After a pandemic shock moment early in 2020, with the Vienna Stock Market crashing in Q1/2020 alongside other European indices, and an abrupt slowdown in deal activity, Austria experienced a rebound starting from mid-2020 that continued throughout 2021, although at a slower rate than globally. While public M&A activity was mainly focused on real estate transactions including Starwood Capital's EUR2.2 billion offer for CA Immobilien Anlagen AG, the technology M&A landscape was characterised by a significant increase in technology-focused venture capital investments, technology start-up exits and other technology-related private M&A transactions. Key sectors include biotechnology, e-commerce applications and platforms, VR/AR applications and blockchain/distributed ledger service providers.
Following both the worldwide trend for – and, specifically, the European Commission's focus on – strengthening the investment control regime within the EU (Regulation (EU) 2019/452), Austria amended and tightened its regulatory framework on foreign direct investment (FDI) in 2020. The framework now affects a wide range of cross-border technology M&A transactions that involve investors from outside the EU, the EEA and Switzerland. The applicability of the new FDI regime covers a broad range of technology sectors and is triggered as soon as a foreign investor directly or indirectly obtains more than 10% (in particularly sensitive areas such as 5G or, until the end of 2022, pharmaceutical products, vaccines and medical devices and protective equipment) or 25% of the voting rights in a target company. Given that an exemption from FDI approval is available for micro-target companies only, multi-jurisdictional tech M&A transactions with non-EU/EEA/Swiss investors that include Austrian subsidiaries also need to consider a mandatory FDI filing in Austria with a minimum review period of at least two months. Note that under the Austrian FDI Act, voting rights from investments made in a "joint process" are calculated together; this could extend to the acquisitions of shares in Austrian target companies by several acquirers who are not somehow affiliated or acting in concert.
It is generally advisable for start-up entrepreneurs to incorporate in the jurisdiction in which they are located, to avoid adverse legal and tax consequences. Austrian entrepreneurs should therefore generally incorporate their company in Austria, and typically do so. The standard company form is the limited liability company (Gesellschaft mit beschränkter Haftung). An Austrian limited liability company can be established within two to three weeks, with the bottleneck typically being the opening of a bank account (which can be circumvented for the purposes of establishing the company). A limited liability company has a minimum share capital of EUR35,000, with EUR17,500 being paid-in in cash. Founders may opt for a so-called foundation privilege, in which case only EUR5,000 must be paid-in in cash. The foundation privilege must be terminated within ten years after establishment.
For legal and tax reasons, entrepreneurs are typically advised to establish their company as a limited liability company (Gesellschaft mit beschränkter Haftung).
Seed investments are typically provided by government grants and government-sponsored funds, friends and family, angel investors and domestic seed-investment-focussed venture capital (including corporate venture capital) funds. International seed investors are also active in Austria but play a lesser role in practice.
Typical sources for venture capital are venture capital funds, corporate venture capital investors/funds and government-sponsored funds. Austria has several active investors, being able to effectively provide venture capital financing until Series A to Austrian start-ups. Investments above Series A are typically led by international investors. Foreign venture capital funds are also very actively providing financing to Austrian start-ups.
There are no standards for venture capital documentation comparable to, for example, the British Private Equity & Venture Capital Association (BVCA) standard.
There is no typical scenario for start-up development. Growing firms sometimes change their corporate form to a joint-stock company in order to benefit from a more management (and less shareholder)-focused corporate governance style, more flexibility for share transfers and IPO readiness. Companies tend to stay in Austria, with more mature companies sometimes introducing international holding structures to attract international investors (this has become less relevant towards the end of 2021 though).
If a liquidity event is envisaged, the process sometimes involves a dual-track approach. But dual-track processes are rare in Austria and cannot be seen as a trend. Private sales are primarily chosen for transactions involving companies from the industrial or services sectors. In the past, most dual-track processes conducted have led to private M&A sales/trade sales and only to a few IPOs involving Austrian companies. However, an IPO process may be a meaningful option for mature technology and growth companies. For growth companies, being public may offer several benefits. Growth companies tend to access public capital markets not only once during an IPO but also in subsequent secondary offerings as a publicly listed company (eg, by means of rights issues). Accordingly, growth companies may have easier access to equity if they are in the spotlight as a listed entity. A recent example of a dual-track process in Austria involved a financial institution that went public in 2019.
