General structuring of financing
Choice of law
What territory’s law typically governs the transaction agreements? Will courts in your jurisdiction recognise a choice of foreign law or a judgment from a foreign jurisdiction?
In general, Portuguese law is retained for many transactions with soft domestic and international investors, certainly in all cases to govern the relevant security packages and any subordination aspects that may be associated with the relevant transactions; and usage of Portuguese law may be considered well-established practice. Bilateral loan agreements may also, in some cases, be governed by the laws of the lender’s jurisdiction - mostly English law. However, in larger syndicated loan transactions, English law has been more likely to be the law chosen to govern the respective loan and intercreditor agreements, although Brexit inevitably raises a series of doubts and concerns that have not been seen previously.
New York law has been used to govern loan debt operations provided by US lenders, but this is admittedly less frequent. High-yield bond documents may also be governed by New York law.
As regards security documents, these are governed by the law of the jurisdiction where the relevant assets are located, and therefore usually Portuguese law, with the exception of security over claims habitually governed by the debtor’s law.
According to Regulation (EC) No. 593/2008 (Rome I) on the law applicable to contractual obligations, Portuguese courts must accept the parties’ choice of law, subject to certain exceptions. Also, judgments from other EU member states are enforceable in Portugal in line with Regulation (EU) No. 1215/2012 (the recast Brussels Regulation). According to the Lugano Convention, in addition to the enforceability of judgments from other EU member states, judgments from Iceland, Switzerland and Norway are also enforceable.
Judgments issued in countries not mentioned above are not necessarily enforceable in Portugal; nevertheless, Portuguese courts will consider these foreign rulings when requested to render a judgment in line with that previous judgment, without substantive re-examination or relitigation on the merits of the case in question.
Restrictions on cross-border acquisitions and lending
Does the legal and regulatory regime in your jurisdiction restrict acquisitions by foreign entities? Are there any restrictions on cross-border lending?
There are no restrictions applicable to the acquisition of Portuguese companies by foreign entities, and cross-border lending is also relatively common, Portugal operating on a free-movement-of-capital basis like any other EU jurisdiction. Portuguese law does not impose specific restrictions on cross-border financing into Portugal for the acquisition of Portuguese companies.
For regulated activities (and particularly for banks, financial intermediaries and insurance companies) the relevant regulators and particularly the Bank of Portugal, the Portuguese Securities Market Commission and the Insurance and Pension Funds Supervisory Authority may intervene in this process if the acquisitions exceed certain thresholds and if the companies involved are subject to financial supervision. Rules governing the acquisition of relevant participations in listed entities (including the duty to launch a compulsory full takeover offer if control of a listed company is acquired) and disclosure announcements also apply when listed entities are at stake.
Under the Regulation (EC) No. 139/2004 (EC Merger Regulation) and the Portuguese Securities Code, specific merger control rules may apply.
Additionally, under Directive 2011/61/EU (Alternative Investment Fund Managers Directive), as transposed into Portuguese law, the competent authorities of the home EU member state must be notified whenever a manager of an alternative investment fund acquires, disposes of or holds shares of a non-listed company above or below certain thresholds, as well as the respective proportion of the shares held and voting rights held.
Types of debt
What are the typical debt components of acquisition financing in your jurisdiction? Does acquisition financing typically include subordinated debt or just senior debt?
Typically, both senior debt and subordinated debt are included in acquisition finance in Portugal. Junior debt may be provided by mezzanine lenders or by sponsors through quasi equity-like loans that are legally subordinated, or by a completed transaction comprising both equity (in Portugal, corporate laws also provide for a special type of additional instalments of capital, on top of real capital) and special types of subordinated instruments or loans.
Are there rules requiring certainty of financing for acquisitions of public companies? Have ‘certain funds’ provisions become market practice in other transactions where not required?
In acquisitions of publicly listed companies, Portuguese law requires that when a public tender is launched, the full disclosure of any finance available to back the bid is contained in the applicable prospectus.
Moreover, upon registration of a takeover offer, if the consideration is in cash, the offeror must deposit the applicable consideration in cash or issue a bank guarantee for the corresponding amount in order to ensure payment of the offer price.
Note that whenever compulsory takeover offers are at stake, a cash consideration shall necessarily be provided and also that there are special rules governing the minimum allowed amount of that consideration.
While not a legal requirement in private acquisitions, ‘certain funds’ provisions have indeed been used in acquisition finance agreements and it is not uncommon for the seller to demand to be provided with evidence of the financial soundness behind the acquiring side.
Restrictions on use of proceeds
Are there any restrictions on the borrower’s use of proceeds from loans or debt securities?
As a general rule, one company may not provide financial support or assistance for any third party to acquire its own capital, as further detailed in question 15.
Additionally, the other restrictions usually applicable to the borrowers’ use of proceeds are those agreed by the parties under the finance documents, notably through purpose clauses and other covenants. The parties usually agree on the purpose of the financing as being the payment of the acquisition purchase price or the repayment of the target’s existing debt, and it is customary practice that this is covered by express provisions of the corresponding contractual documents.
What kind of indemnities would customarily be provided by the borrower to lenders in connection with a financing?
Loan agreements typically include indemnities provided by the borrower to lenders for, among others:
- incidental costs, lost profits or loss of opportunity;
- currency costs;
- expenses arising from the transaction; and
- the enforcement and preservation of security.