Private Equity 2022

Last Updated July 28, 2022

Spain

Law and Practice

Authors



Deloitte Legal SLP has private equity services encompassed within the firm’s structure of specialised services in M&A, which is composed of more than 100 professionals, led by 15 partners. All of them have solid experience in advisory processes to private equity funds, covering all the milestones contemplated in a transaction. Deloitte Legal’s multidisciplinary approach and its specialisation by industry, together with its strong global network and presence in more than 150 countries, enable it to offer the complete range of M&A transaction services, including expansion processes, alliances and divestitures, which present a wide range of legal, tax, regulatory and other issues which may lead to the success or failure of the investment. Clients benefit from Deloitte Legal’s extensive experience of M&A, its understanding of the PE/VC markets and industries, and its close collaboration with colleagues in other disciplines within the Deloitte global organisation.

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 2.5 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. 

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. 

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.

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 2021: 

  • the IT sector, which received 32% of the total resources invested, as a result of transactions by Idealista, Jobandtalent, Signaturit, Wallapop and Devo, among others; 
  • energy and natural resources, which received 25.7% of the total resources invested, had its most significant transactions with Urbaser, Amara and Wallbox, among others; and 
  • medicine and health received 8.7% of the total resources invested, in transactions involving Palex Medical, Grupo Proclinic and Valora Prevención. 

It is noticeable that investment activity was largely directed at the most resilient sectors during the pandemic. This trend is expected to continue in FY 2022, but it should also be noted that according to TTR and Intralinks monthly reports, the real estate sector has been the most active in 2022, with a total of 208 transactions representing an increase of 52% compared to the first quarter of 2021.

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.

As a consequence of COVID-19, several laws have been adopted over the last three years to alleviate the effects of the pandemic. 

The insolvency moratorium was extended to 30 June 2022, meaning that companies in default situations did not have to complete a declaration of insolvency before the competent authorities, and applications from creditors seeking the onset of insolvency proceedings were not admitted, until such date.

The purpose of this regulation was to provide companies with a temporary margin in these uncertain times. However, this moratorium has now expired, so distress transactions carried out by PE funds will likely be the tendency in the coming months. 

In addition to the above, and among other measures, regulations regarding electric power 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 such sector. PE funds have actively followed these new regulations, despite the uncertainty generated by continuous change.

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 mandatory approval of the National Markets and Competition Commission (Comisión Nacional de los Mercados y la Competencia or CNMC) when certain thresholds of market share and target’s turnover are met. Transactions are suspended until such approval by the CNMC is issued. The CNMC may impose the fulfilment of certain actions to complete the relevant transaction (eg, carve-out of certain assets or business units).

Foreign Investment Regulations

These were issued in March 2020 and have been extended until 31 December 2022. 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:

  • 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;
  • is directed into a “strategic sector”; and
  • 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. 

According to a report published by the Ministry of Industry, Consumption and Tourism, during FY 2021, 55 transactions were submitted for prior authorisation and a total of 48 were resolved positive, while seven applications were closed as there was no need for approval.

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 due diligence scope 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, where a vendor due diligence report is not initially provided to potential bidders, it is common to see a fact book which highlights key aspects of the target and where certain contingencies can be identified.

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 buyers 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 a 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 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 (EUR3,000 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 financing purpose could be other tranches, such as 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, 55% of PE transactions were financed with debt in FY 2021. Leveraged transactions have been favoured by the market conditions of the last few years due to ease of access to traditional bank debt.

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 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. 

In general terms and in order to ensure a fixed price at closing date, PE funds prefer a locked-box mechanism in the sale with, in some cases, a ticking fee for the cash generated from the reference date to the closing date.

Although the PE buyer is usually quite reluctant to provide any sort of protection, the most common one would be an equity commitment letter, by virtue of which the fund commits to funding the acquisition vehicle at the closing of the transaction.

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.

In both structures (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 to submit the dispute to the 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.

