit the relevant offer to the remaining shareholders. The voluntary tender offers will be communicated to the market once the bidder adopts the resolution to submit the offer.

Once the tender offer has been announced, any acquisition of voting rights reaching or exceeding 1% shall be communicated to the market. Regarding shareholders, anyone holding at least 3% of the share capital of the company shall communicate any change in such percentage.

Mandatory takeover bids are required when a person acquires “control” of a listed company. In such event, the shareholder acquiring control must make a bid for 100% of the issued shares of the listed company at a fair price (ie, a price not lower than the highest price that the offeror has paid or agreed to pay for the same shares during the 12 months prior to the announcement of the bid).

Control is gained when a person (i) acquires, directly or indirectly, a percentage of voting rights equal to or greater than 30%; and (ii) appoints, within 24 months of the acquisition of the listed company shares, more than half of the members of the board of directors, even if the person's holding stake is lower than 30%. 

The breach of duty to make a takeover bid (ie, failure to make a takeover bid, late submission of a takeover bid, or submission of a takeover bid with material irregularities) might entail: 

• suspension of the voting rights held in the listed company; and
• public sanction by the CNMV for a very serious infringement, including –

1. a fine up to EUR 600,000 or 5% of the offender’s own resources;
2. suspension or limitation of the transaction or activities that the offender may carry out in the market, up to a five-year period; and
3. publication of the infraction in the Spanish official gazette.

In the context of a takeover bid, consolidation and attribution of shareholdings issues are relevant for PE-backed bidders, particularly concerning the treatment of target shares held by affiliated or related funds and portfolio companies. This applies in the following ways:

• Mandatory takeover bid: the 30% of voting rights’ threshold applies whether they are held by a single person or by a group of companies.
• Affiliates: PE often manage multiple funds or entities. During a takeover bid, it is essential to consolidate the shareholdings of all affiliated funds or entities to accurately assess the bidder's overall ownership interest in the target company. This aggregation can impact the bidder's ability to reach regulatory thresholds.
• Other portfolio companies: PE-backed bidders may have portfolio companies that hold shares in the target company. The attribution of these holdings to the bidder needs to be properly determined to assess potential conflicts of interest and to comply with disclosure requirements.
• Antitrust considerations: consolidating shareholdings may raise antitrust concerns, particularly if the bidder already has significant ownership in related industries or competitors.
• Shareholder agreements: shareholder agreements between the bidder and other shareholders have to be taken into account as this may have an impact on how the trigger percentage to launch the takeover bid is achieved.

Consideration in most takeovers is paid in cash. Shares could also be used as consideration (eg, shares of the consolidating entity), however cash is far more common.

Mandatory takeover bids shall be submitted at an equitable price. This price amounts to the highest price paid by the bidder within the last twelve months prior to the submission of the offer or, if no previous transactions have taken place, the equitable price shall not be lower than the exclusion price, which shall be determined by an independent expert.

Mandatory takeover bids can only be conditional on the approval of the competition authorities and/or supervisory bodies, while voluntary bids can be subject to additional conditions, such as:

• approval of resolutions of the general shareholders’ meeting of the listed company;
• acceptance by a certain minimum number of shareholders; or
• any other condition which complies with applicable law at the discretion of the CNMV.

A condition based on obtaining the required financing for the bid would not be admissible under Spanish law, as it would breach the principle of irrevocability of the bid and would be contrary to: 

• the obligation of the bidder to ensure that it is able to cover any cash consideration in full; and
• the obligation of the bidder to provide a guarantee, or constitute a cash deposit, to guarantee payment for the shares that have been sold within the framework of the takeover bid.

Break-Up Fees

In the event of two competitive takeover bids, the listed company and the first offeror may agree a break-up fee by virtue of which the latter is compensated for the expenses incurred in preparing the bid. Such break-up fees:

• cannot exceed 1% of the total amount of the bid;
• have to be approved by the board of directors of the listed company;
• must be supported by a favourable report from financial advisers; and
• must be detailed in the prospectus of the bid.

Any bidder who has acquired at least a 90% stake of the share capital with voting rights of a listed company, as a result of a takeover bid, is entitled to require the remaining shareholders to sell their holding stake in the listed company at a fair price (ie, the consideration of the bid).

The prospectus must indicate the intention of the offeror to execute the squeeze-out right in the event of acquisition of 90% of the stake, which has to be executed within three months after the date of expiry of the acceptance period of the takeover bid.

