Private equity (PE) M&A transactions have reached record levels in recent years despite the uncertainty generated by the COVID-19 pandemic and major international conflicts (Ukraine-Russia and Gaza-Israel).

Record Levels of PE Investment and VC Transactions

According to the Spanish Venture Capital and Private Equity Association (SPAINCAP), Spanish PE capital investment recorded its best ever figures in 2022. This was achieved despite the changing macroeconomic landscape and the uncertainty caused by geopolitical conflicts, driven by favourable investment opportunities.

Pursuant to the information provided by SPAINCAP, FY 2023 was marked by a volatile geopolitical situation, and the Spanish VC and PE industry remained cautious, waiting for interest rates and the macroeconomic environment to become more favourable for investment. Nevertheless, VC and PE investments totalled EUR6,709 million in Spanish companies (844 investments) last year, returning to pre-pandemic levels. However, this represents a 27.4% decrease from the amount recorded in 2022 (EUR9,238 million). Nonetheless, and despite the difficulties for M&A activity worldwide, the value of VC and PE investments in Spain was among the highest on record.

In this context, it is relevant to highlight that a total of 569 Spanish companies (90% of SMEs) received VC and PE funding in 2023. Regarding the number of investments in 2023, and notwithstanding the challenging environment, 54% of investments were made in new companies (6% less than in 2022).

Between 2018 and 2023, the VC and PE sector has funded approximately 3,637 companies, of which approximately 90% are SMEs.

Major Market Challenges

As mentioned previously, FY 2023 was characterised by geopolitical uncertainty, price volatility, and high financing costs and inflation. It should be pointed out that PE funds now assess acquisitions much more carefully, and with more thorough due diligence, to avoid risk exposure post-transaction.

In this sense, and pursuant to information provided by SPAINCAP, VC and PE activity in the first few months of 2024 was similar to that in 2023, yet was influenced by high interest rates and geopolitical uncertainty. In the first quarter of 2024, VC and PE investments totalled EUR1,191 million (229 investments), representing a 42% decrease from the first quarter of 2022. However, experts agree that several factors continue to drive investment: the availability of dry powder for VC and PE general partners, numerous companies being poised for launch, strong investor appetite and the commitment of international funds to the Spanish market. Once the announced interest rate adjustment begins and macroeconomic indicators stabilise, investment activity is expected to experience a gradual resurgence starting in the second half of 2024.

Warranty and Indemnity (W&I) Insurance

In this context, the use of 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 clean transactions.

W&I insurance has become widespread in Spain, not only in PE investment but also – and in fact mainly – in the context of PE fund divestments, to ensure a clean exit (95% of PE divestments included the execution of W&I insurance); it is more common in transactions valued over EUR 100 million due to the cost.

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 (via 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 2023: 

• healthcare, which received 31.3% of funds invested, and for which the most significant transactions involved IVI-RMA Global, Palex Medical, Inke, Health time, Farmalider and Vitaldent;
• industrial products and services, which received 24.1% of funds invested, and for which the most significant transactions involved Gestión Tributaria Territorial, Trison, BCN Visuals and Abrasivos Manhattan; and
• IT, which received 8.1% of funds invested, and for which the most significant transactions involved Kzemos Technologies, Wallapop and Cabify.

By number of companies, the IT sector ranked first (representing 34.4% of the total companies receiving investments in 2023), followed by healthcare, biotechnology/genetic engineering (each accounting for 10% of the total), industrial products and services, and consumer goods (each accounting for 8% of the total).

During FY 2023, PE investment maintained its focus on sectors such as digitalisation, but also focused on sectors that are in the process of recovery such as consumer products and industry.

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

As interest rates increased during the past few years, borrowing costs for businesses and investors escalated, leading to tighter credit conditions and reduced access to cheap financing. This has made it more challenging for PE firms to fund acquisitions, resulting in a slowdown in deal activity in the country.

However, despite such challenges, certain sectors have shown resilience and continue to attract PE interest. IT, healthcare and renewable energy have been among the bright spots, where these industries demonstrate the potential for growth.

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

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

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

The law, in effect as of 29 July 2023, introduced certain changes to the regime governing structural modifications, which have an impact on PE investments. As a result, the expert reports requested for leveraged mergers subsequent to the leveraged acquisition of a target company no longer have to address the “existence of financial assistance”, thus simplifying the process and avoiding controversies related to the evaluation of financial assistance in such transactions, where it is difficult for experts to determine whether financial assistance is fair and equitable.