The Vienna Stock Exchange, operated by Wiener Börse AG, is the main market for Austrian issuers and a few other issuers from abroad. As a home market, it is the primary listing venue for Austrian companies. In a global context and with a few exceptions, Austrian issuers listed in Vienna are, according to market capitalisation, small to mid-size issuers.
In the past, there was a trend for primary and secondary listing. In several cases, Austrian issuers chose the Frankfurt Stock Exchange as the second listing venue for their shares to enhance the liquidity of the stock. In addition, there are some examples of listings of Austrian companies in the USA or in Amsterdam through the implementation of a new holding company going public on these markets; eg, in the biotech/life sciences sector.
Main listings take place on the Official Market (Amtlicher Handel) of the Vienna Stock Exchange and in the prime market segment. The prime market segment is the segment with the highest level of transparency and is considered the premium segment of the regulated market in Vienna.
The Austrian squeeze-out regime applies to all Austrian joint stock corporations (Aktiengesellschaften) and limited liability companies (Gesellschafte mit beschränkter Haftung), irrespective of any listing either in Austria or abroad.
A divergence between the country of domicile and the country of listing results in a partial application of the takeover law regime. Whereas any takeover-related market rules – such as minimum price rules and offer proceedings – follow the rules of the country of listing, takeover-related corporate rules (eg, whether a mandatory offer is triggered) follow the rules of the country of domicile.
Sales processes are typically run as an auction.
Typically, all shareholders except active founders exit a company following its sale, with active founders typically being required to stay on board for at least a transition period (of 18 to 36 months), sometimes in combination with a performance-related portion of the purchase price (earn-out).
Cash and (to a lesser extent) a combination of stock and cash are the predominant forms of consideration in Austria.
This is heavily negotiated, but very often investors (successfully) refuse to give business representations and warranties, in which case founders need to assume liabilities.
The spin-off culture is still quite underdeveloped. A recent initiative has set as its goal to "raise the awareness that entrepreneurship must be a third mission of Austrian universities, universities of applied sciences and research institutions next to research and teaching."
Spin-offs may be structured as tax neutral at the corporate level and the level of the shareholder. Beside other prerequisites, only spin-offs of operative businesses (including operative partnerships and partial businesses thereof) or qualified shareholdings are covered by these provisions.
It is possible to combine several different restructuring steps within one transaction.
A typical spin-off requires four to six months, including the necessary preparation.
Depending on the envisaged offer structure (partial, voluntary or mandatory offer) and to increase the chances of a successful transaction, the bidder can acquire an initial stake in a target prior to announcing a public offer. If a buyer acquires or sells, directly or indirectly, target shares and thereby reaches, exceeds or falls below 4%, 5%, 10%, 15%, 20%, 25%, 30%, 35%, 40%, 45%, 50%, 75% or 90% of the voting rights in the target company, the shareholding must be notified to the Financial Market Supervisory Authority (Finanzmarktaufsicht, or FMA), the Vienna Stock Exchange and the target, but the buyer is not required to disclose the purpose of the transactions. The target's articles of association may provide for a 3% triggering disclosure.
After the announcement of a public offer, a bidder may acquire further target shares but not at better terms than in the offer unless the bidder improves the offer terms.
A shareholder which holds between 30% and 50% must make a mandatory offer when acquiring more than 2% of voting rights within 12 months ("creeping in").
A bidder or a group of concerted parties acting together that obtains voting rights exceeding 30% (controlling interest) triggers the obligation to launch a mandatory offer. Any shareholding below 30% of the voting right does not trigger a mandatory offer (safe harbour). However, voting rights between 26% and 30% are suspended from voting and must be notified to the Takeover Commission.
The Takeover Act provides for various exemptions from the mandatory offer obligation, inter alia, when a controlling interest is acquired in the course of an insolvency or another shareholder or group of concerted parties holds the same number of shares.
Under the Takeover Act three different offer types are available.
These are triggered if a controlling shareholding (see 6.2 Mandatory Offer) is acquired. Except for legal conditions such as regulatory approvals, a mandatory offer must not be made conditional.
When aimed at control, these are triggered if a non-controlling shareholder (ie, one with a shareholding of less than 30%) makes an offer aimed at control. Voluntary offers are subject to a mandatory, statutory 50% minimum acceptance threshold whereby the launching pad (ie, shares already held by the bidder and concerted party prior to the announcement of the offer) is not to be included.
Mandatory offers and voluntary offers aimed at control are subject to minimum pricing rules and require a cash offer, but can have a paper alternative in addition.
