The number of deals with Austrian involvement remained stable while the total volume of deals increased significantly. In 2019, there were 328 merger and acquisition (M&A) transactions involving Austrian companies, compared to 324 in 2018. This corresponds to a slight increase of 1.2% in M&A transactions.
The transaction volume increased by more than 50% from EUR7.9 billion (2018) to EUR12.1 billion (2019). In 2018, only two M&A transactions with Austrian involvement exceeded the volume of EUR1 billion.
In 2019, 37.6% or 121 of the 328 M&A transactions were inbound M&A transactions (where foreign investors sought to acquire Austrian targets or their shares). The number of outbound M&A transactions (where Austrian investors sought to acquire foreign targets or their shares) decreased very slightly to 130 (39.6%) in 2019, from 132 (40.7%) in 2018.
The volume of inbound transactions in 2019 amounted to EUR3.1 billion, compared to EUR3.8 billion in 2018. The top five inbound transactions in 2019 represented a volume of EUR2.2 billion. Austrian companies spent EUR8.7 billion on outbound transactions, with the top two outbound transactions (the takeover offer by ams AG regarding OSRAM; the acquisition of 15% in Abu Dhabi Oil Refining Company by OMV AG) accounting for as much as EUR6.8 billion of the total volume of outbound transactions. By comparison, Austrian companies spent EUR3.2 billion on outbound transactions in 2018.
Domestic M&A transactions (where both the target and the buyer are Austrian) accounted for 23.5% or 77 out of 328 M&A transactions in 2019, compared to a total of 69 domestic transactions in 2018.
Strategic investors still account for the vast majority of transactions in the Austrian M&A market. In 2019, 308 out of 328 transactions involved strategic investors, compared to a total of 297 in 2018. By contrast, the involvement of financial investors (private equity or venture capital firms) decreased to 20 transactions (a reduction of approximately 25%) from 27 transactions in 2018.
Furthermore, nearly 40% of all M&A transactions involved European investors. The vast majority of transactions in the Austrian M&A market, approximately 64%, involved investors whose corporate seat is located in Europe, whereas in 2018 approximately 70% of such transactions involved European investors.
Germany remains the most attractive target for Austrian investors with 30% of all outbound transactions relating to Germany, while 56.9% involve the rest of Europe. Undoubtedly, Europe is still the top investment destination for Austrian investors accounting for 86% of the outbound transactions.
In 2019, the most attractive industry for inbound M&A transactions in Austria was the telecoms, media and technology sector. Foreign investment in the telecoms, media and technology sector (33 transactions) was closely followed by foreign investment in the real estate and construction sector (28 transactions), with investment in the industrial sector (17 transactions) lagging well behind.
On the other hand, Austrian investors concentrated their M&A activities mainly on the industrial sector, with 34 transactions in 2019 (compared to 37 transactions in 2018). The real estate and construction sector with 24 transactions closely followed by the telecoms, media and technology sector with 23 transactions, were the two other main areas of M&A activity in 2019.
While the number of deals in the industrial sector (63 transactions) is slightly below the real estate and construction sector (66 transactions), the transaction volume in the industrial sector (EUR5.5 billion) far exceeds the transaction volume in the real estate and construction sector (EUR3.5 billion). As a result, the industrial sector unambiguously leads the ranking in terms of transaction volume (mostly driven by the takeover offer made by ams AG regarding OSRAM).
In Austria, a private M&A acquisition is usually structured either as a purchase of shares (share deal) or of business assets (asset deal).
In case of a share deal, the buyer directly acquires the shares in the target and (only) indirectly the target's business.
In an asset deal, the buyer acquires a business from a seller, which means that the assets and liabilities need to move from the seller to the buyer (subject to limitations, in particular with respect to liabilities, the parties may further define the details of the scope of the purchased assets).
Whether the one or other method is applied, often depends on tax considerations, but also on the scope, shape and complexity of the business that shall be acquired, liability issues and results of due diligence, etc.
As regards merger control, the relevant authorities are the Federal Competition Authority (Bundeswettbewerbsbehörde), which is the recipient of Austrian merger control filings, the Federal Cartel Prosecutor (Bundeskartellanwalt) and the Cartel Court (Kartellgericht).
Depending on the turnover thresholds, competence may pass to the European Commission, in which case the EU Merger Regulation exclusively applies.
Dependent on Industry/Target Type
Depending on the industry of the target entity, regulators like the Financial Market Authority (Finanzmarktaufsicht) or E-Control, an authority monitoring the Austrian energy market, may supervise M&A activities and require additional notification obligations, approvals or "fit and proper" tests.
Typically, these restrictions are used to assess the identity, quality and fitness of the new acquirer and are limited to regulated industries (eg, banking, insurance, investment, pensions, telecoms, aviation, gambling, and in some respects gas and electricity).
Furthermore, M&A activities within certain sensitive – mainly public order and safety related – industries may require approval by the Austrian Ministry for Economic Affairs (see 2.3 Restrictions on Foreign Investments and 2.6 National Security Review).
Public takeovers of shares in Austrian listed entities falling within the Austrian Takeover Act are regulated and supervised by the Austrian Takeover Commission (Übernahmekommission).
Dependent on Asset Class
With regard to real estate, acquisitions may in limited circumstances be subject to notification or approval by regional land transfer authorities (Grundverkehrsbehörde) (see 2.3 Restrictions on Foreign Investments).
By and large, direct inward investments are usually freely available.
Apart from restrictions that may be equally relevant for Austrian investors (eg, notification duties in cases of acquisition of certain share percentages in Austrian listed companies and approval/non-prohibition of the acquisition of certain qualified shareholdings in the financial sector), restrictions that may in particular also have relevance to foreign investors mainly relate to real estate and sensitive industries.
Further restrictions may stem from anti-money laundering legislation and KYC requirements, as well as in relation to intended transactions with blacklisted/sanctioned foreign states and/or individuals.
The relevant pieces of merger legislation are the Austrian Cartel Act 2005 (Kartellgesetz 2005) and the EU Merger Control Regulation (Regulation (EC) No 139/2004).
Depending on turnover thresholds, transactions of a certain size become subject to the requirement of merger control clearance by either the Federal Competition Authority or the European Commission. The European Commission has exclusive jurisdiction if the transaction results in concentrations with an EU dimension.
Where a transaction does not fall within the exclusive jurisdiction of the European Commission, it may require (pre-merger) notification to and clearance by the Federal Competition Authority.
The Austrian merger control regime catches several corporate transactions, such as the direct or indirect acquisition of shares, if a shareholding of 25% or 50% is attained or exceeded, any other combination (even below this threshold) enabling the buyer to exercise a controlling influence on the target or joint ventures.
These concentrations have to be notified to the Federal Competition Authority if certain turnover thresholds are fulfilled (and provided that no exemption applies).
Furthermore, an additional threshold applies under Austrian merger control law since 1 November 2017 which is linked not only to the turnover of the undertakings involved, but also to the transaction value.
Within one month of receiving the complete notification, the Federal Competition Authority and the Federal Cartel Prosecutor conduct an initial assessment (Phase I) and, most commonly, following the transaction is cleared at the end of that period.
In more critical cases, the Federal Competition Authority or the Federal Cartel Prosecutor initiates the main examination proceedings (Phase II).
