Structure and process, legal regulation and consents

Structure

How are acquisitions and disposals of privately owned companies, businesses or assets structured in your jurisdiction? What might a typical transaction process involve and how long does it usually take?

In Portugal, M&A transactions related to privately owned companies are structured in a similar way to the UK and US. The acquisition process usually follows four main structures: share deals, asset deals, transfer of a business as a going concern or mergers. Determining the acquisition structure would depend on certain factors. This would include the business type acquired, the buyer’s funding capacity, the legal and tax considerations affecting the target, and the target’s financial condition.

Although asset deals have become more popular during the past few years, especially in insolvency proceedings, share deals against cash consideration are still by far the most used vehicle for the acquisition of business undertakings. Asset deals are often used to acquire a target’s specific parts or assets. This is because asset deals avoid exposure to the company’s past liabilities and contingencies, and can therefore be more flexible when funding the transaction. What is more, in most cases, this structure does not trigger change of control provisions involved in typical finance, commercial or other agreements material to the target’s business.

The transfer of a business as a going concern is mainly tax-driven. It involves the simultaneous transfer of some or all of the company’s business to the buyer. Consequently, all assets, debts, rights and obligations related to the transferred business are transferred.

Share deals are typically performed through the execution of a contract referred to as a sale and purchase agreement entered into between the seller and the purchaser. Depending on the terms and conditions agreed on and each party’s negotiating power, the seller and the purchaser’s parent companies may be also asked to execute the agreement to secure their affiliates’ obligations.

The complexity and sophistication of the documentation required to complete a share deal have increased substantially over the past decade. This is because most transactions involving large and mid-cap corporations are now carried out through bid auctions, whereby several bidders are selected to submit offers to acquire the target’s shares. A typical bid auction would be structured in two rounds, involving drafting and negotiating the following documents:

  • first round:
    • confidentiality agreements between the seller and each bidder to protect sensitive information disclosed to the bidders to evaluate the transaction during the negotiations;
    • prospective bidders submit first round or non-binding offers;
    • preliminary versions of transaction documents (eg, a share purchase agreement, shareholders’ agreement and transitional services agreement), which will be sent to prospective bidders; and
    • a small number of selected bidders submit second round or binding offers, along with mark ups of the most important transaction documents;
  • second round:
    • final versions of the transaction documents with one or more selected bidders (simultaneously or not) until final terms and conditions are agreed upon with the final purchaser (preferred bidder); and
    • closing documents required to complete the transaction.

The final duration of the transaction process depends on several factors, especially the extent of potential liabilities and contingencies identified during the due diligence phase. The target’s size (large-cap versus small and mid-cap) and the number of conditions precedent (eg, clearance from the competition authorities, waivers from creditor institutions and regulatory approvals) may also influence the complexity and length of the process.

Legal regulation

Which laws regulate private acquisitions and disposals in your jurisdiction? Must the acquisition of shares in a company, a business or assets be governed by local law?

The general legal framework for M&A transactions is established in the Civil Code, the Commercial Code and the Companies Code, along with ancillary legislation and regulations. The Securities Code contains the key provisions governing public companies’ transactions. Other areas of law that play an important role in structuring the transaction or in the due diligence phase are labour law (eg, the protection granted to employees in a transfer of undertakings), tax and competition (merger control). For transactions in regulated sectors, specific laws and regulations governing these sectors may also need to be accounted for.

Given the increasing importance of transactions made in insolvency or company restructuring proceedings, the Insolvency and Companies Recovery Code could also be crucial when assessing a specific deal.

Although the Portuguese legal system is based on civil law, common law jurisdictions, including the UK and the US, have a large influence on cross-border transactions. Despite the fact that the majority of deals affecting Portuguese companies remain subject to Portuguese law, the parties can opt to submit the transaction documents to a foreign law, especially when overseas investors are involved. EU Regulation 593/2008 (Rome I), which is effective in Portugal, grants the parties to a civil or commercial contract the right to choose its governing law, provided that the mandatory rules established under local law are complied with (eg, provisions governing the transfer of shares, assignment of credits and obligations).

Legal title

What legal title to shares in a company, a business or assets does a buyer acquire? Is this legal title prescribed by law or can the level of assurance be negotiated by a buyer? Does legal title to shares in a company, a business or assets transfer automatically by operation of law? Is there a difference between legal and beneficial title?