Remaining shareholders also have a sell-out right which must be executed under similar terms and conditions to the squeeze-out right.

Debt pushdowns are typically used in public to private transactions (ie, PE that submits a takeover bid over listed companies with the aim of delisting them). There is no specific threshold to implement such structures, but it must be noted that shareholders’ approval at the level of the target companies may be needed at the time of entering into the financing agreement and security instruments. The most common debt pushdown structure is through financing a dividend or reserve distribution by the target company to the shareholders, which in turn will cancel the initial financing. In any event, Spanish law restrictions on financial assistance will have to be considered when structuring a debt pushdown.

To ensure the success of the takeover bid, it is common to reach irrevocable commitments with significant shareholders prior to the issuance of the offer.

These commitments often include not only an irrevocable right to sell, but also a commitment to exercise their voting rights in such a way as to facilitate the success of the bid (both at a shareholder level and, as far as legally possible, at the board of directors’ level). 

Equity incentivisation of the management team is very common in PE transactions. The management will often retain equity between 5% and 10%. 

Incentivisation is normally structured through management incentive plans, that might include: 

• salary incentives, such as an extraordinary bonus (ratchet) linked to the return on investment of the PE fund and subject to the continuation of the management team; 
• phantom shares or similar plans; and
• debt instruments, the interest on which is linked to the return on investment of the fund. 

Rights and obligations of the management are regulated through shareholders’ agreements, management incentive agreements and/or executive director agreements. 

PE investors hold preferred shares to retain the decision-making control of the company, by holding either or both the majority of the voting rights of the company and/or certain veto rights over key decisions.

It is also quite common that the PE finances the acquisition of the managers’ equity (especially when the managers are not former shareholders of the company).

The management equity plans, which consist of the investment of the management in the investment structure of the PE fund, are becoming one of the most common incentive mechanisms in the PE environment. The investment is made at the same level as the PE fund, which typically takes place in a foreign jurisdiction, indirectly through several fully participated entities. It is common that all managers invest in the same vehicle (ManCo) that is managed by the PE fund and that is the one holding the sweet equity shares.

Vesting provisions are very common in management incentive plans in Spain as they ensure the continuation of the management team. They usually range between four and five years.

Accelerated vesting provisions are also very common, meaning that in the event that the liquidity event occurs prior to vesting of 100% of the incentive, and provided that the beneficiary complies with all the terms and conditions set forth in the incentive agreement, the beneficiary would normally be entitled to receive 100% of the incentive amount at the time of the liquidity event.

Management incentive plans also include certain "good leaver" and "bad leaver" provisions. 

• Good leaver provisions entitle the beneficiary to receive the total amount of the incentive linked to the liquidity event or prior to the liquidity event, but for certain specific and “reasonable” reasons agreed between the PE and the manager, including death, severe/permanent disability, dismissal by the company without cause or resignation by the manager for good cause.
• Bad leaver provisions entitle the PE to early termination of the management incentive agreement, without paying the incentive to the beneficiary, and are the opposite of the good leaver scenarios given above.

Restrictive covenants and obligations are usually regulated between the PE and the beneficiary in the shareholders’ agreement, the employment/director's agreement and/or the management incentive plan. 

PE funds usually require the beneficiaries:

• to assume non-compete obligations and non-solicitation obligations;
• to stay as managers for a certain period of time after the exit of the PE fund if the new investor offers them similar conditions; and
• in certain transactions, to put the R&W in the exit of the PE fund.

Non-disparagement covenants are not that common in Spain but can be agreed between the parties.

Restrictive covenants of managers, such as non-compete or non-solicitation provisions, are typically included in both equity plans and bonus/contractual plans, and a breach of such provisions usually impedes the perception of the incentive by the managers.

Manager shareholders are usually granted protection as regards exit/divestment of the PE fund and anti-dilution.

In this sense, in some cases, manager shareholders have tag-along rights, so they are entitled to divest in the company at the same time as the PE investor. 

Regarding anti-dilution protection, it is also common to guarantee to manager shareholders either that they can maintain their percentage of sweet equity in the company during the investment period of the PE investors, or to grant them the required financing for subscription to additional shares. The anti-dilution provision typically includes commitment from the PE to try, as far as possible, to seek non-dilutive external sources of funding. An exception to this principle is usually the urgent need for financing, which allows the fund to meet urgent treasury needs.