Here, the Cartel Court has five months to finalise the investigations, consider whether the transaction creates or strengthens a dominant market position and finally either clears the transaction (which may be subject to conditions and/or obligations) or prohibits it (which is rare in practice).
In particular, an acquirer has to consider the following rules.
Protection Against Dismissal
The Austrian employment law framework grants special status to certain groups of employees such as pregnant women or disabled persons, apprentices and members of the works council.
These groups typically enjoy increased protection concerning the termination of their contracts. In addition, older employees enjoy some protection against dismissal, particularly when the dismissal results in social hardship or otherwise substantially violates their justified interests.
Besides that, some employees could be entitled to the old severance payment scheme (granting such employees a multiple of their monthly salary which depends on, and increases with, their term of service).
Under all these considerations, intended (post-closing) restructuring measures may become more difficult and/or costly to implement.
The Austrian Stock Corporation Act (Aktiengesetz) provides for a two-tier board structure composed of the management board and the supervisory board.
In some instances this structure also applies to limited liability companies. The management board is responsible for the day-to-day business, while the supervisory board mainly monitors these activities and in particular resolves statutory as well as assigned matters.
If a works council is established, the Austrian Labour Constitution Act (Arbeitsverfassungsgesetz) entitles employees to delegate one third of the supervisory board’s members and the shareholders elect the remaining two thirds (principle of one-third parity (Drittelparität)).
Thus, employee representatives may gain insights, are entitled to the same level of information as shareholder delegates and, most notably, actively take part in important business decisions.
Since the implementation of the European Acquired Rights/Transfer of Undertakings Directive, the Employment Contract Law Adaptation Act (Arbeitsvertragsrechts-Anpassungsgesetz) states that the acquisition of a business unit (eg, by way of an asset deal) involves a mandatory automatic transfer of all employment contracts that are part of the affected business unit.
Therefore, a "pick-and-choose" of employees is not possible and consequently the acquirer assumes the employment contracts, as they exist at the time of the transfer (including all benefits, unsettled claims, unconsumed vacation and severance pay entitlements).
In accordance with the Foreign Trade Act 2011, Section 25a, Austrian companies operating in areas of internal and external security (the defence industry, security services, etc) or general public services, including social security (particularly healthcare, energy or water supply, telecommunication services, traffic or education) are protected against acquisitions by foreigners by the statutory requirement of an approval of the Austrian Ministry for Economic Affairs.
Generally, the requirement of ministerial approval applies to acquisitions of domestic listed and non-listed companies by foreign investors that are not residents or citizens of the EU, the EEA or Switzerland. In particular, the Foreign Trade Act 2011 involves three scenarios:
For the purpose of calculating the threshold triggering the approval requirement, shares of buyers acting in concert as well as persons having agreed to jointly exercise their voting rights have to be aggregated.
The request for approval has to be filed prior to signing of the respective acquisition documents. Where there is deemed to be a "serious threat" to the interests of public security and order, the approval may be subject to conditions (which are not specified in further detail). Prior to the approval, an acquisition subject to the Foreign Trade Act 2011 must not be implemented.
In 2018, the Austrian Constitutional Court (Verfassungsgerichtshof) subjected the Minority Shareholders Squeeze-Out Act (Gesellschafter-Ausschlussgesetz) to close scrutiny. A former minority shareholder of an Austrian limited liability company (GmbH) argued that the Squeeze-Out Act had infringed their rights with respect to property.
The Austrian Constitutional Court rejected the complaint and ruled that the relevant sections of the Squeeze-Out Act do not violate rights with respect to property because they reasonably weigh the competing interests of the majority shareholder and the minority shareholder.
The Supreme Court (Oberster Gerichtshof) ruled that the sale of the whole business of an Austrian limited liability company, by way of analogous application of the Austrian Stock Corporation Act, Section 237, requires the approval of the general meeting.
In its decision, the Court did not clarify its view on the Holzmüller decisions of the German Federal Court of Justice and left open whether an approval of the general meeting by a majority of three quarters of the votes cast is sufficient or whether unanimity is required.
In 2019, the Supreme Court ruled on the admissibility of using a cash pooling system within a group. In its ruling, the Supreme Court explained that participation in a cash-pooling system is deemed inadmissible if:
In late 2019, the Supreme Court ruled in connection with a joint venture that the exercise of rights and powers under company law does not violate or contradict the prohibition of cartels under Art 101 TFEU. All effects that result from the merger are encompassed by the effect of the exemption related to the respective merger decision. The exertion of controlling participation rights under company law is part of the merger of the companies involved and, thus, cannot violate the prohibition of cartels at a later point in time.
Cartel and Competition Law Amendment Act 2017
The Amendment Act introduced numerous changes, especially relating to the private enforcement of actions for damages for infringements of competition law based on the EU Directive on Antitrust Damages Actions (Directive 2014/104/EU), but it also introduced a host of innovations in other areas as well.
The Austrian legislator introduced the possibility for civil courts to order the disclosure of evidence and/or impose sanctions for any failure to disclose evidence. This provision may prove to be of considerable significance in future, especially for quantifying the amount of damages.
A disclosure order requires precise justification and must weigh the interests of the involved parties. It is even possible to request the disclosure of evidence in files held by courts or public authorities.
However, this does not apply to leniency applications or settlement submissions, as the attractiveness of leniency programmes and settlement decisions should not be jeopardised by disclosure requirements that are too extensive in scope.
In addition, claims for damages for competition violations become time-barred after five instead of three years, and an additional threshold has applied under Austrian merger control law since 1 November 2017.
Austrian Stock Exchange Act 2018
The new version of the Austrian Stock Exchange Act 2018 (Börsegesetz 2018), based on the Markets in Financial Instruments Directive II (Directive 2014/65/EU) was a significant legal development for listed companies.
The Austrian Stock Exchange Act 2018 now includes a provision enabling companies to voluntarily withdraw from the Official Market of the Vienna Stock Exchange.
In 2019, one company (VALNEVA SE) made use of the possibility of a voluntary withdrawal from the Official Market of the Vienna Stock Exchange (but without the submission of a delisting offer under the Austrian Takeover Act).
Introduction of new market segments to the Vienna Stock Exchange
As part of an initiative, the Austrian Stock Exchange Act 2018 facilitates access to the capital market for small- and medium-sized stock companies. The Vienna Stock Exchange introduced two new market segments to the Third Market, the so-called "Direct Market" and "Direct Market Plus" segments, thus, replacing the "Mid Market" segment.
A listing on either of the two new market segments does not require a capital market prospectus. No minimum market capitalisation requirements and no requirements for placement volume have to be met.
The starting date for trading on the Direct Market and the Direct Market Plus was 21 January 2019. In 2019, 12 companies listed their shares in the two new market segments.
Equality Act for Women and Men in Supervisory Boards
On 1 January 2018, the Equality Act for Women and Men in Supervisory Boards (Gleichstellungsgesetz von Frauen und Männern im Aufsichtsrat) entered into force.
The Act applies to listed companies (Austrian stock corporations and Societas Europaea) as well as to companies (Austrian limited liability companies and co-operatives) which permanently employ more than 1,000 people if the supervisory board of those companies consists of six shareholders' representatives and at least 20% of the workforce are male/female.