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

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

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

Furthermore, regulations concerning foreign investment regulations and foreign subsidies regulations were introduced; these are explained in 3.1 Primary Regulators and Regulatory Issues.

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

Merger Control Regulations

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

Foreign Investment Regulations

These were issued in March 2020 and in 2023. A Royal Decree on foreign investment came into effect on 1 September 2023. This Royal Decree has two crucial aspects:

• the scope of investment operations to be reported to the Foreign Investment Registry is modified; and
• the regime for the suspension of liberalisation of foreign direct investments (FDIs) in Spain is clarified and developed, requiring administrative authorisation in certain cases.

As a result of these regulations, any investment into Spain carried out by residents of countries outside the EU and the European Free Trade Association (EFTA), or carried out by residents of the EU or EFTA whose ultimate beneficiary owner lies outside the EU or EFTA, needs prior authorisation by the Spanish government if the foreign investment meets the following conditions.

• The foreign investor will hold a stake equal to or greater than 10% of the share capital of a Spanish company, or will effectively control a Spanish company. Pursuant to the regulation, some types of operations that were not covered by the previous Royal Decree are included in the notification obligation, such as:

1. acquiring shares in closed-end investment schemes or collective investment schemes resulting in a stake equal to or exceeding 10% of the entity’s capital;
2. equity contributions that do not increase the share capital, provided the contributor holds a stake equal to or exceeding 10%;
3. intra-group financing to companies or branches exceeding EUR1 million with a repayment period longer than one year; and
4. real estate investments, although the new regulations set the thresholds at EUR3 million for Spanish investments executed in foreign countries and EUR500,000 for foreign investments in real estate assets in Spain.
• It is directed towards a “strategic sector”.
• It is greater than EUR1 million.

Strategic sectors include, among others, critical physical or virtual infrastructures (the 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 require prior authorisation from the Spanish government; otherwise, they have no legal effect whatsoever until legalised and entail an infringement punishable by law. 

Data for Spain shows that foreign investment increased by 12% in FY 2023 compared to FY 2022, surpassing EUR28.215 million.

According to a report published by the Ministry of Industry, Consumption and Tourism, during FY 2023, 97 transactions were submitted for prior authorisation. Nine applications were closed as there was no need for approval, and 80 of the remaining 88 applications were approved without mitigation measures due to the absence of significant risks for security, health, or public order. In eight cases, the investments were approved with mitigation measures.

EU Foreign Subsidies Regulations

On 23 December 2022, Regulation (EU) 2022/2560 of the European Parliament and of the Council of 14 December 2022 on foreign subsidies that distort the internal market (FSR) was published in the DOUE, which empowers the European Commission to investigate the granting of subsidies from third countries to companies operating in the EU that may cause distortions in the internal market and undermine the conditions of competition within the internal market. The FSR entered into force on 12 January 2023 and has been applicable since 12 July 2023.

FSR provides for a gradual implementation that has allowed both operators and the European Commission to prepare for the new regime. As of 12 October 2023, the regime of prior notification and authorisation of certain concentrations and bids submitted in public procurement processes that meet a series of specific thresholds came into force. In this context, FSR introduced mandatory notification requirements for certain transactions where the acquired company, one of the merging parties or the joint venture generates an EU-wide turnover of at least EUR500 million, and the foreign financial contribution exceeds EUR50 million. PE firms involved in large transactions must be prepared to notify the European Commission about foreign subsidies.

FSR covers a wide range of economic activities, including mergers, acquisitions and public procurement, making it highly relevant to PE transactions. It applies to any company engaging in these activities within the EU, including those operating in Spain.

In this regard, the European Commission has the authority to investigate and assess the impact of foreign subsidies on competition. If a PE firm has received significant foreign subsidies, the Commission will evaluate whether these subsidies could distort the internal market. This review can lead to delays in the transaction process and additional compliance requirements.

Consequently, PE firms need to conduct thorough due diligence to identify any foreign subsidies received by the target companies or themselves.

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.

Regarding sovereign wealth investors (when they are involved as fund or deal co-investors), scrutiny is generally higher; being state-owned, they often raise national security concerns, especially if they are from countries with strategic or political interests that may not align with Spain’s. The involvement of sovereign wealth investors can lead to heightened scrutiny to ensure that investments do not compromise national security or critical infrastructure.

Additionally, Spain has specific regulatory frameworks in place that address FDIs, particularly in sectors deemed critical to national security, public order and public health. The involvement of sovereign wealth funds can trigger reviews under these frameworks. For example, the Spanish government might scrutinise investments in sectors such as energy, transportation, telecommunications, and defence more closely if a sovereign wealth investor is involved.