Voluntary Partial Offers
These are offers that do not result in a controlling shareholding. Such offers have no minimum price rules, the consideration may be in cash or securities, and the offer may be conditional.
The acquisition of public listed companies by way of mergers has been the exception rather than the rule even though the EU Cross-Border Mergers Directive and its implementation in Austria also allows (reverse) takeovers through cross-border mergers.
Mandatory offers and voluntary offers aimed at control are subject to statutory minimum price rules; ie, the higher of the six-month value-weighted average price (VWAP) prior to the announcement of the offer and the 12-month reference price (ie, the highest price paid by the bidder or a concerted party for a single share during the 12 months prior to submitting the offer memorandum to the Takeover Commission). Furthermore, mandatory offers and voluntary offers aimed at control require a cash offer, but shares can be offered in addition.
In a merger transaction, the bidder must offer an adequate exchange ratio for its paper offer and is ultimately limited in offering cash as an alternative. Minority shareholders may initiate a subsequent review procedure of the adequacy of the exchange ratio.
Except for legal conditions such as regulatory approvals, mandatory offers must not be made conditional. Voluntary offers aimed at control are subject to a statutory minimum acceptance threshold of 50% (see 6.7 Minimum Acceptance Conditions).
In addition to legal conditions (regulatory approvals), voluntary offers aimed at control and partial offers often include:
In recent years, business combination agreements have become popular in public M&A transactions that do not involve a selling core shareholder. Under such agreements the target usually agrees to support and recommend the offer but also to help the bidder post-closing with the integration of the target. A no-shop confirmation, conduct of business, waiver of management's change of control (CoC) rights and the resignation of supervisory board members is usually accepted, whereas a no-talk agreement would violate the board neutrality rule.
Further representations and warranties as well as access to non-disclosed information prior to closing is usually not accepted.
In a voluntary offer aimed at control, the offer is successful only if the bidder receives acceptance declarations for more than 50% of the voting rights that are subject to the offer (statutory minimum acceptance threshold). Shares acquired in parallel to the offer; ie, off-market but at the same terms, count towards the threshold. However, a launching pad; ie, shares already held by the bidder and concerted party prior to the announcement of the offer, is not included. The bidder may also introduce a higher minimum acceptance threshold as a condition precedent (eg, 75% as the delisting threshold to pass material decisions for the target's business and implement corporate restructurings or 90% as the squeeze-out threshold) but in practice the threshold is usually set at the statutory acceptance threshold (50%).
Partial offers may have maximum or minimum acceptance conditions.
Under the Squeeze-Out Act, which applies for both listed and unlisted companies, a majority shareholder that holds at least 90% of the outstanding share capital of the target may resolve on the squeeze-out of the remaining minorities, which cannot block the squeeze-out but can request a review of the adequacy of the cash compensation.
If the squeeze-out follows a public offer no later than three months after the end of the acceptance period and 90% of the offer addressees accepted that offer, there is a rebuttable presumption that the offer price qualifies as adequate compensation for the squeeze-out.
A bidder may announce a public offer only if financing will be available at settlement date. An independent expert appointed by the bidder must confirm to the Takeover Commission that the bidder has the financial means to fully fund the offer.
In practice, the expert's requirements as to bank documentation will depend on the size and structure of the offer and the bidder's financial strength. In case of a financially strong bidder, the balance sheet and the bidder's statement can be sufficient to allow the expert to issue a confirmation, whereas other bidders may also require a legally binding bank funding commitment letter.
The settlement of a public offer (ie, availability of the cash consideration) may not take place later than ten trading days after the unconditional effectiveness of the offer.
Break fees are not forbidden but are not common in public M&A transactions as they could hinder competing offers and would need to be disclosed in the offer memorandum.
A no-shop agreement between a bidder and target is possible. The management would be prevented from actively looking for an alternative bidder. However, if the target is approached, it must nevertheless evaluate the competing offer.
A domination arrangement to give instructions to the management board, similar to that in Germany, is not available under Austrian law. However, a core shareholder holding of at least 75% could enter into a profit and loss transfer agreement or delist the shares from the stock market and subsequently transform a stock corporation into a limited liability company.