The Act introduced a minimum quota of 30% of women/men as members of a supervisory board. As a result, the number of women in supervisory boards has increased from 22.4% to 31.7%.
Austrian Beneficial Owner Register Act
As part of the transposition of the fourth Anti-Money Laundering Directive (Directive (EU) 2015/849), the Austrian Beneficial Owner Register Act (Wirtschaftliche Eigentümer Registergesetz) entered into force in 2018. All legal entities pursuant to Section 1, paragraph 2 of the Act were required to register their beneficial owners by 16 August 2018.
If, however, the respective legal entity becomes aware of any change of or relating to its beneficial owners, a change notification must be filed within four weeks.
This notification requirement can be disregarded in the context of the closing of an M&A transaction where a change of beneficial owner(s) occurs.
Fifth Anti-Money Laundering Directive
The provisions of the fifth Anti-Money Laundering Directive (Directive (EU) 2018/843) include, inter alia, the extension of the scope to auditors, external accountants, tax advisers, as well as estate agents, art dealers and intermediaries (transactions with a value of less than EUR10,000 remain excluded from the scope of the Directive), the public accessibility of specific information contained in the Beneficial Owner Register, and the establishment of a centralised bank accounts register.
Furthermore, each Member State is required to issue and maintain an up-to-date list of politically exposed persons (PEPs). The Commission consolidates these lists into a single list, which must be made accessible to the public.
Austrian Stock Corporation Amendment Act 2019
The Austrian Stock Corporation Act (Aktiengesetz) transposed, inter alia, the Second Shareholder Rights Directive (Directive (EU) 2017/828) and the so called “Say on Pay” provisions were incorporated. Thus, the supervisory board shall now establish the general principles of the remuneration policy for the management board and the supervisory board.
The shareholders' meeting then must resolve on the presented general principles of remuneration and any amendments thereto. The resolution of the general meeting, however, is only of advisory nature.
Additionally, the provisions for the review of the exchange ratio and review of the amount of cash compensations in connection with mergers and squeeze-outs of minority shareholders were amended due to the long duration of these proceedings in the past.
The collegial body shall now focus on leading the settlement discussions between the company and its (former) shareholders.
Furthermore, the court shall now state in its decision the aggregate value of additional payments to be paid by the company to the shareholders. This will then be the assessment base for the reimbursement of legal expenses to the shareholders. A mandatory minimum assessment base was introduced.
A new section has been added to the Austrian Takeover Act, which entered into force in 2018, regulating offers for delisting securities from the Official Market of the Vienna Stock Exchange.
Pursuant to the Takeover Act, delisting offers are subject to the provisions governing mandatory offers in accordance with the derogations set out in the new section 27e of the Act.
Offer documentation must expressly indicate that the offer is a delisting offer. The delisting offer can be combined with a voluntary takeover offer to acquire a controlling interest or with a mandatory takeover offer.
The consideration offered under the delisting offer will be subject to two additional price floors. The consideration has to reach at least:
A bidder can acquire an initial stake in the target company prior to launching an offer. Although pre-launch stake building is generally permitted under Austrian takeover law, a shareholder is obliged to fulfil certain notification requirements if the thresholds described below are met or exceeded. As a consequence, stake-building involves the risk of generating publicity.
In 2013, the Transparency Directive Amending Directive (Directive 2013/50/EU) introduced stricter disclosure requirements, including a reporting obligation regarding cash-settled equity swaps. This makes it harder to carry out a creeping increase of control.
Under the Austrian Stock Exchange Act 2018, section 130, any person directly or indirectly acquiring or selling shares in a company listed on a regulated market is required to inform the Austrian Financial Market Authority and the exchange operating company if their shares carrying voting rights reach, exceed or fall below the thresholds of 4%, 5%, 10%, 15%, 20%, 25%, 30%, 35%, 40%, 45%, 50%, 75% and 90%.
These material shareholding disclosure thresholds only apply to shareholders who hold an interest in a company whose registered office is in Austria. The personal scope of application includes individuals, legal entitites, registered partnerships without legal personality and investment funds.
The aim of the provision is to ensure the functioning of the capital market and to provide a reliable basis for shareholders concerning decisions about the acquisition and sale of shares.
The material shareholding disclosure thresholds mentioned are compulsory. However, the Austrian Stock Exchange Act 2018, Section 130 paragraph 1, makes it possible to include a threshold of 3% in a company's articles of incorporation, in addition to the other thresholds.
Dealings in derivatives are permitted.
Any financial instrument is subject to disclosure and/or filing and reporting obligations as specified in the section regarding material shareholding disclosure thresholds.
There are no specific statutory competition rules covering derivatives. Neither are there any for other financial instruments.
National merger control will, in principle, only be triggered in case an option right is exercised in order to acquire shares unless such option right itself comes with considerable and material influence as regards the target entity and its management.
The Austrian Takeover Act, Section 7, states that the offer document must contain, inter alia, the terms of the offer and information regarding the bidder.
In addition, details of the bidder's intention with regard to the future business operations of the target company and, to the extent it is affected by the offer of the bidder company must be disclosed.
Furthermore, information regarding the continued employment of employees and management must also be provided.
In the event of a voluntary takeover offer to acquire control, the bidder's intention will be obvious, as the aim of the offer is to acquire a controlling interest in the target by exceeding the minimum acceptance threshold of 50% of the permanent voting shares.
If, however, the material shareholding disclosure thresholds of Section 130 Austrian Stock Exchange Act 2018 are exceeded, the disclosed information does not have to include the bidder's intention or the rationale behind the acquisition.
In the case of extended circumstances, not only the realisation of the transaction but also each intermediate step is subject to the principles of ad hoc disclosure in accordance with Article 17 of the Market Abuse Regulation (Regulation (EU) 596/2014).
The existence of inside information can be assumed if either:
Intermediate steps that derive their price relevance from the final result are to be regarded as price-relevant if the occurrence of the final result can actually be expected.
Generally, the information is not precise enough to constitute inside information at the time at which the target is first approached or the negotiations commence.
A non-binding letter constitutes an ad hoc notification obligation if it is price specific and price relevant. The question of how likely it is that the final result will occur plays a crucial role in this respect.
In general, the signing of definitive agreements triggers an obligation to issue an ad hoc notification.
The issuer is required to publish inside information without undue delay. Therefore, the market practice on the timing of disclosure regularly does not and should not differ from legal requirements in order to avoid any consequences of the violation of the disclosure obligations.
In the course of takeovers, due diligence is rather the exception than the rule.
In such cases, the scope of due diligence can be limited to only the publicly available information of the target. Pursuant to the Austrian Stock Corporation Act, Section 84, paragraph 1a, members of the management board of a stock corporation are said to be exercising the diligence of a responsible and conscientious corporate executive when taking business decisions if they do not allow themselves to be guided by extraneous interests and if it may be reasonably assumed on the basis of adequate information that they are acting in the best interest of the company (Business Judgement Rule).
Defining the scope of the due diligence to be carried out is in particular a commercial decision based primarily on the Business Judgement Rule, knowledge of the relevant market and the target.
When determining the scope of the due diligence, it always comes down to the relevance of the transaction, with the transaction volume playing a significant role.
Due diligence can be conducted in a two-step process. First, due diligence is carried out with certain restrictions, second, comprehensive and unrestricted due diligence may be performed.