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 theCOVID-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.

Generally, in Spain, break fees or reverse break fees are very rare in PE transactions. In sale and purchase agreements, sellers are hesitant to accept any walk-out rights other than the conditions precedent previously negotiated and agreed by the parties. 

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 set out in the SPA. However, in such 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.
  • 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. 

Nevertheless, negotiations on MAC clauses have increased to regulate the impact of COVID-19 and the war in Ukraine. The exclusion of the pandemic from MAC clauses has been common (a fact that is well known and assumed by the purchaser). Only a limited number of deals have taken certain effects of the pandemic into consideration as part of MAC events, thereby precluding the closing of the transaction.

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. 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 the PE fund. PE sellers are usually unwilling to accept escrow or any sort of price retentions.

W&I insurance is becoming increasingly common in PE transactions, although it still has certain drawbacks, such as, the additional costs of the transaction and the exclusion of certain known issues.

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. 

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).

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).

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 EUR600,000 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.

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 can only be conditional to 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.

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). 

Hostile takeovers are legally possible, but are less common than non-hostile takeovers in Spain.

Unlike in other jurisdictions (eg, the USA, which has the “poison pill” mechanism), the target listed company has no other protection mechanism to persuade its shareholders to reject the offer or find another bidder.

Hostile takeovers usually take place among competitors or private investors and not between PE investors.

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).

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

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.

On the other hand, veto rights are generally reserved for the PE investors through their preferred shares, either by having a direct veto right in 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, 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, 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 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.

Compliance and corporate social responsibility (CSR) and environmental, social and governance (ESG) obligations for portfolio companies have become more important in recent years. PE funds will typically require the adoption of compliance systems in the acquired companies.

This trend has also been reflected in the scope of due diligences carried out by PE funds, which increasingly include a review of the target’s criminal risks, compliance systems and ESG policies.

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

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

Dual-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 processes increase the chances of an investor achieving a favourable divestment and maximising value for existing market conditions.

In PE deals there is sometimes reinvestment in certain secondary buyouts.

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. 

Threshold varies, depending on the specific case, but in PE transactions would apply to any other co-investors, regardless of its 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 manager shareholders with tag-along rights in the shareholders’ agreement. There is no standard threshold for the granting of such rights. 

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 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. 

In FY 2021, the number of IPOs in the Spanish market increased in respect of FY 2020 (Soltec), but only Acciona Energía and Ecoener were listed. 

On other hand, IPOs to BME Growth (a stock market for smaller companies with a more flexible regulatory regime, like the Alternative Investment Market (AIM) of the London Stock Exchange) are more common.

Deloitte Legal SLP

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28020 Madrid
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+34 915 14 50 00

isanjurjo@deloitte.es www2.deloitte.com/es
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Trends and Developments


Authors



Deloitte Legal SLP has private equity services encompassed within the firm’s structure of specialised services in M&A, which is composed of more than 100 professionals, led by 15 partners. All of them have solid experience in advisory processes to private equity funds, covering all the milestones contemplated in a transaction. Deloitte Legal’s multidisciplinary approach and its specialisation by industry, together with its strong global network and presence in more than 150 countries, enable it to offer the complete range of M&A transaction services, including expansion processes, alliances and divestitures, which present a wide range of legal, tax, regulatory and other issues which may lead to the success or failure of the investment. Clients benefit from Deloitte Legal’s extensive experience of M&A, its understanding of the PE/VC markets and industries, and its close collaboration with colleagues in other disciplines within the Deloitte global organisation.

Introduction

This report outlines private equity (PE) activity in Spain for 2021 and 2022 (up to the second semester) and the trends and legal considerations for the second semester of 2022 in this extraordinary global situation. The COVID-19 pandemic and war in Ukraine will undoubtedly set the trend for the second semester of 2022 in a market that in 2021 reached historic figures.