Irrevocable tender commitments from exiting core shareholders are quite common in the Austrian market. However, such undertakings oblige the seller only to tender its shares into the offer, not to sell and transfer its shares directly to the bidder. Therefore, bidders normally prefer to enter into share purchase agreements (SPA) prior to the announcement of an offer with economic terms similar to the offer and closing of the SPA in parallel to the settlement of the offer. Other than a tender commitment, the SPA offers a direct claim against the exiting shareholder to sell its shares directly to the bidder. A top-up agreement protects the seller from any price increase granted during the offer to the other shareholders.
An offer document that contains detailed information for the target's shareholders needs to be prepared and filed with the Takeover Commission within at most 40 trading days after the announcement of an offer ( 20 trading days in a mandatory takeover offer). Such an offer memorandum must include a brief expert statement on the completeness of the offer, the compliance of the offer with the Takeover Act and the bidder's ability to finance the offer. It must also include, inter alia, the terms and conditions of the offer, background information regarding the bidder and its future plans, the offered consideration as well as the valuation method used.
The Takeover Commission has a two-week review period and may prohibit the publication of the offer memorandum. If the Takeover Commission does not prohibit the publication, the bidder must publish the offer memorandum between the 12th and 15th trading day after filing with a minimum of four weeks and a maximum of ten for acceptance.
In the case of a competing offer, the timeline is extended and both offers are aligned ex lege so that both end on the same day.
The acceptance period for a public offer is a minimum of four weeks and a maximum of ten. Following the initial acceptance period, a subsequent three-month sell-out period applies in mandatory offers as well as for bidders in voluntary offers aimed at acquiring control, which successfully fulfil the statutory 50% minimum acceptance.
The offer condition must normally be fulfilled within the initial acceptance period. However, for regulatory approval requirements, the Takeover Commissions accepts a longer timeline of up to 90 trading days starting with the launch of the offer.
In addition to typical regulatory compliance with public laws and orders (eg, GDPR/data protection obligations), setting up and starting new tech companies that operate in regulated sectors such as banking or insurance can be subject to regulation and may also require certain licences (eg, a fintech payment solution provider would require a banking licence). Regulatory control provisions also apply to the utilities, gambling and telecommunications industries and may affect the process of an acquisition. In these sectors, changes in the target ownership of existing companies will usually require advance notification to the relevant government agencies in cases where certain thresholds of stake ownership are reached or exceeded.
The primary market regulator for public M&A transactions is the Takeover Commission.
In Austria, a new foreign investment screening act (ICA) entered into force in July 2020, tightening the regulatory framework for foreign investment in tech companies. The ICA covers foreign direct investments by a non-EU, non-EEA and non-Swiss person or legal entity and includes the direct/indirect acquisition of (i) an Austrian undertaking, (ii) voting interests in such an undertaking (10%, 25% and 50% of the voting rights), (iii) a controlling influence over such an undertaking, and (iv) the acquisition of the essential assets of such an undertaking.
The ICA applies to an investment in an undertaking which is active in a sector listed in the Annexe to the ICA that covers a wide range of industries and sectors including critical digital infrastructure, critical technologies and dual-use items as defined in Regulation (EC) No 428/2009, artificial intelligence, robotics, cybersecurity, quantum and nuclear technology, nano and biotechnology and media.
A mandatory filing is triggered if a foreign investor (ie, non-EU, non-EEA, non-Swiss individual/entity) intends to carry out an investment in a target that operated in a relevant sector.
Except for the requirement for ICA approval (see 7.3 Restrictions on Foreign Investments) and save for limited restrictions in the defence equipment/defence technology sector, there are no direct Austrian inward investment restrictions in the tech sector.
Antitrust filing requirements generally depend on the turnover of the undertakings involved. The Austrian Cartel Act generally provides for the following turnover thresholds:
Exemptions for smaller target companies and media companies apply.
In addition to a turnover test, an alternative jurisdictional test based on the size of a transaction has been introduced. The test aims to cover cases with respect to the acquisition of start-ups in the digital economy, where the target has little to no current turnover and is bought primarily because of its potential growth. It sets out three cumulative conditions: (i) the combined turnover of the undertaking must be at least EUR300 million worldwide and EUR15 million domestically, (ii) the "value of consideration" for the transaction must be above EUR200 million (the new transaction value element), and (iii) the target must be active in Austria to a significant degree.
There are no particular concerns from an Austrian labour law perspective. Investors should note, generally, that Austrian labour law provides for a rather employee-friendly environment, including minimum wages, working hours restrictions and restrictions on termination of certain employees or groups of employees. In the context of an M&A transaction, notification of or consultation with the works council may be required. The works council's opinion/advice is not binding on the board and does not need to be disclosed.