Generally, exclusivity is not very often required in the course of public transactions while standstill obligations are the rule. Standstills provide an incentive to successfully conclude the envisaged transaction on the first attempt.
Therefore, standstills prohibiting interested parties from acquiring or selling securities in the target company or the bidder from making another offer for a certain period of time even after a takeover has failed are regularly requested and, in most cases, they are also a legal consequence of the prohibition of insider dealing.
Exclusivity arrangements vary depending on the structure of the takeover and the underlying transaction. In general, exclusivity arrangements tend to be made in connection with negotiated deals as opposed to auction sales.
Exclusivity arrangements restricting the future scope of discretion of the management are not allowed in general.
The bidder can unilaterally specify in its offer document the terms and conditions of the agreement. It is not possible for individual recipients of the offer to negotiate or change the terms and conditions.
The bidder makes a tender offer to all shareholders concerning the conclusion of an agreement regarding the target company.
The Austrian Takeover Act assumes that a contract will only be concluded in respect of the offer aimed at the shareholders of the target company by means of the publication of the offer document if a declaration of acceptance is received.
Essentially, a takeover offer fulfils the key requirements of a contract offer due to the fact that its terms are adequately defined and it expresses the willingness of the applicant to enter into an agreement. Therefore, the terms and conditions of the tender offer are documented according to the described procedure.
In general, the timetable for M&A transactions may be subject to various drivers.
The duration primarily depends on, inter alia, the target's size, complexity of the transaction structure, organisation and co-operativeness of the parties, the industry the target company operates in and regulatory aspects.
Additionally, the chosen method for acquiring the target (share deal versus asset deal versus regulated takeover regime) may have an impact on the duration of the process.
Public takeovers, which are governed by a strict regulatory framework including prescribed steps in a prescribed timeframe, usually take a minimum of three, and up to six, months from the announcement of the offer to closing (hence, not including any time requirements for preparatory work).
Private small- to medium-sized transactions structured as share or asset deals may typically be manageable from a minimum of three to six months onwards. In particular, in the area of distressed M&A and small, simple transaction structures where no material due diligence of the target is performed, quite swift transactions, even below three months, are common.
All of the foregoing assumes that no need for merger control clearance or other regulatory approval issues arise. For larger international M&A transactions, including a competitive tender process and usual regulatory approval requirements, time periods may extend up to 12 or even 18 months from the first preparatory steps through to closing.
Essentially, the Takeover Act regulates public offers aiming at the gaining or expanding of control by acquiring shares issued by a stock corporation having its corporate seat in Austria and being listed on a regulated market on the Vienna Stock Exchange.
Furthermore, the Takeover Act also applies (partially) where only the requirement of a corporate seat or the listing is fulfilled in Austria and the other requirement is fulfilled in another jurisdiction.
The Takeover Act distinguishes between three types of offers, namely mandatory offers, voluntary offers and voluntary offers aimed at obtaining control.
As of 3 January 2018 a new section has been introduced to the Takeover Act that governs offers for delisting securities from the Official Market of the Vienna Stock Exchange. Such offers are subject to the provisions governing mandatory offers whereby certain modifications apply (see 3.2 Significant Changes to Takeover Law).
Generally, the obligation to launch a mandatory offer is triggered if a bidder (be it an individual or parties acting in concert) seeks to acquire a controlling shareholding, which is defined by statute as a direct or indirect controlling interest of more than 30% of the voting stock.
A shareholding that gives the holder between 26% and 30% of the voting rights must, however, be notified to the Takeover Commission. An exception to this rule applies in certain cases in which an obligation to launch an offer would exist in principle due to the acquisition of a controlling interest.
In the following cases, the Takeover Commission only needs to be notified:
The Takeover Act also catches the so-called "creeping in" by shareholders: If a shareholder obtains a controlling interest which does not, however, provide them with the majority of the voting rights, and within 12 months obtains at least additional 2% of the voting rights, a mandatory offer must be launched.
Based on experience, cash consideration is most common whereas offering shares (or the combinations of both) is rather rare. However, sellers not infrequently explore alternative ways such as the assumption of debt by a buyer, sometimes in combination with a cash payment.
As regards takeover transactions, mandatory offers always require cash consideration, but may have a paper alternative in addition.
The same applies to voluntary takeover offers aimed at obtaining control. Only purely voluntary offers (not aimed at obtaining control) may be in cash or securities.
In general, mandatory offers may not be conditional on acceptance or any internal approvals by the bidder. It may solely be subject to obtaining regulatory clearance (eg, merger control).
With regard to purely voluntary offers (ie, not aimed at obtaining control) and voluntary takeover offers aimed at obtaining control, the completion may be subject to objectively justified conditions including minimum or maximum acceptance thresholds, clearance by merger control and other regulatory authorities or absence of a material adverse change.
However, the fulfilment of a condition or a right to withdraw may not depend on the buyer's discretion. The Takeover Commission may declare an offer unlawful if conditions are unjustified, discretionary or not objectively determinable.
As a result, the latter may prohibit its launch. Therefore, it is advisable to consult the competent authority prior to submitting an offer that includes conditions which are unusual, not precise enough or where their justification is not clearly evident.
A distinction must again be drawn between mandatory offers, voluntary offers aimed at obtaining control and purely voluntary offers:
As regards private transactions, it is legally possible to make completion of a signed SPA/APA conditional upon the bidder obtaining financing (eg, by implementing a condition precedent stipulating (re)financing measures).
However, such a contract structure is seldom accepted by the seller’s side and therefore rarely seen in practice (except in small private real estate transactions, for example).
In the case of public takeovers, financing must be ensured up-front, ie, a qualified independent expert has to certify in advance that the bidder is able to finance the offer.
The principle of freedom of contract granted by Austrian law enables transaction parties to seek any type of deal security measure as long as they do not violate moral principles (Sittenwidrigkeit). However, in situations where the Takeover Act) applies, further limitations need to be observed.
Exclusivity agreements appear quite commonly sought after by a bidder from a core shareholder and should be legally feasible, particularly in a phase preceding a public tender, but arguably also during a tender process.
Exclusivity arrangements with the target, on the other hand, appear more problematic, in particular if they are aimed to restrict the free business judgement of management acting in the best interest of all shareholders.
Therefore, no-talk arrangements (lock-ups) typically risk being too restrictive and thus void, while there are good arguments that no shop provisions and market test provisions (if they just limit management to actively look for other bidders) are more likely to be upheld.
Break-up fees (sometimes also called inducement fees, termination fees or drop-dead fees) will conflict with the Takeover Act if the amounts involved are substantial so that they de facto exclude or materially impede competing offers (in particular, if they are not limited to just compensating the bidder for their out-of-pocket costs but also have some penalty element).
Standstill obligations are essentially already foreseen by the Takeover Act, containing statutory rules prohibiting the launch of a new or modified offer once the tender offer is published (with only very few exceptions) as well as a statutory waiting period in case the offer turns out unsuccessful
.Further, see 6.11 Irrevocable Commitments.
If the shares in a company are not held by a single shareholder, but by two or more shareholders, it is very common to stipulate a governance structure among unaffiliated shareholders that goes beyond the protection and instruments afforded under statutory corporate law.