Due diligence is normally carried out through a virtual data room 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).

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

Contingencies Identified in Financial, Tax and Labour Due Diligence

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

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

Contingencies Identified in Legal Due Diligence

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

• remedies applied by the seller before closing;
• remedy obligations for the seller included in the private share SPA, which must be applied after closing or between signing and closing;
• general representations and warranties (R&W) included in the SPA; and
• specific indemnities included in the SPA.

In addition, given the current uncertainty, 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 meetings between the purchaser’s and seller’s advisors are usually held during the due diligence process.

Contingencies identified will thereafter be discussed among the parties 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 the buyer’s knowledge).

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

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

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

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

Private SPAs

The private SPA continues to be the most common form of PE transaction. 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.

In Spain, private SPAs are usually notarised before Spanish notaries public who, among other functions, confirm the date and the capacity of the parties and – as the case may be – their legal representatives, to execute the transaction documents. Notaries public 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 become enforceable titles for all the purposes provided for under the applicable Spanish law, and the parties may request copies of said deeds at any time.

Bilateral and Auction Processes

PE deals can be run as bilateral or auction processes, depending on the specific transaction.

PE transactions run as auctions with multiple prospective bidders have decreased in number since 2022; however, in 2023, the number of PE transactions run as auctions increased slightly, returning to typical levels.

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 buyer.

Auction processes tend to slightly favour the seller, who seeks to maximise the selling price and to achieve the best contractual terms and conditions in the agreement; however, this varies depending on the characteristics of the transaction (industry, types of parties involved, etc).

Share Deals and Asset Deals

Share deals continue to be 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, rights and liabilities, in asset deals there is a need to:

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

Ancillary Documentation

PE transactions involve the execution of a SPA and, if there are additional shareholders, a shareholders’ agreement is needed between the PE fund special purpose vehicle (SPV) and the other shareholders, particularly those who manage the company, to regulate the relationships between shareholders and between the shareholders and the company.

Likewise, it is also common to formalise different types of guarantee agreements (eg, in favour of the seller as a guarantee of payment of the selling price when it is retained by the buyer and/or deferred, or in favour of the buyer when a contingency has been identified from which the buyer wants protection).

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

PE funds almost always directly buy the target company through an SPV incorporated in Spain as limited liability companies (“SL companies”). PE funds prefer such companies for the following reasons:

• favourable capital requirements (EUR1 to incorporate an SL company); 
• the shareholders’ liability is limited to the amount of their contributions; and
• a 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.

Most PE transactions continue to be financially leveraged, involving a combination of equity and debt (the proportions depend on the size of the transaction and the business involved).

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

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

Depending on the characteristics of the acquisition, lenders may require collateral or the personal guarantee of the parent company.

The contribution of public domestic (Centro para el Desarrollo Tecnológico y la Innovación, E.P.E (CDTI), Compañía Española de Financiación del Desarrollo (COFIDES), Empresa Nacional de Innovación, SME, S.A. (ENISA), and Instituto de Crédito Oficial (ICO)-AXIS)) and European funds (next-tech funds) to VC and PE must be also stressed. The public-private collaboration has been an essential relationship for years, helping PE general partners close new vehicles.

According to SPAINCAP, despite the change in monetary policy by central banks and the consequent change in interest rates, leveraged transactions stood out from the other types of transactions, and 54% of PE transactions were financed with debt in FY 2023.

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

When the purchaser is an SPV, the sellers might request an equity and/or debt-commitment letter from the PE fund.

Acquired Stake

The most common PE transaction for PE funds continues to be one in which they buy 100% of the target company’s capital stock or take a majority shareholding through a share purchase, with the key managers remaining as managers and minority shareholders. In 2023, there was a meaningful increase in the number of PE deals where a PE fund took a majority stake.

PE deals involving multiple investors continue to be unusual in Spain, except for transactions involving large-cap companies. Exceptional PE transactions involve other investors alongside the PE fund, but these do not happen very frequently (although they are common in VC deals) and are normally driven by the modus operandi of the PE fund rather than being a general form of PE transaction. 

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

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

Completion and locked-box accounts are the predominant consideration mechanisms in PE transactions in Spain, together with the fixed-price mechanism. A mechanism combining the locked-box and completion accounts mechanisms is also commonly used (mostly in more complex transactions and those of higher value).