An Overview of 2021 

A record year for the PE market

Despite the uncertainty generated by the COVID-19 pandemic, the PE market reached record figures in 2021.

According to the Spanish Venture Capital and Private Equity Association (SPAINCAP), Spanish PE capital investment in 2021 reached its second-highest record ever.

In the annual report for the M&A Iberian market, Transactions Track Record (TTR) confirms this growth trend in the PE market in FY 2021, with the volume of transactions increasing by 41%; and the aggregate value of PE deals increasing by 82%. A curious fact about the impact of COVID-19 on PE funds was that 84% of the total PE deals announced were closed by year-end. 

Venture capital (VC) also achieved a growth of 27%, while the number of IPOs in Spain increased from 21 in 2020 to 27 in 2021.

2021 deal activity

The following trends were observed in Spain in FY 2021 according to SPAINCAP.

  • The IT sector led the rankings with 32% of the total funds invested. Energy and natural resources ranked second, with 25.7% of the total resources invested; and medicine and health captured 8.7% of the total resources invested. 
  • In terms of size, 2021 was the second-best year ever on record for big-ticket deals (over EUR100 million) with 11 deals in eight different companies: Platinum Equity (Urbaser), Cinven (Restaurant Brands Iberia), Silver Lake (Grupo BC), Apax Partners and Oakley Capital (Idealista), ICG (Alvinesa), Archimed (Suanfarma), Kinnevik and Softbank Vision Fund (Jobandtalent), Fremman Capital (Palex Medical) and Orient Hontai (Imagina Media Visual). This market sector has recovered its investment level (during 2019 it reached an all-time high) after the downturn experienced in FY 2020 due to the COVID-19 crisis.
  • The middle market (investments between EUR10 and EUR100 million) reached near-historic heights in terms of volume (EUR2,436.9 million) and was the best year in terms of the number of transactions (94).
  • International PE funds continue to lead investments with 80% of the total annual investment. This is the second-highest record ever in aggregate value and the highest-ever number of transactions in Spain (236). 

2022 Deal Activity and Expectations

In its first quarterly update for the M&A Iberian market in FY 2022, TTR reports:

  • PE transactions reached 122 with EUR8,088 million of aggregate value, which implies an increase of 13%; 
  • VC transactions reached 240 with EUR2,851 million of aggregate value, which implies a decrease of 11% but a 2% increase in the number of transactions; and
  • in relation to asset deal transactions, the first quarter of FY 2022 saw 321 transactions with EUR8,114 million of aggregate value, which implies an increase of 4% and 78%, respectively.

Likewise, according to the latest available TTR report, as of July 2022, 1,597 transactions worth EUR69.794 million had been executed, led by the real estate sector with 392 transactions.

The expectations for the second half of FY 2022 are not clear, however, due to major market challenges, such as the following. 

  • The uncertainty generated by the COVID-19 pandemic, the war in Ukraine and, more recently, the monkeypox (MPX) outbreak, which, according to the European Centre for Disease Prevention and Control, has led to 8,697 confirmed cases of MPX in 27 EU/EEA countries, with Spain leading the number of cases with 3,125 as of 21 July 2022.
  • The current situation resulting from inflationary pressures and the progressive increase in financing costs.
  • Significant regulatory changes, detailed in later sections of this report.

In this context, despite the good results reached in the first half of FY 2022, there is a general situation of uncertainty which could lead to a temporary standstill in PE market activity. 

Nevertheless, IT, energy and natural resources, medicine and health, and real estate will likely continue to be the most attractive sectors for PE players in the coming months. 

Regulatory Changes

Insolvency moratorium

As indicated in our 2021 trends and developments report, the Spanish government took certain relevant measures at the beginning of the pandemic to mitigate COVID-19’s negative economic effects, including the suspension of filing for insolvency until 31 December 2021, ie, companies in default situations did not have to complete a declaration of insolvency before the competent authorities, and applications from creditors seeking the onset of insolvency proceedings were not admitted until such date. 