Typically governance documents include a shareholders' agreement, the articles of association themselves (stipulating rights in the articles of association may have some benefits from an enforcement perspective but at the same time means that they will be disclosed and available to the general public through the companies register) as well as by-laws for the management board (and the supervisory board and/or advisory board, if any).
In general, governance documents frequently contain rights to appoint and dismiss members of the supervisory and/or management board (and/or advisory board, if any), a catalogue of reserved matters with veto rights or qualified majorities, restrictions on dealings with shares (typically rights of first refusal, tag-/drag-along rights and/or a lock-up), profit distribution, anti-dilution, escalation/deadlock clauses, exit/termination rights (including also put and/or call option rights) as well as reporting and access to information rights, or any combination of the above.
In addition, financing commitments between shareholders to provide the company with further equity and/or shareholder loans are sometimes agreed.
In Austria, shareholders may vote by proxy. However, certain formal requirements are applicable. As a rule, proxies should be issued in writing. A Power of Attorney in simple written form typically suffices as regards stock corporations.
Proxies relating to limited liability companies will in certain cases (ie, when certain entries in the commercial register need to be applied for following a resolution) require notarised signatures and, if applicable, an apostille (or even super-legalisation, depending on the country of the shareholder).
Depending on the subject of the voting/resolution, a general voting proxy may not always be sufficient; in a number of cases the proxy will be required to outline in very specific detail the subject matter of a resolution or commitment if it is to be covered by a proxy.
The Austrian Minority Shareholders Squeeze-Out Act allows a majority shareholder holding directly or indirectly at least 90% of the shares to squeeze out remaining minority shareholders.
The consent of minority shareholders is not required and, therefore, the respective shareholders may not block the procedure.
However, they are entitled to adequate cash compensation that is, on request, subject to a judicial review mechanism as to the adequate amount. Moreover, the articles of association may state an exclusion of the squeeze-out right (opting out) or introduce a higher threshold.
With regard to squeeze-outs effected within three months from the completion of a successful mandatory or voluntary takeover offer aimed at obtaining control, a special regime applies (see Section 7 of the Squeeze-Out Act).
The shareholder structure of Austrian listed companies is typically composed of one or a few core shareholders holding large share packages, whereas the percentage of free float shares is sometimes rather limited. Therefore, it is not uncommon to approach a core shareholder first – if it makes sense strategically – and to privately negotiate and seek an irrevocable commitment by the shareholder to sell these shares before launching a public offer.
There are good arguments supporting the validity of such commitments even with a view of a public tender process and it might also be argued (although some grey area exists) that such irrevocable commitment, if already made prior to the launch of a public tender offer, should also remain binding in the case of a competing offer.
Contractual provisions providing a way out for the principal shareholder before a tender process is rather unusual, although such a clause would appear to be legally permissible.
Within a tender process, the Takeover Act gives shareholders who have already accepted a public tender offer the mandatory right to withdraw their acceptance in the event that a competing tender offer is launched (but a contractual right of exit will make sense for those commitments which, as outlined above, would otherwise arguably remain binding in a subsequent tender process).
The bidder must disclose without undue delay its plan or intention to make an offer and it must inform the administrative bodies of the target company via press agencies and international news services (eg, APA, Bloomberg, Reuters) once its administrative bodies have decided to make an offer, or if circumstances oblige the bidder to make an offer (eg, acquisition of control), or in the event of rumours and speculations or market distortion.
After the bidder makes their intention public, they must file an offer (including all relevant documentation) with the Takeover Commission within ten trading days or within 20 trading days of acquiring a controlling interest.
Between the 12th and 15th trading day after the Takeover Commission is notified, the details of the offer must be published either in a nationwide Austrian newspaper or as a complimentary brochure that is provided to the public by the target company at its registered office and by the bodies entrusted with the task of paying the consideration.
Making a public offer triggers an obligation to produce a prospectus, as laid down in the Capital Market Act (Kapitalmarktgesetz), Section 2 to give investors the opportunity to gain greater knowledge of the risks involved. Before publishing the prospectus, the Austrian Financial Market Authority has to approve the prospectus.
The prospectus must comply with the provisions of the Capital Market Act and must be published at least one banking day in advance. It is deemed available to the public if it is published in the Austrian Official Gazette (Amtsblatt zur Wiener Zeitung) or in a nationwide newspaper, on the issuer's website, on the website of the regulated market to which admission to trading is being sought, on the website of the Financial Market Authority or in a printed form to be made available free of charge to the public at the competent bodies of the market on which the securities are being admitted to trading.
Financial statements are to be included in the prospectus. Consolidated financial statements are prepared according to IFRS standards, whereas others (on a stand-alone level) apply Austrian GAAP standards.
It is crucial that, although the requirements regarding mandatory minimum contents are met, additional information may be needed to give the investor the chance to make a well-founded decision.
Parties to the takeover proceedings are under an obligation to co-operate with the Takeover Commission by way of providing comprehensive information as far as necessary for the Takeover Commission to fulfil its duties.
All relevant documents (eg, share purchase agreements and shareholders' agreements) must be fully disclosed to the Takeover Commission. However, the bidder or the party obliged may only disclose extracts of certain documents if the bidder or the party obliged has an interest in ensuring that information is kept secret.
There is no disclosure requirement vis-à-vis the recipients of the takeover offer.
Austrian stock corporations are governed by a two-tier board system. The members of both boards – the management board and supervisory board – are required to comply with the duty of care of a prudent businessman (Sorgfalt eines ordentlichen Geschäftsleiters) and act foremost in the best interest of the company.
Additionally (but only ranking second) shareholders', employees' and public interests may be taken into consideration. Besides that, the Austrian Stock Corporation Act, Section 47a, lays down a general principle of equal treatment of all shareholders.
Subject to the principles of the so-called business judgement rule, failure to comply with these duties may result in personal liability. For the managing directors of limited liability companies, similar duties of care and loyalty towards the company apply.
The Austrian Takeover Act additionally requires managing directors as well as members of the supervisory board to act in the interest of all shareholders as well as in the interest of the employees, creditors and the general public, and to remain objective during the takeover procedure.
As soon as the intention to launch a bid has been announced, but also when the members of the boards have been approached by a bidder or have knowledge of the intention to launch a bid, the boards must not prevent the public bid (Verhinderungsverbot), must stay objective (Objektivitätsgebot) and, in addition, have to respond to the bid by way of a statement. Nevertheless, searching for a "white knight" to make a competing offer is permitted.
In Austria, it is not common for managing boards to establish special or ad-hoc committees in business combinations or in the case of a conflict of interest.
Usually, conflicted members would:
Depending on the corporate governance, conflicts of interest of directors may also be addressed to an existing supervisory board that has, among other things, some intermediary role between the managing board and the shareholders, and represents the company in dealings with directors.
Note that on the level of supervisory boards, specific committees, eg, audit committees, may have to be established, depending, however, on the size of the company rather than being driven by a transaction situation.
In Austria, courts defer to the judgement of managing directors according to the business judgement rule, which applies to any business decisions of board members regardless of the business situation.
In 2016, the business judgement rule was expressly incorporated into Austrian statutory law, although Austrian courts had applied similar principles before. The business judgement rule, as it is understood in Austria, establishes a "safe harbour" with regard to decisions of board members, provided that:
A board member acting within the scope of the business judgement rule will generally not be liable to the company, its shareholders or other stakeholders.