In-bound M&A transactions are neither subject to central bank approval nor limited by a currency control regime. However, for statistical purposes, cross-border investments of at least EUR500,000 must be notified by the Austrian target company to the central bank.
The introduction of the amended and tightened regulatory framework on foreign direct investments (FDI) is one of the most significant legal developments in Austria in the past three years related to technology M&A. Please refer to 1.2 Key Trends for further detail.
In most public M&A transactions, including those that are recommended by the target management, the bidder regularly conducts a due diligence based on publicly available data. This is because the management needs to balance the bidder's need for disclosure against its fiduciary duties towards other shareholders as well as regulatory and contractual secrecy obligations. In a competing bid situation, the target company is ultimately required to provide all bidders with the same level of information, given that the target's management must remain neutral and objective in relation to all bidders. Due diligence in transactions involving privately held companies can be and in practice is quite extensive, including non-public information – with staggered access to sensitive information depending on the progress of the transaction.
There are no particular restrictions in excess of general data privacy restrictions under the GDPR.
A bidder may prepare an offer in secret and has the option to build a stake in advance. However, a public offer must be announced if (i) the bidder has decided to launch an offer, (ii) market rumours occur due to the preparation of an offer ("put-up or shut-up"), or (iii) the bidder obtained a controlling interest (ie, more than 30% of the voting rights).
Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered (Prospectus Regulation) also applies in Austria. Article 3 of the Prospectus Regulation provides for a need to publish a prospectus in several instances of share offerings (including stock-for-stock offerings), unless an exemption applies. Article 1 (4) of the Prospectus Regulation provides a list of prospectus-exempt offerings, including for securities offered in connection with a takeover by means of an exchange offer, provided that a document is made available to the public in accordance with the arrangements set out in Article 21 (2) of the Prospectus Regulation, containing information describing the transaction and its impact on the issuer. From a prospectus law point of view, no listed buyer's shares are required as a consideration. Also, non-listed shares might be offered as a consideration.
In relation to cash-only offer documents, there is no mandatory requirement to provide the bidder's financial information in the offer memorandum.
If for a stock-for-stock offer a document is made available to the public in accordance with the arrangements set out in Article 21 (2) of the Prospectus Regulation, containing information describing the transaction and its impact on the issuer, and is published in order to avoid a fully-fledged prospectus document, such a document will also need to provide the historical financial information of the bidder/issuer of the share contribution.
The offer memorandum for a public takeover must be filed with the Austrian Takeover Commission and is published on the websites of the bidder, the target company and the Takeover Commission.
In the case of a merger transaction, the merger agreement together with ancillary documents is published by that target in advance of the shareholders' meeting that resolved on the merger transaction.
In principal, all management decisions must be made in compliance with the business judgement rule; ie, the management resolves without any conflict of interest, based on adequate information and to the benefit of the company and its stakeholders.
In public M&A transactions, the target's management also needs to comply with the board neutrality rule. After the target becomes aware of a bidder's intention to launch an offer, any measure that could prevent the target shareholders from making a free and informed decision or any action that could likely frustrate the offer requires prior approval by the target shareholders (eg, sale of core assets, issuance of new shares).
The corporate governance of public listed companies usually provides for the possibility to form ad hoc committees in the supervisory board to react quickly in case of unexpected events (eg, unsolicited announcement of an offer). The supervisory board may delegate issues to special committees for further evaluation and decision. In case of a conflict of interest of one (or more) supervisory board members, the governance usually provides that the respective members need to disclose such circumstances to the board and to refrain from voting. In sensitive cases, such members should also not participate in the preceding discussions.
Immediately after the intention to launch an offer is made explicit, the target management board and supervisory board must stay objective towards the potential offer and may not prevent the offer (board neutrality rule). The search for a white knight is explicitly permitted.
After the publication of the offer memorandum the management's main task is to prepare and publish a reasoned statement that includes an assessment of the offer, inter alia regarding the offered consideration and the impact on the target and its workforce.
Depending on the offer and its complexity, the target management could also involve financial advisers, which usually prepare a fairness opinion that serves as a basis for the management's decision to either support or reject the offer. If the management issues a neutral statement, the pro and cons for accepting the offer shall be included.