Completion Accounts Mechanism

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

Locked-Box Mechanism

The locked-box mechanism continues to grow in popularity and was again the most used pricing mechanism in 2023 for both sell-side and buy-side transactions.

This mechanism implies that 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 that are not within the ordinary course of business. 

Earn-Outs, Deferred Consideration and Roll-Over Structures

Earn-outs, deferred consideration and roll-over structures are relatively common in PE transactions in Spain.

With the aim of maximising returns within a specific investment period, PE funds might use mechanisms such as earn-outs or deferred consideration to bridge valuation gaps or incentivise future performance, which helps parties overcome their differing expectations about a company’s future performance; this is particularly important in times of uncertainty. These mechanisms are often used to incentivise sellers to remain involved in the business and increase the purchase price, contingent on achieving certain performance milestones or future financial results (most earn-outs are linked to EBITDA or, more generally, the company’s benefits).

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

PE deals wherein a PE fund takes a majority stake are also structured using a roll-over formula, whereby the PE fund buys the target company through an SPV, after which the seller reinvests in the SPV (usually through a capital increase).

In the event of the application of a locked-box structure, the seller usually tries 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.

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

However, the use of equity tickers and adding interest to the leakage amount continues to become more prevalent in Spanish PE transactions.

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

In the most common dispute-resolution mechanism, the parties will initially negotiate in good faith during a determined period of time, with the aim of reaching a mutually agreeable resolution, and in the event of lack of agreement, the decision will be made by an independent expert selected in accordance with the SPA’s conditions (usually an international audit company). The independent expert’s opinion is usually binding for the parties, excluding the possibility of submitting the dispute to a court or arbitration unless the independent expert is grossly negligent.

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

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

The most common regulatory condition of PE deals is the need for regulatory approvals (particularly antitrust clearance) and FDI screening (where a preliminary analysis is needed for most deals involving international parties). In 2023, many deals required a preliminary analysis of the need for regulatory approvals but, based on the conclusion of such analysis, most PE transactions ultimately did not need to include a condition precedent in the SPA for that purpose. Likewise, as indicated in 3.1 Primary Regulators and Regulatory Issues, in the event of the application of FSR, authorisation shall be obtained from the European Commission if one of the parties involved in a transaction received financial contributions (such as a subsidy) from a third country, which would be an additional regulatory condition precedent.

Aside from regulatory approvals, other conditions could include:

• the buyer’s financing of the acquisition;
• obtaining third parties’ consent for significant agreements containing change-of-control provisions of the target (the termination of which would have a significant impact on the acquired business); and
• fulfilling pre-closing covenants, such as carve-out or reorganisations that may need to occur before closing the transaction or executing, terminating or maintaining certain key agreements.

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

Approval of the seller or the purchaser at 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 execute the agreement.

Due to their inherent nature, PE funds typically adopt a highly aggressive negotiating position, and PE purchasers are usually very reluctant to accept any “hell or high water” undertakings. It is not, therefore, very common to include such undertakings in PE transactions, although a trend towards sellers trying to push the execution risk onto the purchaser through such clauses is becoming apparent. These provisions usually apply to antitrust, foreign investment and foreign subsidies (according to new EU foreign subsidies regulations). Authorisations conditions precedent (CP) might stipulate that the parties must accept the conditions imposed by the authorities, unless they are overly burdensome or exceed certain limits, and could require the purchaser to adopt the required measures – including the execution of divestments – in order to close the transaction. 

In Spain, break fees and reverse break fees have typically been very rare in PE transactions. In SPAs, sellers are hesitant to accept any walk-out rights other than the CPs previously negotiated and agreed by the parties. Notwithstanding this, break fees provisions were included in 25% of transactions with deferred closing in 2023. The penalty is typically linked to the purchase price and varies depending on the particularities of the transaction; thus, the percentage of the purchase price to be paid as a penalty varies, at times reaching 10% or 15% while at other times more symbolically being below 1%. 

As a general rule, SPAs exclude the application of Spanish law and are governed by their specific provisions. Accordingly, an acquisition agreement cannot be terminated for a legal reason other than the provisions agreed therein (except in cases of 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 CPs set out in the SPA prior to the relevant long-stop date. Notwithstanding this, the parties might find an amicable way to proceed with closing and, given that CPs (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 prior to the relevant long-stop date, 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 that are unlikely to materialise) have been introduced in some SPAs as a consequence of the impact of COVID-19 and major international conflicts (Ukraine-Russia and Gaza-Israel). 