However, the business judgement rule will not help if the law explicitly sets up a more specific rule in certain situations. Violations of law, even if they were believed to be in the best interest of the company, cannot be justified under the business judgement rule.
Under the Takeover Act, there exist such more specific rules that take precedence, eg, directors need to act in the interest of all shareholders as well as in the interest of the employees, creditors and the general public and generally need to stay objective.
Directors of Austrian target companies sometimes turn to lawyers and other consultants seeking outside advice on business combination matters, particularly if they perceive a risk that they could lose their job following transaction closing or that their job terms may become subject to change.
Therefore advice given to directors is often limited in scope and typically concerns aspects of employment law (eg, regarding employment contract issues) but also the conduct of a due diligence process (eg, regarding confidentiality/disclosure matters) or, more generally, the scope and limitations of the business judgment rule and related aspects of careful management of a prudent businessperson.
In regulated industries managing directors may request advice regarding statutory duties, for example ad-hoc reporting obligations.
Public takeovers require appointing independent experts (normally auditors) to assess launched offers and provide opinions. Additionally, an expert appointed by the target company has to assess the obligatory statements of the target company's managing board and supervisory board in which they recommend whether or not to accept the offer.
Directors’ conflicts of interest may be addressed to a supervisory board that has, among other things, the role of intermediary between the managing board and the shareholders. It generally supervises the managing board and represents the company in dealings with directors.
In addition, shareholders may initiate special audits to review (potentially conflicted) business activities. However, conflicts between shareholders and the managing board that find their way to court are rather seldom in Austria.
By and large, conflicts among shareholders – which may arise from time to time – also do not often end up in court. Conflicts, if any, between majority and minority shareholders sometimes result in the legal challenge of majority resolutions filed by minority shareholders.
Under the Austrian Takeover Act both, friendly and hostile takeovers, are allowed. Nonetheless, friendly takeovers prevail in practice.
Either way, one of the general principles of the Act requires the management board and the supervisory board of the target company to remain neutral in the interests of the shareholders and not in any way to prevent the shareholders from taking a decision on the proposed takeover or seek to influence the decision of the shareholders.
In the event of a takeover offer, the administrative bodies of the target company (management board and supervisory board) must not take any measures which would likely deprive shareholders of the opportunity to make a free and informed decision about the offer.
No measures must be taken that frustrate the outcome of the offer from the moment the bidder's intention to launch an offer becomes known until publication of the results of the offer, and in the event that the offer is a success, until implementation of the offer.
However, measures that could frustrate the outcome of the (hostile) takeover are permissible if the target company's shareholders' meeting explicitly approves such concrete measure. The Takeover Act mentions the issue of securities that could prevent the bidder from acquiring control of the target company.
The administrative bodies of the target company are also free to seek out competing bidders ("white knights") without obtaining the consent of the shareholders' meeting.
If an intention to make an offer has not yet been announced, the management board may take defensive measures in the form of preventive measures against hostile takeovers, such as the introduction of an upper limit on voting rights or long-term contracts with members of the management board, provided that standards under applicable Austrian stock corporation law are met.
Defensive measures taken after the bidder's intention to make an offer has been announced require the approval of the shareholders' meeting and may inter alia consist of the inclusion of change of control clauses in certain contracts, the issue of securities, the purchase or disposal of own shares, the disposal of important assets of the company, or significant changes concerning the company's finance structure.
The Takeover Act does not provide specific duties for administrative bodies when enacting defensive measures, but based on the rules of general Austrian stock corporation law, preventive measures taken by the management board must be in the interest of the target company.
However, should preventive measures be based on a resolution adopted by the shareholders' meeting, such rules of general Austrian stock corporation law do not apply.
A baseless rejection of a takeover offer is not permitted since this is in most cases not in the interest of the company. After the offer document has been published, the management board (and the supervisory board) of the target company must prepare a statement regarding the takeover offer, encompassing an economic assessment of the offer price and a recommendation to the shareholders of the target company.
The management board is at liberty to explain in its statement why a takeover offer should not be accepted and it ought to underscore its position by putting forward a counterplan for the future direction of the company and its corporate policy.
In general, litigation is not common in connection with M&A transactions in Austria. In practice, the main deciding factors whether litigation proceedings or other ways of dispute resolution, such as arbitration, are chosen are costs and the duration of proceedings.
The parties in small M&A deals tend to favour litigation. The main argument in favour of litigation is that the costs incurred in connection with arbitration proceedings are usually higher, making litigation the more attractive means of settling disputes.
In the case of medium or large M&A deals with a multi-jurisdictional background, the parties mostly agree on arbitration to settle any disputes that arise.
Arbitration allows the parties involved to receive a swift decision on a dispute away from the public spotlight, compared to litigation proceedings that sometimes drag on for years and are open to public scrutiny. Therefore, the parties in such transactions are often willing to accept the higher costs that come with arbitration proceedings.
Enforcement issues need to be taken into consideration in the case of cross-border M&A transactions as arbitral awards might be enforceable in countries where judgments of state courts are not.
Disputes in connection with M&A deals occur at every stage of the transaction (pre-closing versus post-closing).
The majority of disputes occur after closing. Such disputes are often characterised by the buyer asserting claims either regarding reps and warranties provided by the seller, error on behalf of the buyer, or in connection with the calculation of purchase price adjustment amounts.
Shareholder activism has emerged and become increasingly visible in Austria in recent years. However, shareholder activist organisations (eg, typically the Austrian Chamber of Labour, trade unions and consumer protection organisations such as Verein für Konsumenteninformation) mainly focus on advising and representing consumers who have suffered damage to their investment made in units for collective investment or similar instruments, mainly by a wrongful prospectus or advertising, including in legal proceedings, rather than tackle M&A cases.
It is noteworthy that minority shareholders in particular may avail themselves of legal remedies surrounding M&A activities – not so much preventing or challenging a takeover, merger or similar reorganisation or squeeze-out as such, but as regards the judicial review of the adequacy of (cash) compensation offered or granted for any forced exit as shareholder of a company. These proceedings mostly go without media publicity.
In addition, shareholders may exercise minority rights prior to and in the general meeting, eg, by taking advantage of their right to ask questions. In rare cases minority shareholders have tried to stretch these rights, but since the law provides for a rather limited system of minority rights, these strategies have not often proven successful. However, lawsuits do occur from time to time.
Most recently, a lawsuit to challenge a resolution to appoint members of the supervisory board of a large listed Austrian company was filed for lack of gender diversity.
In Austria, activists seeking to encourage companies to enter certain M&A transactions, spin-offs or major divestitures are hardly seen.
There may have been very rare M&A cases where the picture may have looked rather the opposite – that hostile acquisitions or takeovers with the likely intention to liquidate, restructure or dispose of large parts of the target business and/or workforce may in rare cases have triggered certain activism or involvement (typically on a discussion and negotiation level rather than by strikes) by politicians or trade unions.
Undoubtedly, cases exist where activists, typically minority shareholders, have sought to reinforce their ideas by putting pressure on management.
Shareholder activists rarely interfere with the completion of announced transactions in Austria.
Regarding the workforce and employee representatives, such as works councils and trade unions, interfering measures, if any, are quite seldom since Austrian corporate culture is in many ways characterised by discussion and compromise rather than by strikes or other disruptive action.