In November 2021, the insolvency moratorium was extended up to 30 June 2022. Since it has not been extended further, companies and creditors may now apply for voluntary and necessary insolvency proceedings, respectively. 

Under these circumstances there are expected to be many distressed M&A transactions, restructurings, and transactions in insolvency or pre-insolvency scenarios in this second quarter of FY 2022. 

These transactions are typically carried out swiftly, mainly due to the urgent cash needs of the target company. Other typical aspects of these M&A transactions are: 

  • due diligence processes tend to be more agile and quicker, with focus on the material aspects of the business and the target; 
  • payment of the price tends to be partially deferred and is usually linked to future results of the target (earn-out); and 
  • the purchaser’s protection for breach of representations and warranties by the sellers is more limited.

Amendment to the Spanish Insolvency Law

On 25 August 2022, the Spanish government approved an amendment to the consolidated text of the Insolvency Act, which will come into force 20 days after its publication in the Spanish Official State Gazette, which is still pending as of the date of this report.

This amendment includes significant changes that aim to: 

  • promote the refinancing of companies (financial and operational restructuring) and pre-insolvency agreements; 
  • reconcile the compensation of creditors and the recovery of business solvency;
  • speed up insolvency proceedings at the commercial courts;
  • reduce the number of insolvency proceedings conducted at the commercial courts; and
  • establish more flexible mechanisms for the sale and purchase of productions units.

In addition, a “pre-pack” mechanism, expressly regulated by the law, is now being executed. This pre-pack mechanism allows the express sale and purchase of production units in operation in an auction process carried out prior to the insolvency procedure. These units are sold free of debts and liabilities and with the essential contracts to continue the activity in force. This will undoubtedly enhance the maintenance of viable productive units and represent an excellent opportunity to distressed transactions. 

European Court upholds extension of European Commission control over mergers

Recently, the EU’s General Court (GC) has confirmed the EC's jurisdiction to review the Illumina/Grail merger transaction on the basis of the application of the referral mechanism set out in Article 22 of the EU Merger Regulation (EUMR), even if the concentration did not fulfil any merger control thresholds in any EU jurisdiction. Under Article 22 of the EUMR, any EU member state may request the EC to review a concentration that affects trade between member states and threatens to significantly affect competition. However, Article 22 referrals have so far been limited to cases where national merger control thresholds were indeed met but where the EC was the best-placed authority to decide on the case (mostly for consistency reasons).

Conversely, in the Illumina/Grail case, France made a referral request to the EC, in which it was joined by Belgium, Greece, Iceland, the Netherlands and Norway, even if none of the respective merger control thresholds in any of these member states were met. Illumina has subsequently challenged, before the GC, the EC's decision to accept jurisdiction to review the transaction pursuant to Article 22 of the EUMR, seeking its annulment.

The GC’s judgment on 13 July 2022 has now confirmed that the EC may review a concentration through the referral mechanism set out in Article 22 of the EUMR even if national merger control thresholds are not met, provided that the transaction affects trade between member states and threatens to significantly affect competition within the territory of the member state or states which made the referral request. This is regardless of the current implementation status of the transaction (ie, even after completion). In other words, the EC could eventually subject its approval to the fulfilment of certain conditions or remedies to validate a closed or an ongoing transaction, which would otherwise not be subject to scrutiny in the absence of the EC’s new policy regarding the applicability of Article 22 of the EUMR.

Although it is expected that the new approach to Article 22 of the EUMR by the EC will affect only some transactions under very specific conditions (eg, the so-called “killer acquisitions” in the pharma or digital industries) and the GC’s judgment is still subject to appeal before the EU Court of Justice, this development does generate some legal uncertainty for specific large PE transactions and any potential practical implications would need to be considered in advance. 