The definition of property in Portugal follows other continental legal systems based on civil law. This definition encompasses the ownership, full possession, exclusive use and disposition rights.

The Civil Code provides the basic rules that govern the core areas of private law, including the legal framework for sale and purchase agreements.

Under the Civil Code, the sale of shares or assets, unless the agreement’s circumstances demonstrate that the parties have a different intention, must entail the seller’s implied warranty that it has the right to sell the shares or assets, and that they are transferred to the buyer free of charges, encumbrances or third-party rights. On top of this implied warranty, the buyer would normally seek additional protection from the seller by including in the transaction documents a complete set of title warranties relating to the shares or assets’ ownership, and the absence of charges and encumbrances.

Multiple sellers

Specifically in relation to the acquisition or disposal of shares in a company, where there are multiple sellers, must everyone agree to sell for the buyer to acquire all shares? If not, how can minority sellers that refuse to sell be squeezed out or dragged along by a buyer?

In most cases involving privately held companies, the buyer would typically acquire the target company’s entire share capital, conditioning the acquisition to all sellers signing the transaction documents. If this outcome is unfeasible, the acquisition of stakes that the minority shareholders own could take place through exercising the drag-along rights established in the company’s by-laws or, more often, in shareholders’ agreements, or through the squeeze-out procedure established in the Companies Code.

The right to squeeze out may be exercised after a company acquires, directly or indirectly, shares of 90 per cent or more of another company’s share capital. Within six months of the date the acquisition is notified to the target, the buyer may launch a squeeze-out offer for the remaining shares that minority shareholders possess in exchange for consideration in cash, its own shares, quotas or bonds.

The offered consideration must be confirmed and justified in a report that an independent statutory auditor must prepare. This report must be given to the competent commercial registry office and made available to the target’s shareholders in the registered office of both companies. The acquisition would then become effective when registering the squeeze-out offer in the commercial registry office, as long as the buyer deposits the consideration (shares, quotas or bonds) to acquire the target’s shares or quotas into a bank account.

Exclusion of assets or liabilities

Specifically in relation to the acquisition or disposal of a business, are there any assets or liabilities that cannot be excluded from the transaction by agreement between the parties? Are there any consents commonly required to be obtained or notifications to be made in order to effect the transfer of assets or liabilities in a business transfer?

Under Portuguese law, a buyer can generally choose the assets or liabilities it would like to acquire in a transaction structured as an asset deal. However, in certain situations that qualify as a transfer of an undertaking or of a business, from an employment law perspective, the acquirer is automatically assigned the legal position of employer concerning its labour relationship with the employees.

The transfer of assets and liabilities may require third-party consents or authorisations, especially in the event of a transfer of the contractual position in certain agreements to the buyer or the transfer of licences or permits in regulated sectors. This normally requires government, municipal or other public entities’ approval before being transferred. Therefore, the buyer should try to identify all third-party authorisations required at an early stage of the transaction, which can only be made through an adequate due diligence review. This procedure would normally avoid significant delays at closing.

Consents

Are there any legal, regulatory or governmental restrictions on the transfer of shares in a company, a business or assets in your jurisdiction? Do transactions in particular industries require consent from specific regulators or a governmental body? Are transactions commonly subject to any public or national interest considerations?

Concentrations between undertakings in Portugal are subject to merger control under the terms and conditions established in Law 19/2012, of 8 May 2012 (Competition Act). The Competition Act applies to concentrations between undertakings that meet the below thresholds:

Turnover threshold

Concentrations must be notified to the Portuguese Competition Authority if, in the preceding financial year, the aggregate combined turnover of the undertakings involved in the concentration in Portugal exceeded €100 million after deducting the taxes directly related to the turnover. However, this would only apply if the individual turnover achieved in Portugal in the same period by at least two of these undertakings exceeded €5 million.

Standard market share threshold

Even if the turnover threshold is not reached, notification is mandatory if implementing the concentration results in the acquisition, creation or reinforcement of a market share exceeding 50 per cent in the ‘national market’ for a particular good or service, or a substantial part of it.