There is no general rule for the allocation of risk, so risk allocation varies and needs 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 R&W insurance is narrowed and the quantum is also limited. In PE transactions in which the PE funds are the purchasers, the sellers usually grant business and tax R&W; alternatively, R&W insurance is agreed.

In the case of a PE seller, R&W insurance basically refers to capacity, the title to the shares being sold and the absence of liens or encumbrances over the shares. It is common for the management team to grant the R&W, which can be dealt with in a separate document known as the management warranty deed. In the case of a trade seller, a more complete set of R&W is usually agreed (including business-related R&W). 

In Spain, the impact of a buyer’s actual or deemed knowledge on claims for breach of warranties is usually negotiated under SPAs. The most common limitation on liability for a seller includes full disclosure of the data room. On some occasions, as a consequence of the due diligence exercise, known issues also limit the liability of the seller. In the event that the PE fund sells, an anti-sandbagging clause is most common.

R&W under a SPA include the following categories.

• Fundamental R&W – this mainly refers to the existence of a valid target, ownership of the shares, the capacity of the parties, the absence of conflict, lack of insolvency and the absence of liens or encumbrances over the shares being sold/acquired. For these fundamental R&W, liability would only be capped at the purchase price, and may even not be limited at all, and in the case of several sellers, the most common liability regime is individual instead of joint liability. 
• Business R&W – this refers 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; and the conducting of business). In exits, PE funds are reluctant to grant these business R&W, and in some cases, they are granted by the management team even if the team’s liability is often capped at a symbolic quantity in the management warranty deed or replaced by the agreement of a W&I insurance (or if the liability was capped at less than 1% of the purchase price without agreement regarding W&I insurance). 

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

Limitation Provisions

The liability of sellers under SPAs is usually limited quantitatively and temporally. However, those limits change depending on whether there is an investment or an exit, and on whether W&I insurance is taken out.

In an investment by a PE, the following applies.

• Fundamental R&W are in all, or almost all, cases limited to the purchase price or even not limited at all.
• 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 or environmental warranties, which are usually limited to the relevant statutory limitation period). Quantitative limitations could include the following. 
1. A cap – the seller’s maximum aggregate liability to the purchaser may not exceed a certain amount. 
2. De minimis – by virtue of this limitation, only those damages that, when individually considered, exceed a certain amount can be claimed by the purchaser. Usually, when a de minimis amount is agreed, a series of claims arising from facts or circumstances that are substantially the same can be accumulated.
3. Basket/deductible – the seller’s obligation to compensate the purchaser is not enforceable until the damages exceed a certain amount. When exceeding this 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 against the known issues arising from the due diligence exercise. Furthermore, specific indemnities are not usually subject to any limitation and do not have to follow the claim procedure negotiated under the SPA, or at least enjoy higher quantitative and temporal limits. 

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

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

Litigation provisions are always introduced in the SPA. Disputes that are not solved amicably may be solved by the courts, which is the most widely used dispute-resolution mechanism, or by an arbitrator.

Regarding any consideration mechanisms or earn-out discussions, PE transactions usually agree to refer these to an external expert appointed 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 continue to be somewhat uncommon in Spain, since the number of listed companies is relatively low in comparison with other jurisdictions such as the UK and the USA.

P2P transactions in Spain are still usually 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 an emerging 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: 

• to lower 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
• based on valuation reasons (when the prices of unlisted companies begin to surpass those of listed ones).

The Spanish legislation on takeover bids states that the governing bodies and management of the target company, any delegated or empowered body thereof, their respective members, the companies belonging to the target company's group and anyone who might act jointly with the foregoing shall:

• remain passive during the execution of the takeover bid; and
• obtain prior approval at the general shareholders’ meeting before taking any action that may prevent the success of the bid, with the exception of seeking other bids, in particular before initiating any issue of securities that may prevent the offeror from obtaining control of the offeree company.

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

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

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

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

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

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

Control is gained when a person:

• acquires, directly or indirectly, a percentage of voting rights equal to or greater than 30%; and
• 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%. 

A breach of duty pertaining to 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 the following. 

• Suspension of the voting rights held in the listed company.
• 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 for up to five years; and
3. publication of the infraction in the Spanish official gazette.

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

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

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

Mandatory takeover bids shall be submitted at an equitable price. This price amounts to the highest price paid by the bidder within the 12 months prior to the submission of the offer; alternatively, if no previous transactions have taken place, the equitable price shall not be lower than the exclusion price, which shall be determined by an independent expert.