Investments made by non-EU/EFTA investors

Foreign investment restrictions have been extended until 31 December 2022. This regulation requires that any foreign investment will need prior authorisation of the Spanish government if: 

  • the investor acquires a stake equal to or higher than 10% of the share capital of a Spanish company, or acquires control according to the Spanish Antitrust Law; and
  • the target operates in a “strategic sector”, including, among others, critical physical or virtual infrastructures (in the energy, health, water, transport, communications, communications media, processing and data storage, aerospace, military, electoral and financial sectors); critical technology; essential commodities (eg, energy, raw materials and “food safety”); sensitive data and the media; and
  • the investment is greater than EUR1 million.

Despite the control mechanism established by this regulation, in accordance with the report published by the Spanish Ministry of Industry, Consumption and Tourism during FY 2021, this measure has apparently not defaulted any transaction (although it has delayed closings, as the relevant approval is required as a condition precedent to the execution). 

Measures to minimise the impact of the war in Ukraine

The Spanish government has adopted several measures in response to the economic and social consequences of the war in Ukraine.

Among other things, these measures aim to enhance the use of renewable resources and regulate remuneration to this sector. PE funds actively follow this new regulation, despite the uncertainty generated by the continuous changes.

In addition, the Spanish government has approved the issuance of direct subsidies to gas-intensive industry for 2022 to alleviate the adverse effect of the increase in the cost of gas as a result of the war in Ukraine.

In this context, significant M&A transactions may arise in the energy and gas sectors, as market players may seek price stabilisation formulas through power purchase agreements (PPAs). 

M&A Trends

Most of the trends that have emerged due to COVID-19 have become common practices in the PE market, including:

  • electronic negotiation meetings through Zoom or Teams;
  • counterparty authentication signing platforms; and
  • transaction clauses that were not as relevant a few years ago.

In this context, new trends have emerged (or previous trends have been fostered) as analysed in the subsequent sections of this report.

MAC clauses

A material adverse change (MAC) clause is a pro-buyer clause particularly common in M&A transactions with deferred closing, in which purchasers seek to allocate to the seller pre-closing adverse change risks on the business, thereby providing the purchaser with a way out of the transaction.

Such MAC clauses may be more or less purchaser-friendly as per the negotiation between the parties, but they could include: 

  • force majeure events such as natural disasters, war, or acts of terrorism (very common nowadays); 
  • significant changes in the target business arising from amendments to the law or changes in the financial markets, interest rates, exchange rates, etc; 
  • increases in raw material, commodities, labour or other costs; and 
  • unwise business judgments.

In summary, the enforcement of a MAC clause would require:

  • the existence of a substantial change with respect to the circumstances under which the parties adopted the decision to enter into the transaction;
  • that said change is of an adverse nature and is objectively negative for any of the parties; and
  • that the adverse change is considered as “material”.

In these uncertain times, MAC clauses are likely to be included in many M&A agreements, the main points of negotiation among the parties being the definition of potential MAC events and the definition of "material". 

Cybersecurity in R&W and due diligence

Cybersecurity challenges have begun to take on greater significance in recent years, particularly in certain industry sectors such as technology and finance, as cyber-attacks and security breaches may cause material and, in some cases, reputational damage. 

Purchasers are therefore demanding (i) a review of the cybersecurity systems of the target company within the due diligence process, and (ii) more extensive and detailed R&W regarding the security of computer and technological systems, although these R&W are not commonly accepted by sellers and R&W insurers. 

ESG

Although ESG cannot in itself be deemed a trending topic, its impact on the M&A market during the last 12 months and the outlook of its constant growth as a matter to be taken into account in future deals, places it among the most relevant trends in 2022 market development.

A powerful combination of environmental, social and governance (ESG) demands is driving PE funds and corporations to urgently transform their core strategies. 

The reputational impact ESG matters have in the current market has significantly led acquirers to seek improving ESG credentials, so that ESG has become one of the drivers within the M&A decision-making process. All of the foregoing leads us to believe that every deal will be scrutinised on ESG parameters, in order to reduce risk and generate long-term value.

