Introduction
Mixed contracts
Amendments to procured contracts
Procurement risks
Comment
Introduction
It is widely known that the Public Procurement Act regulates how contracting authorities act when purchasing supplies, services and public works. However, it is less well known that the act can also be of significance in relation to how a public contract is handled after the procurement process has ended and that the act's provisions can apply in completely different contexts (eg, in conjunction with M&A transactions). This update provides some examples of what companies should watch out for in transactions which concern contracts subject to the act.
The act is based on EU directives and regulates contracting authorities' purchases of supplies, services and public works. Simply put, the act contains rules regarding how contracting authorities can act when choosing suppliers with which to enter into contracts. However, the act can also be of importance in conjunction with M&A transactions. This update considers two examples of this. The first concerns mixed contracts (ie, contracts which contain both aspects which are subject to the act and aspects which are not), and demonstrates that in some cases the procurement rules may apply to share transfers, for example. The second example concerns amendments to procured contracts, and demonstrates that procurement issues can arise in transfers of procured contracts or companies awarded contracts by participation in public procurements, for example.
It is evident from EU case law on mixed contracts, whose various aspects are inseparably linked (and thus form an indivisible whole), that the transaction at issue must be examined as a whole and be assessed based on the provisions which govern the aspect which constitutes the contract's main object. In other words, procurement must be conducted if the contract's main object is something which is subject to the act – otherwise, the transaction constitutes an illegal direct award of contract. However, if the main object of the contract is not subject to the act, no procurement must be conducted.
The issue of mixed contracts was considered by the ECJ in its judgment in the joined cases Club Hotel Loutraki AE (Case C-145/08) and Aktor ATE (C-149/08). The decision made it clear that, in order for a procurement obligation not to arise, a contract must:
- constitute an 'indivisible whole' – that is, that the various aspects cannot be separated. In other words, it is not possible for a contracting authority to avoid procurement, for example, regarding purchase of supplies or services from a divested company – by packaging different aspects which are not naturally linked into the same contract; and
- have as its main object something which is not subject to the act (eg, the sale of publicly owned property). Those aspects of the contract which are actually subject to the act must thus be of clearly subordinate significance. Indications that this is the case, which can be understood from the ECJ judgment, are that the buyer's income from the acquired property exceeds the income from the aspects of the contract which are subject to the act, and that the possibility of receiving income from the acquired property is unlimited in time, while the income from the aspects which are subject to the act is limited in time.
Amendments to procured contracts
EU case law makes it clear that essential amendments to a public contract mean that the directives on public contracts become applicable. If an essential amendment is made without a prior procurement, it may constitute an illegal direct award of contract. The reason for this is that if the contract in question is subject to an essential amendment, it is considered to be so changed compared to the original that, in reality, it constitutes a new contract (ie, a contract which should have been subject to procurement).
The question of what shall constitute an essential amendment has been tried by the ECJ in its judgment in Pressetext Nachrichtenagenturcase (Case C-454/06). In that case the ECJ held that the transfer of a basic agreement should constitute an internal reorganisation, which does not involve any essential amendments to the terms of the original contract.
The ECJ also expressed more general opinions regarding amendments to public contracts, some of which are highly relevant for the assessment of M&A transactions. The ECJ's statements in this case mean that transfer of a public contract to a new supplier generally constitutes an essential amendment. Such transfer is therefore deemed to constitute a new contract award (ie, a new procurement), except in certain exceptional cases. However, it seems to be permissible to assign a public contract to a wholly owned subsidiary, provided that no essential amendments are made to the original contract terms, and provided that the parent company – vis-à-vis the contracting authority – undertakes to cover any losses in the subsidiary, and to be jointly liable with the subsidiary for the performance of the contract. Such a transfer is not deemed to constitute an essential amendment and therefore is not a new procurement situation. However, transfers of companies which have been awarded public contracts contract to a third party are deemed to constitute an essential amendment. The same applies to a transfer of a public contract to a subsidiary which can be expected to be acquired by a third party during the term of the contract.
However, the ECJ seems to be of the opinion that one must, in these cases, make exception for companies listed on a stock exchange and limited liability registered cooperatives, where trade in shares and changes in the composition of shareholders is not reason for a new procurement other than in exceptional cases, such as when there are practices intended to circumvent EU rules governing public contracts. While it cannot be completely ruled out that a supplier may transfer a public contract to another legal entity without this being deemed to constitute a new procurement situation, the main rule is still, arguably, that a change of supplier in a public contract is not permitted without the contracting authority first conducting a new procurement. The same applies to the transfer of a company which is party to a public contract to a third party, with certain exceptions for companies listed on a stock exchange and limited liability registered cooperatives.
Both entering into a mixed contract and making an essential amendment to a public contract in Sweden may result in the Public Procurement Act becoming applicable. If no procurement is carried out in cases where a procurement obligation exists, the contracting authority commits an illegal direct award of contract. In Sweden, if made on July 15 2010 or later, such awards may be declared ineffective by an administrative court upon the application of a competing supplier. The consequence of a contract being deemed ineffective is that all performances shall revert. If this is not possible, the economic balance shall be restored to how it was before the illegal direct award of contract took place. Thus, a declaration of ineffectiveness affects both the contracting authority and the supplier. The contracting authority can also be ordered to pay an administrative fine of between Skr10,000 and Skr10 million (but no more than 10% of the contract value). If the declaration of ineffectiveness is made in conjunction with a merger, acquisition or similar, the situation is further complicated, since the measure may also affect the value of the acquired company.
Comment
There are clear reasons to take the Public Procurement Act into consideration in connection with M&A transactions. In conjunction with due diligence, it is important for Swedish companies to be especially vigilant when entering into contracts which are subject to the act, or where public contracts exist and the planned transaction risks involving an illegal direct award of contract which violates the act.
For further information on this topic please contact Kristian Pedersen or Sara-Li Olovsson at Delphi by telephone (+46 8 677 54 00), fax (+46 8 20 18 84) or email ([email protected] or [email protected]).