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

• approval of resolutions of the general shareholders’ meeting of the listed company;
• acceptance by a certain minimum number of shareholders; or
• any other condition that 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 a cash deposit, to guarantee payment for 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. Break-up fees:

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

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

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

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

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

To ensure the success of a 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 voting rights in such a way as to facilitate the success of the bid (both at the shareholder level and, as far as legally possible, at the board of directors’ level). 

Equity incentivisation of the management team is very common in PE transactions. As indicated previously, equity incentivisation aims to increase the value of the target company and its affiliates by providing an extraordinary incentive to the target’s managers (independent from and additional to their employment or mercantile relationship with the company) in exchange for maximising the value of the company in a liquidity/exit event. The management will often retain equity between 5% and 10%. 

Incentivisation is normally structured through MIPs, which might include: 

• salary incentives, such as an extraordinary bonus (ratchet) linked to the ROI or the IRR 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 ROI or the IRR of the PE fund. 

The rights and obligations of the management are regulated through shareholders’ agreements, management incentive agreements (in the form of MIP general terms and conditions together with letters of endorsement by managers of the general conditions, which sometimes lay down special conditions) and/or executive director agreements. 

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

It is also quite common for the PE fund to finance the acquisition of the managers’ equity (especially when the managers are not former shareholders of the company).

Management equity plans, which involve the investment of the management in the investment structure of the PE fund, are emerging as one of the most common incentive mechanisms in the PE environment. The investment is made indirectly at the same level as the PE fund, which typically takes place in a foreign jurisdiction, through several fully participating entities. It is common for all managers to invest in the same vehicle (ManCo), which is managed by the PE fund and holds the sweet equity.

Vesting provisions are very common in MIPs in Spain as they mitigate the risk of non-continuation of the key management team. They usually range between four and five years.

Accelerated vesting provisions are also very common, where 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.

MIPs 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, 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 good-leaver scenarios.

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 MIP. 

PE funds usually require the beneficiaries:

• to assume non-compete obligations and non-solicitation obligations, and to assume the obligations of exclusivity;
• to remain 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 include the R&W in the exit of the PE fund.

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

Restrictive covenants of managers, such as non-compete, non-solicitation and exclusivity provisions, are typically included in both equity plans and bonus/contractual plans, and a breach of such provisions usually has a negative effect on mangers' perceptions of the incentive.

It is important to analyse under the applicable law (particularly under labour legislation) and duly cover the remuneration of such obligations of the beneficiaries.

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, and the minimum valuation of its shareholding is required for the PE fund to exercise its usual drag-along rights. 

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

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

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

This control is ensured in the usual 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 (veto right), including, among others:
1. at the 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, appointment of the auditor of the annual accounts (if mandatory), disposal of essential assets, agreements with persons related to the other shareholders and the granting of convertible loans; and
2. at the managing body level – the granting and revocation of powers of attorney, acquisition of assets or business exceeding a certain amount and/or outside the ordinary course of business, significant decisions over judicial proceedings, the obtaining of financing over a certain amount, formulation of the annual accounts, appointment of the auditor of the annual accounts (if voluntary), and approval of the remuneration policy of the company and the business plan.

• Reporting obligations to the PE fund. 
• Drag-along rights. 
• Purchase option.
• First offer or pre-emptive acquisition immediately after the lock-up period.
• Lock-up mechanisms. 
• Non-competition, exclusivity and continuation covenants.

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

The liability of the shareholders is, in principle, limited to the share capital contributed to the company. However, under certain exceptional circumstances, shareholders could be found personally liable through the application of the “corporate veil” doctrine – ie, 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:

• control of several companies by the same person;
• related transactions between such companies; and
• no economic or legal justification for such transactions.

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

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

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

The number of secondary buyouts increased significantly during the past few years, especially in 2022; in that year, secondary buyouts accounted for more than 40% of all deals, largely due to the high liquidity of funds resulting from the extensive and successful capital-raising processes seen in recent years. However, their prevalence declined throughout 2023, when almost 80% of all deals were pure investments.

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

Thresholds vary among cases, but in PE transactions they apply to any co-investors, regardless of their nature and the percentage held. 

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

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

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

Although an IPO is still the preferred exit strategy for PE investors in large deals, this has become increasingly unusual, especially after the severe economic conditions brought on by the 2007–08 financial crisis and the COVID-19 pandemic, and also given today’s economic uncertainty. 

An IPO led by a PE fund has several features distinct from those of the traditional IPO of a non-PE-backed company. Some of the key characteristics are as follows.

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

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