Within this context, ESG has impacted the M&A market from a legal standpoint in the following areas. 

  • Due diligence: the scope of due diligences tends to include ESG areas such as equal employment opportunities, environmental checks/law stoppers, anti-corruption and bribery measures, or compliance with governance recommendations.
  • Specific transactions: purchasers are increasingly more interested in green transactions, ie, investments in sustainable and socially responsible assets or targets in different areas including renewable energies, energy efficiency, clean transport or responsible waste management. Green-finance transactions have also gained greater importance (ie, financing alternatives linked to ESG purposes), such as sustainability-linked bonds, social bonds and hybrid arrangements.
  • Transaction documents: the outcome of due diligence is reinforced by the inclusion of specific R&W and specific commitments of the seller in the transaction documents.

In summary, it is likely that ESG and responsible investment considerations will become intrinsically embedded across M&A transactions. 

R&W Insurance

The use of R&W insurance (ie, insurance that covers potential damages derived from a seller’s breach of the R&W granted to the buyer within the context of an M&A transaction) is gradually increasing. 

Potential drawbacks, such as the additional costs of the transaction and the exclusion of certain known issues, are weighed against the security and the possibility of executing a clean transaction.

SPACs

Special purpose acquisition companies (SPACs) are empty shell companies or investment vehicles that a management team, usually with a strong track record in a specific activity sector and also known as “sponsors” (usually, a hedge or PE fund), makes public in an IPO in order to raise funds to participate in the merger or acquisition of an existing privately-owned company. The identity of the target company is still unknown to the investor when the funding of the SPAC is executed.

SPACs’ popularity in Europe is increasing because they represent a faster route for companies to go public and offer greater certainty on pricing than traditional IPOs.

However, SPACs do not suit everyone, as poor aftermarket performance in some cases is raising concerns among investors. 

Although SPACs could boost the Spanish stock market system, no SPACs have yet been listed in Spain (some Spanish companies have, however, been acquired by foreign sponsors). The most recent update in this matter was the draft bill published by the Spanish Ministry of Economy on 5 May 2021, but it is a very incomplete draft and still needs a lot of development.

Deloitte Legal SLP

Plaza Pablo Ruiz Picasso 1
28020 Madrid
Spain

+34 915 14 50 00

isanjurjo@deloitte.es www2.deloitte.com/es
Author Business Card

Law and Practice

Authors



Deloitte Legal SLP has private equity services encompassed within the firm’s structure of specialised services in M&A, which is composed of more than 100 professionals, led by 15 partners. All of them have solid experience in advisory processes to private equity funds, covering all the milestones contemplated in a transaction. Deloitte Legal’s multidisciplinary approach and its specialisation by industry, together with its strong global network and presence in more than 150 countries, enable it to offer the complete range of M&A transaction services, including expansion processes, alliances and divestitures, which present a wide range of legal, tax, regulatory and other issues which may lead to the success or failure of the investment. Clients benefit from Deloitte Legal’s extensive experience of M&A, its understanding of the PE/VC markets and industries, and its close collaboration with colleagues in other disciplines within the Deloitte global organisation.

Trends and Development

Authors



Deloitte Legal SLP has private equity services encompassed within the firm’s structure of specialised services in M&A, which is composed of more than 100 professionals, led by 15 partners. All of them have solid experience in advisory processes to private equity funds, covering all the milestones contemplated in a transaction. Deloitte Legal’s multidisciplinary approach and its specialisation by industry, together with its strong global network and presence in more than 150 countries, enable it to offer the complete range of M&A transaction services, including expansion processes, alliances and divestitures, which present a wide range of legal, tax, regulatory and other issues which may lead to the success or failure of the investment. Clients benefit from Deloitte Legal’s extensive experience of M&A, its understanding of the PE/VC markets and industries, and its close collaboration with colleagues in other disciplines within the Deloitte global organisation.

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