On the other hand, veto rights are generally reserved for the PE investors through their preferred shares, either by having a direct veto right over certain decisions or by keeping control over the majority of the voting rights of the company (sometimes, sweet equity has no direct voting rights). However, some veto rights may also be granted to manager shareholders.

As a general rule, the management team is entrusted with the day-to-day activities of the company, while the PE has control over the key matters at the levels of both the shareholders and the board of directors. 

This control is ensured in the shareholders’ agreement by means of the following: 

• reserved matters in respect of which decisions will only be adopted with the vote of the PE fund, including, among others – 

1. at a shareholders’ level: amendment to the by-laws, mergers, spin-offs, transformation or winding-up, distribution of dividends, share capital increase or decrease, approval of the annual accounts, and the granting of convertible loans; and
2. at a management level: granting and revocation of powers of attorney, acquisition of assets or business exceeding a certain amount, significant decisions over judicial proceedings, the obtaining of financing over a certain amount, and the approval of the remuneration policy of the company and the business plan;

• reporting obligations to the PE fund; 
• drag-along rights; 
• lock-up mechanisms; and 
• non-competition covenants.

The relevant investment documentation typically includes the undertaking of the management to inform the PE fund on all matters materially affecting the business, assets, financial position, tax treatment, and prospects of the relevant company, in addition to their periodical reporting obligations.

The liability of the shareholders is, in principle, limited to the share capital contributed to the company. However, under certain exceptional circumstances, shareholders could be found personally liable through the application of the “corporate veil” doctrine, when they have fraudulently benefited from the establishment of the limited liability company or group of companies.

The corporate veil doctrine was established by the Spanish Supreme Court in May 1984 with the aim of preventing the legal personality of a company from being used as a means or instrument of fraud or for a fraudulent purpose. Its use is restricted and generally requires fraudulent use of the corporate personality and (i) control of several companies by the same person; (ii) related transactions between such companies; and (iii) no economic and legal justification for such transactions.

The usual holding period for a PE fund before a divestment takes place ranges from four to six years, but depends on many aspects, such as the expected return or market momentum.

Auctions and bilateral sales have been the most common form of PE exit. 

Dual-track and triple-track processes require a significant investment of resources and time to materialise and are therefore only attractive to large-cap companies under specific circumstances (market appetite, potential acquirers, etc). However, if carried out effectively, dual-track and triple-track processes increase the chances of an investor achieving a favourable divestment and maximising value for existing market conditions.

The number of secondary buyouts has increased significantly during the recent years and especially in 2022. Specifically, 41% of the PE deals in 2022 were secondary buyouts, and regular exit transactions were reduced to 4% of the deals.

PE transactions usually include drag-along rights in favour of the PE investors. Such rights are included in the shareholders’ agreement and aim to ensure partial or total divestment by the PE investors. 

Thresholds vary, depending on the specific case, but in PE transactions would apply to any other co-investors, regardless of their nature and the percentage held. 

If the co-investor is another PE entity, the lock-up period and exit by either of the investors is heavily negotiated.

Minority shareholders and manager shareholders are in some cases vested with tag-along rights governed by the relevant shareholders’ agreement. The tag-along rights of the managers that are minority shareholders are typically triggered as a consequence of a sale of the PE fund of shares that implies a change of control of the company. 

In the event that the PE investor is the minority shareholder, or two PE investors are co-investors in the same target company, such PE shareholders will usually have both tag and drag-along rights.

Although an IPO is still the preferred exit strategy for PE investors in large deals, this has become increasingly unusual, especially after the severe economic conditions brought on by the 2007–2008 financial crisis and the COVID-19 pandemic and today's economic uncertainty. 

An IPO led by a PE fund has several distinctive features compared to a traditional IPO of a non-private equity-backed company. Some of the key characteristics are the following:

• Valuation and pricing: the company's valuation at the time of the IPO is a critical factor. PE funds often work with investment banks to establish an initial share price that is attractive to both industrial investors and PE investors.
• Relationship with the company and management: PE funds often have an active role in the management and strategy of the invested company. However, after the IPO, their influence may diminish as the company becomes subject to increased scrutiny and governance by public shareholders.
• Partial or total sale: depending on the PE fund’s strategies and market conditions, the IPO can involve a partial or total sale of the PE fund's stake in the company. Some PE funds may choose to retain a certain amount of shares to benefit from potential future increases in share price.

In summary, an IPO led by a PE fund can be an opportunity for both public investors and the PE funds. It allows public investors to access a company with a proven track record and growth potential, while enabling the PE fund to realise profits and redirect its capital to new investments.