Depending on the size, complexity and required financing of the offer, bidders as well as target companies regularly involve financial, tax and legal advisers in connection with a takeover. A trend in past years was to also engage public relations agencies as well as proxy advisers in contested, hostile and unsolicited situations.
Furthermore, the Takeover Act obliges bidders and targets to nominate an expert (usually a certified public accountant) who confirms the compliance of (i) the offer memorandum and (ii) the target management's statement to the offer with applicable Takeover Law rules.
Technology M&A is on the rise. Globally, the TMT sector accounted for about 30% of all M&A activity in 2020. In the DACH region (Germany, Austria and Switzerland), the volume of technology M&A transactions almost tripled between 2017 and 2020. Software/data was the most active Austrian industry in terms of the number of M&A transactions in 2020 and the trend is continuing in 2021.
Still, tech transactions have never been as challenging as today. With a significant portion of many target’s core, value-driving assets being intangible, asset protection is as important as it is demanding. As data has become one of the key assets, the exposure to cybercrime and data protection incidents has increased significantly. Recent rulings of the Austrian Data Protection Authority underline that data breaches may result in significant financial liabilities of affected companies. Last but not least, tightened regulation in the context of global trade wars has put foreign tech investments under increased scrutiny, in Austria as elsewhere. Given that more than 70% of all technology M&A transactions are cross-sectoral – ie, pursued by non-tech businesses – an experienced team is indispensable to master the challenges and realise the potential value of technology M&A.
A Tech Approach to Identifying and Mitigating Risks
Tech targets generally entail a specific risk profile. Not only do they typically operate in highly dynamic markets, they also tend to be younger than traditional companies. Hence, a more forward-looking approach is required during the due diligence. In view of typical key assets, the due diligence of an Austrian tech target will put a special focus on IP rights, data privacy, cybersecurity and founders/key employees.
IP rights should be tested for their validity; eg, for problems due to non-specific patent claims, prior disclosure in academic papers or insufficient employment and developer agreements. Licences (both inbound and outbound) should be reviewed for their scope and audit rights to ensure compliance with their terms. If the target uses open source software, copyleft requirements may interfere with the commercial exploitation and protection of proprietary IP. The management of the target may not be aware of the significance of such risks from a purchaser’s perspective. Hence, a pro-active approach is recommended, including both expert analysis, mitigation through post-closing compartmentalisation and legal protection by way of specific indemnities for infringements.
A state-of-the-art data due diligence not only considers ownership and protection of the target’s rights in data, GDPR compliance and related processes, but also covers the right of both target and purchaser to use the data in the desired way. Against the background of very active Austrian authorities and the number of administrative fine proceedings soaring to an all-time high, special emphasis should be placed on past data incidents and associated liabilities. In addition, potential constraints for the business model resulting from future regulation, both nationally and at an EU level, need to be considered.
Cybersecurity due diligence requires a combination of legal and technical expertise. The legal due diligence of an Austrian target will typically address IT security standards, governance policies/processes, the organisational set-up (eg, the existence of incident response teams) as well as indemnities, liability caps and connected liability risks in customer and supply contracts.
For start-up targets, founder business risks need to be considered. Austrian start-ups tend to suffer from a lack of separation between the company and their founders. In particular, it needs to be ensured that the target actually owns the IP; eg, by a sweep-up assignment as a closing condition. If warranties are given by transferring employees, counterparty risk, agency issues and conflicts of interest will need to be addressed. Retention arrangements and/or warranty and indemnity (W&I) insurance may be preferable alternatives to a standard warranty regime, although not yet widely in use with respect to Austrian targets.
While tech targets hardly fall short of other industries in terms of complexity, competitive bid processes for targets combined with the vast amounts of “dry powder” available tend to result in tight timeframes for the due diligence exercise. To succeed in such challenging circumstances, focus and efficiency are key. Experienced due diligence teams to hit the ground running, tailor-made scoping together with innovative legal tech solutions are critical to success.
Innovative Contractual Structures Catering to Tech Specifics
To share the increased level of risks, to pool expertise and to speed up time to market, minority participations or joint ventures play an important role in technology transactions and are widely used in the Austrian technology sector. Participations of less than 100% involve an increased level of complexity, in particular due to customary governance regulations and pre-emptive rights which need to be agreed between the shareholders and aligned with the statutory legal framework in Austria. From a structuring perspective, share deals are typically preferential in Austria, in particular if (personal) data or customer contracts are a key asset of the target. With respect to structuring equity financings, the formal process, including notaries and bank statements as well as the timing and challenges of court procedures will have to be taken into consideration.