In this context it should be noted that the Austrian Labour Constitution Act grants the works council certain rights to be informed about, to comment on and to be consulted in a timely fashion of planned transfers or reorganisations of undertakings or business units, particularly as to the consequences for the employee workforce.
M&A Market Trends
After a decline in 2018, Austria’s M&A market is now steady, perhaps even seeing a small increase in the number of deals with Austrian involvement. In 2019, there were 328 M&A transactions involving Austrian companies, compared to 324 in 2018. This increase of four deals corresponds to a slight increase of 1.2% in M&A transactions.
The transaction volume, however, increased much more and accounted for EUR12.1 billion in 2019, which is an increase of approximately 50% compared to the amount of EUR7.9 billion in 2018. This increase was mostly driven by mega-deals, of which the biggest deal was the takeover of Osram by ams AG.
In 2019, 121 (37.5%) of the 328 M&A transactions, compared to 123 transactions in 2018, were inbound M&A transactions, ie, where foreign investors sought to acquire Austrian targets or their shares. The number of outbound M&A transactions (where Austrian investors sought to acquire foreign targets or their shares) decreased slightly by two transactions compared to 2018, which reached 130 (39.6%) transactions.
The volume of outbound transactions in 2019 amounted to EUR8.7 billion, compared to EUR3.2 billion in 2018. The top five outbound transactions in 2019 represented a volume of EUR8.2 billion. Foreign companies spent EUR3.1 billion on inbound transactions, with the top five inbound transactions accounting for a volume of EUR2.2 billion.
Domestic M&A transactions, where both the target and the buyer are Austrian, accounted for 23.5%, or 77 out of 328 M&A transactions in 2019, compared to a total of 69 domestic transactions in 2018.
Strategic investors are still involved in the vast majority of transactions in the Austrian M&A market. Of the 328 transactions in 2018, 308 involved strategic investors. Compared to 2018, transactions that involved financial investors, such as private equity or venture capital firms, again dropped back to the level of 2017, with only 20 transactions.
Austrian companies are still attractive targets for German investors. This is demonstrated by the fact that transactions involving German investors remain steady at a rate of 35.5% of all M&A transactions involving foreign investments in Austrian companies.
Furthermore, 28.9% of all M&A transactions involved European investors. The vast majority of transactions in the Austrian M&A market, approximately 64.5% involved investors whose headquarters are located in Europe.
Germany still remains the most attractive target for Austrian investors. 30% of all transactions occurred in Germany, with a further 56.9% in the European market. Without doubt, Europe is still the top investment target for Austrian investors.
Although the most deals took place in the tech sector with 75 transactions in 2019, the highest transaction volume was generated in the industrial sector with EUR5.5 billion compared to EUR0.7 billion in the tech sector.
The most attractive industry for inbound M&A transactions in Austria is the tech sector, with 66 deals in 2019, followed by the real estate and construction sector with 28 deals and the industrial sector in the third place with 17 deals. Foreign investments in the consumer sector accounted for 15 deals and six deals took place in the automotive sector.
As for outbound transactions, Austrian investors are continuously active in the industrial sector, with 34 transactions in 2019 compared to 37 transactions in 2018. Other attractive sectors that saw considerable outbound M&A activity in 2019 include the real estate and construction sectors with 24 transactions, and the tech sector with 23 transactions.
The Austrian M&A market is expected to remain robust and for the trend towards larger transactions to continue. Although Austria is a relatively small market, Austrian companies have a strong reputation worldwide for having excellent expertise, especially in the high-end tech area. As the modern M&A market is driven by tech transformation, Austria’s expertise in this field will drive growth in Austrian M&A transactions. Another reason for optimism is Austria’s strong economic position, which is firmly embedded in the EU. Persistently low interest rates and high rates of liquidity in the market will also continue to push the M&A market forward.
Recent Legal Developments
Recent changes in law
Under corporate law, after closing an M&A transaction, the management of the target company is obliged to file a notification with the Ultimate Beneficial Owners (UBOs) Register to update the registration with respect to the beneficial owners who ultimately own or control a legal entity. This is generally the case if a direct or indirect owner holds shares or voting rights of more than 25% in a company. If no beneficial owner can be identified, the members of the top management level of the legal entity (for example, the managing director and/or board of directors) are considered to be beneficial owners.
The Austrian Beneficial Owner Register Act (Wirtschaftliche Eigentümer Registergesetz) entered into force on 15 January 2018 as part of the transposition of the fourth Anti-Money Laundering Directive (Directive (EU) 2015/849). All legal entities pursuant to Section 1, paragraph 2 of the Act were required to register their beneficial owners by 16 August 2018. If, however, the respective legal entity becomes aware of any change of or relating to its beneficial owners, a change notification must be filed within four weeks.
One recent change that will affect M&A transactions was the Amendment of the Austrian Law on the Ultimate Beneficial Owners (UBOs) Register (UBO Register, Wirtschaftliche Eigentümer Registergesetz). The amendment was part of the EU Financial Adaptation Act 2019 (EU-Finanz-Anpassungsgesetz), which was published on 22 July 2019 and came into force on 10 January 2020. The law amendment increases access to the database on UBOs.
The new regulations brought in via the amendment implement the fifth Money Laundering Directive. One of the most important single changes is that the UBO Register will become accessible to the general public. As of 10 January 2020, any person can request an extract from the register about any legal entity without having to demonstrate any specific reason or legitimate interest. Previously, only authorities and certain groups of persons such as lawyers, notaries or credit institutes had access. The public extract contains information on the legal entity’s name, address, register and register number and legal form as well as information regarding the period of time for which the legal entity has been in existence, the direct or indirect beneficial owner’s forename and surname, date of birth, nationality and country of residence and the nature and scope of the beneficial ownership.
Furthermore, the notification obligations for legal entities have been made more stringent. An annual statement regarding the completeness and correctness of the data on the UBO Register is required regardless of whether any changes have occurred. Apart from this annual statement, changes must be reported on an ongoing basis within four weeks of the change taking place. The Austrian Ministry of Finance, as the competent register authority, is obliged to ensure the accuracy and completeness of the registrations, which can be enforced by penalties that have been increased.
Another change to the UBO Register concerns the voluntary provision of a “KYC compliance package” by a professional party representative. The UBO Register will be able to store and exchange KYC-relevant documents about beneficial owners, and these will only be accessible to certain persons, such as financial institutions, tax advisors, attorneys and notaries, to make KYC due diligence more efficient. Access to this data can be limited to individual persons and entities.
Regulatory changes under discussion
In many countries, laws are being discussed to prevent foreign buyers from taking over companies in sensitive industries. Austria is one of the EU member states that already has such a control mechanism in place: Section 25a of the Foreign Trade Act 2011 (AußWG 2011). This mechanism allows the government to prevent and control purchases of shares in companies in sensitive industries by foreign investors. In short, foreign direct investments (FDI) in companies involved in public security and public order, as defined by Art 52 and Art 65 (1) TFEU, are subject to approval. This primarily impacts the defence goods industry, security services and services of general interest (in particular energy and water supply, telecoms, transport and certain infrastructure for healthcare education and training).
