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What preliminary agreements are commonly drafted?
Confidentiality and pre-agreements are commonly drafted.
Confidentiality agreements To start the negotiation procedure, parties often sign a confidentiality or non-disclosure agreement (NDA). The seller will often ask for an NDA as a means of protecting the target company’s interests before disclosing confidential information concerning it to the potential buyer and its advisers. In such an NDA, the potential buyer undertakes to use the information submitted in the course of the due diligence only for purposes of the intended transaction and keep it secret from persons not involved in the transaction. The legal penalties for a breach of such an agreement will not always be effective, because proving the existence and amount of damages may be difficult. Austrian NDAs therefore often include provisions on contractual penalties in case of a breach.
Pre-agreements Pre-agreements – in the form of letters of intent (LOI), heads of agreements, memoranda of understanding or term sheets – are often used, particularly in private equity transactions.
Following international standards, private equity transaction term sheets can be detailed and will often include the terms of the subsequent purchase agreement documentation. Auctions will usually involve indicative offers (ie, non-binding and binding offers). LOIs for private transactions outside the private equity environment are usually short. Such LOIs contain the key parameters of the intended transaction, such as:
- the type of transaction (ie, an asset or share deal);
- the price or price range, which will usually be explicitly subject to further adaptation or negotiation following the outcome of due diligence; and
- the content and timeframe of the steps to finalise the transaction.
An LOI will frequently provide for non-solicitation covenants relating to the target company’s employees and will sometimes also provide for exclusivity (both of which will be punishable with contractual penalties). It may also set out whether the buyer or seller will prepare the first draft of the documentation.
What documents are required?
An asset purchase agreement is required in case of an asset deal and a share purchase agreement is required in case of a share deal.
Which side normally prepares the first drafts?
Either the parties to a transaction agree which side prepares the first draft (eg, in the LOI) or the seller includes the first draft of the asset or share purchase agreement in the data room for the buyer’s review.
What are the substantive clauses that comprise an acquisition agreement?
Some of the key provisions of a share or an asset purchase agreement are as follows.
Preamble/recitals In the preamble or recitals, the parties usually describe in more or less detail the background of the seller, the purchaser and the target company and the context of the transaction. The preamble has no binding effect on the parties. However, in case of a dispute with respect to the interpretation of the agreement, it may help to understand and prove the parties’ original intentions.
Object of purchase The contract should identify in detail the object of purchase. In case of a share deal, the shares to be sold must be identified in detail (eg, by indicating the amount of the paid-in capital stock in case of a limited liability company and the number of shares and the individual share numbers in case of a stock corporation). In an asset deal, the assets and liabilities relating to the business to be sold are listed individually (by reference to the relevant annexes).
Purchase price and payment of purchase price The purchase price can be freely determined by the parties. It is generally:
- a fixed amount;
- an amount determinable based on a calculation method or formula set out in the agreement; or
- a combination of the two.
In addition, the payment of the purchase price (eg, by way of hold backs or escrow) is determined in the agreement.
Representations and warranties There are Austrian statutory rules on warranties and damages, including provisions governing indemnity. However, the contractual regime will seek to replace the statutory regime to the largest extent possible and limit the buyer to claiming damages which are contractually agreed on and limited in scope and amount.
Indemnities Attention must be paid to the provisions governing the legal consequences of a contractual breach – in particular, a breach of the representations and warranties. Indemnification clauses will not only set out the remedies available, but also define, and usually thereby limit:
- the kind of remedies available and their scope;
- the limitations as to the indemnity amount; and
- the cut-off date for the pursuit of a claim.
Given the difficulty in conducting a second transaction, rescission of the sale and purchase agreement will usually be excluded, whether based on impossibility to cure substantial (value) defects or error or on other grounds. The indemnification regime usually also provides for:
- a notification duty by the buyer in case of a breach of a warranty or defect within a stated time; and
- the possibility for the seller to cure the defect and, failing such remedial action, for the buyer to be entitled to claim damages, payable by either the seller or the target.
The buyer will aim for a broad definition of loss; a point of negotiation is usually also whether, and to what extent, lost profit or certain types of indirect damage are excluded. Caps, floors and baskets defining and limiting the amount of damage entitlement are consistent with international practice and the thresholds are usually determined by the bargaining power of the buyer and seller. In addition, time limits must be agreed.
Applicable law and dispute resolution In cross-border transactions, it is essential for the parties to specifically agree on the law to govern the contracts.
Disputes in M&A transactions can be solved by ordinary courts or arbitration. In cross-border transactions (eg, transactions involving a foreign buyer or seller and in which the contract language is English), parties usually agree on arbitration. The most common type of chosen arbitration is that which is governed by the Vienna Rules administered by the Austrian Federal Economic Chamber.
Merger control and approval requirements Conditions precedent to closing a transaction in a second step have become common in M&A transactions – for example:
- regulatory approvals (merger control or industry specific regulations);
- approvals of other shareholders as required in the articles of association;
- company or group internal board approvals;
- third-party approvals; and
- other contractually agreed conditions precedent.
What provisions are made for deal protection?
M&A transactions are regularly protected by comprehensive confidentiality agreements or non-disclosure agreements binding both sides. In addition, termination of the negotiations before closing the transaction may be subject to a break-up fee which also covers the parties’ advisory costs.
What documents are normally executed at signing and closing?
As to share deals, a share purchase agreement is executed at signing. The transfer of shares in limited liability companies requires the form of a notarial deed; notarisation must be made by an Austrian notary or a notary subject to a comparable regime (eg, a German notary). The documentation does not necessarily have to be in German; English-language documentation can also be notarised. Acquisition agreements for shares of stock corporations or asset purchase agreements do not require a notarial form.
At closing, a closing memorandum or closing protocol is signed. Such documents do not require a notarial form.
Are there formalities for the execution of documents by foreign companies?
Under Austrian law, no specific formalities for the execution of documents by foreign companies exist. However, in some cases, parties may request an extract from the relevant commercial or trade register confirming the signatories’ authority.
Are digital signatures binding and enforceable?
According to the Act on Digital Signatures, digital signatures can be binding and enforceable under Section 886 of the Civil Code.
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