In view of high market volatility and typically long pre-closing periods, there is a noticeable desire on the part of purchasers for industry-specific material adverse change (MAC) clauses enabling them to withdraw from the transaction or adjust the purchase price under certain circumstances, such as cyber-attacks or departure of key talent.
Tech deals often include deferred consideration (earn-out) based on the future performance of the target, so as to share valuation risks and align interests of retained founders. However, earn-out components are prone to disputes for three reasons.
To avoid misalignment of interest and future disagreements with the seller on deferred consideration claims, earn-out mechanisms should be designed with great care. Most importantly, the underlying performance indicators and thresholds need to be defined precisely and unambiguously from the outset. Alternatively, the investor could initially acquire only a portion of the shares in the target and purchase further equity at a later stage upon achievement of certain financial hurdles by the target. Needless to say, pricing is a pivotal and often controversial element in the mechanics of staggered acquisitions.
Performance-based consideration components are frequently combined with employee retention bonuses to reflect the decisive role of key individuals for the target’s financial success. Structuring options include deferred payments to selected employees during specified periods after the acquisition; eg, depending on the employee’s base pay as well as individual performance, the retention period and the financial performance of the target. Management incentive programmes need to be carefully structured and, due to the strict legal environment in Austria in this respect, are often set-up as virtual/phantom shares rather than as actual options on additional equity in the target.
Representations and warranties should reflect the business and the key assets of the target. For a tech company, warranties on IP ownership and non-infringement may be just as fundamental as title and authority warranties. Typical warranties on Austrian tech deals include ownership of or access to essential IP and data, functionality of IT infrastructure as well as compliance with data protection laws and IP licences. In view of the significant risks associated with, for example, GDPR breaches or cyber-attacks, and comparatively high valuation multiples, the common approach to limitations of liability (ie, standard basket, threshold, cap and, for example, exclusion of consequential losses or reputational damages) may not be appropriate. Given that the sell-side of tech ventures tends to be highly fragmented and may entail significant counterparty risk, W&I insurance has increasingly become a feature of Austrian tech transactions. In light of the complexity of the W&I process, planning ahead, dedicating resources and ensuring process efficiency are of utmost importance to avoid time delays whenever W&I insurance is considered.
Ensuring Deal Certainty in Tech
Deal certainty is among the top concerns for tech investors. Mitigation measures need to start long before signing.
National protectionism has increased significantly since 2016, when the Chinese electrical appliance manufacturer Midea acquired the Germany robotics company KUKA. Austria is one of many states worldwide which have recently tightened their foreign investment control regime. In 2020, not only was the number of sensitive sectors enlarged but the thresholds for qualified investments were lowered. The technology sector – including artificial intelligence, robotics, semi-conductors, cybersecurity, and bio technology – is now considered to be sensitive. Approval thresholds start from as low as 10% of the shares. As non-EU/non-EEA/non-Swiss investors face increased scrutiny when investing in Austrian (tech) companies, thorough preparation and structuring is indispensable to avoid costly delays or negative rulings in the approval process.
Tech deals are also affected by recent changes in Austrian merger control law. Reflecting the high enterprise value/sales multiples in the valuation of tech targets, an additional merger control threshold has been introduced in the Austrian Cartel Act which takes the transaction value into account. Conversely, the potential effect of a merger on sustainability and climate neutrality targets are increasingly considered in merger control proceedings. This development is particularly relevant for businesses with large carbon footprints seeking to acquire green tech ventures to adapt their business model and reduce emissions. However, competition authorities have indicated that they will scrutinise “green killer acquisitions” and protect innovation efforts on environmentally friendly technologies where a merger might threaten ongoing R&D or reduce incentives to innovate. With data being a key asset in many transactions, data accessibility and concentration is increasingly becoming a concern during merger control proceedings when assessing competitive effects of contemplated transactions. Regulators strive to ensure that the combination of data sets does not result in market dominance.
What Really Matters
Technology M&A is a fast-paced, risky and highly specialised business. Unlocking the value potential of acquisitions predominantly requires a thorough understanding of the value drivers and key assets, not only from a commercial point of view, but also from a legal perspective. With the key assets often including data, IP and technology, asset protection strategies need to be tailor-made, focusing on associated legal risks. Careful preparation and a specialised team with a truly commercial mindset may make the difference and help to get the deal through.