Since May 2019, a ministerial draft has been in existence, and under consideration by the government, to amend the Foreign Trade Act. The draft foresees a change to Section 25a. The minimum threshold for shareholdings acquired by foreign investors in Austrian companies will be reduced from 25% to 10%. Anything above the 10% threshold will require approval. Certain companies in the media industry which contribute to the formation of public opinion via broadcasting, tele media or print products and which are characterised by their particular topicality and broad impact, will also be included in the group of companies where foreign investors need approval.
Furthermore, the obligation to obtain approval would not only apply to the foreign acquirer of the Austrian company – as is now the case – but also to the Austrian target company, which will have to obtain approval and to submit the application for approval. As a new Austrian government was only appointed in January 2020, the timeline as to when and to what extent the amendment will come into force is unclear.
Also of note is that the new government’s 2020-24 programme provides for a further acceleration and simplification the process for business start-ups, for example by promoting the development of digitisation in corporate law.
COVID-19 – M&A Will Not be Spared Either
As in many other countries, the COVID-19 crisis has already hit the economy and has also lead to uncertainties in the field of upcoming or already ongoing M&A transactions. Cross-border transactions, particularly large transactions and transactions concerning automotive, transportation, gastronomy and the energy sector, are particularly affected in this context. However, risks arising from the crisis can be contained by designing the transaction processes and drafting the contractual regulations accordingly.
Consequences for due diligence
Identifying risks within the target company is the main focus of due diligence. Buyers should consider the specific consequences of COVID-19 for the target company in the due diligence process to determine whether the target company is adequately protected against the negative impact caused by the virus. Disrupted supply chains, loss of production and decline in revenue, but also existing insurance policies, if any, measures ordered by public authorities, crisis management processes and consequences entailed by remote working, if applicable, should be taken into consideration. Sellers, however, should approach this issue with particular sensitivity and proactively provide the corresponding information. The risks identified in this step will form the basis of further negotiations and the drafting of the agreement.
Material adverse change (MAC) clauses native to Anglo-American transactions are agreed upon to cover any material changes between signing and closing of the SPA. These clauses aim at providing for circumstances that were not predictable and adversely affect the target company. The MAC clause entitles the buyer to rescind the agreement between signing and closing, which gives buyer leverage to renegotiate SPA conditions without being liable for a breach of contract. In particular, new transactions require increased care when it comes to wording of the MAC clause. Even if the extent of the pandemic cannot be estimated at the moment, it has become a known event by now. Nevertheless, it will certainly be possible to find an appropriate wording taking into account the specific COVID-19 risk. In this context, the parties should carefully weigh the risks (and how they are addressed in the wording) in each individual case.
From the seller’s perspective, agreeing to a break-up fee would be advisable. A break-up fee is a penalty determined in advance, which becomes due if a party withdraws from the deal. The purpose of the break-up fee is to reimburse the other party for the time and expenses it has invested in the deal. However, in particular from the buyer’s perspective, break-up fees will not be easy to negotiate due to the current uncertainty.
The unclear further development of the virus and its economic consequences are a major factor of uncertainty, which entails major difficulties in the determination of a purchase price. Thus, from the perspective of the buyer, particularly locked box and fixed pricing concepts are not recommended. Particular caution is also called for in case of price adjustment clauses based on historical working capital.
Caution should also be used in the context of warranties and guarantees. Often, these are the subject of tough negotiations even under normal circumstances. Buyers should keep a particularly good eye on those fields which are the most affected by the uncertainty caused by the virus. These include, for instance, the collectability of the target company’s claims, its financial projections and a possible breakdown of its supply chain. From the seller’s perspective, demands for more extensive warranties and guarantees can be counteracted by way of more transparency.
If the agreement has already been executed, the question arises whether the buyer can still exit the deal. In this respect, various possibilities could offer themselves. First of all, the written agreement is to be examined in great detail with regard to possibilities of termination and/or an adjustment of the purchase price. In some cases, agreements may already include exit possibilities.
In particular international transactions often contain so-called force majeure clauses, which provide, in particular, for the at least temporary cancellation of performance obligations, for the exclusion of liability and for the right of withdrawal in case of an event of force majeure. But even without explicitly agreeing upon such a clause, the remedy of force majeure may be applicable. However, this needs to be treated with caution. Even if epidemics and pandemics can generally be considered an event of force majeure, this does not necessarily mean that the parties to the agreement can actually invoke this circumstance successfully. Rather, it is necessary to specifically interpret the actual circumstances on a case-by-case basis.
A termination of concluded agreements or at least an adjustment can also be achieved on the basis of frustration of contract if certain prerequisites are met. For this to apply, the circumstances typical of this kind of transaction must have become the basis of the agreement and material changes in circumstance that are unforeseeable must have occurred after conclusion of the agreement. Case law has allowed avoidance or rectification of contract due to frustration of contract only in exceptional cases so far. Ultimately, however, this, too, depends on the actual circumstance of the individual case.
Opportunities with respect to distressed M&A
As any other crisis, the COVID-19 crisis also offers possibilities for seasoned, crisis-resilient buyers and strategic financial investors to purchase the desired target company under favourable conditions. It is foreseeable that despite the national and European aid packages already announced, many companies will come under economic pressure. Thus, even companies that have not been available for sale and/or have been offered at a much higher purchase price will find themselves entering the transaction market. In our view, an increase in new distressed M&A deals is to be expected in the short term.
The COVID-19 crisis triggered a series of regulatory amendments that will be in place until the end of 2020. Also M&A transactions may be impacted by some of these changes.
With regard to corporate law, the legislator was quick to take advantage of the already existing benefits of digitilisation and thus enacted a law that allows all companies to hold their general meetings and pass shareholder resolutions virtually via video conferencing so that the physical presence of persons is no longer necessary. The new amendment triggered by COVID-19 also enables the vital execution of notarial deeds during the COVID-19 crisis. These changes enable M&A transactions to be conducted, while maintaining physical distance and promoting health. This is important for the typical Austrian target N&A transaction, which involves the sale of shares in a limited liability company (GmbH), which must be completed in the form of a notarial deed.
In the context of deals subject to reporting obligations, the Second Covid-19 Act (2. Covid-19-Gesetz) brought about an extension of the time limits to be considered. In case of merger filings received by the Federal Competition Authority (Bundeswettbewerbsbehörde) after the Second Covid-19 Act has entered into force but before 30 April 2020, the four and sicxweek time limits within which the Federal Competition Authority and/or the Federal Cartel Prosecutor (Bundeskartellanwalt) can file an examination application with the Austrian Cartel Court (Kartellgericht) will not start to run until 1 May 2020.
Also, for examination applications which have already been pending before the Cartel Court at the time when the Second COVID-19 Act entered into force or will become pending before 30 April 2020, the five and six-week time limits for the passing of decisions will not start running until 1 May 2020. These new time limits, however, do not necessarily have to lengthen the period of time between signing and closing as the possibility to waive examinations remains unaffected by this amendment. It is to be expected that in the current situation, authorities will assess applications to waive examinations in a more generous manner in order to enable deals to be processed as fast as possible under the given circumstances.
Though many M&A deals will ultimately be postponed or cancelled due to COVID-19 in the short-term, M&A is expected to bounce back in the medium-term, and the recovery process may be accelerated for Austrian target companies due to the strict recovery measures instituted that have led to a cautiously optimistic view of economic recover in the near term.