De minimis market share threshold

Even if the standard threshold is not met, the creation or reinforcement of a share between 30 and 50 per cent of the ‘national market’ of a particular good or service will still be subject to mandatory filing if at least two of the participating undertakings achieved, individually in Portugal, a turnover of at least €5 million in the previous financial year.

When mergers occur in regulated markets, the Portuguese Competition Act establishes cooperation mechanisms between the Portuguese Competition Authority and sector regulators during the merger review procedure. This includes the duty to request an opinion from the appropriate regulator before adopting a final decision.

Transactions in certain sectors that entail the acquisition or reinforcement of a qualified shareholding (ranging from 10 to 50 per cent) may also be subject to the approval or non-opposition of the competent regulatory bodies (insurance, banking and media).

In Portugal, there are no legal or regulatory restrictions on foreign ownership of companies or assets. However, Decree Law 138/2014, of 15 September 2014, establishes the framework to acquire control of strategic assets, guaranteeing the defence and national safety and the safety of the country’s supply of services that are fundamental to national interest. These include energy, transport and communications. Acquisitions of control over strategic assets in these areas by a person or an entity from a non-EEA country may be subject to an evaluation by the member of the government responsible for the area at stake. If the government concludes that the acquisition may substantially hamper national security or services fundamental to the national interest, the acquisition may be blocked.

Are any other third-party consents commonly required?

In share companies, a shareholder has, prima facie, the right to transfer his or her shares when to whom he or she pleases. In certain cases, the transfer of shares may be curtailed, although not excluded, provided that any restrictions are established in the by-laws. These restrictions include the company’s consent, mandatory pre-emptive rights or compliance with certain requirements relating to the company’s commercial interests.

When required for the transfer of shares, the general shareholders’ meeting must grant the company’s consent, which can be rejected based on any motives described in the by-laws or on the basis of any justified company’s interest. If the company refuses to consent to the transfer of the shares, it must find another purchaser to acquire the shares under the same price and payment conditions for which the consent was requested.

In private limited companies, the transfer of participations is subject to the company’s consent, except for transfers between spouses, ascendants, descendants or partners (unless prescribed otherwise in the by-laws). If the company refuses consent, it must make an offer to acquire or redeem the quotas. Provisions of by-laws that exclude the transfer of participations are valid in these kinds of companies provided that the partners have the right to withdraw within 10 years from joining the company.

Contractual pre-emptive rights or tag-along rights may also be agreed upon in shareholders’ agreements or in the by-laws both for share companies and private limited companies. In shareholders’ agreements, pre-emptive rights can be in the form of rights of first offer, meaning that the selling shareholder must negotiate the transfer with other shareholders before offering the participations to third parties; or rights of first refusal, meaning that the selling shareholder must grant to the other shareholders the right to match the terms of a transfer negotiated with a third party. Tag-along rights are aimed at restricting the ability of any shareholder to transfer his or her shares without including other shareholders’ stakes in the same proportion.

Depending on the deal’s structure, other consents may be required to complete the transaction. A ‘share deal’ would normally reduce the number of third-party authorisations needed, as the purchaser acquires the company’s shares and, indirectly, the ownership of all its assets and liabilities. Apart from potential change of control covenants usually included in certain financing and facility agreements, the buyer does not have to seek specific consents from third parties for the agreements that the target entered into. In asset deals, provided that the buyer will only acquire the assets and liabilities specifically established in the asset purchase agreement, there could be a significant number of assets or rights that cannot be transferred without the consent of the third parties involved (eg, licences, permits and lease agreements).

Regulatory filings

Must regulatory filings be made or registration (or other official) fees paid to acquire shares in a company, a business or assets in your jurisdiction?

Often in regulated sectors filings must be made with the competent authorities, depending on the transaction’s nature, structure and scope.

In share deals involving the transfer of nominative shares, there is an additional requirement to notify the company of this transfer.

Asset deals that involve acquiring real estate or other assets subject to mandatory registration would require the corresponding filings to be made with the competent land registry office. Similarly, any transaction involving a change to the company’s corporate information that is subject to mandatory registration would also entail the respective filing with the commercial registry office.

Depending on the transaction’s scope, filings with the Competition Authority and other regulatory authorities may also be required.

The notification of concentrations to the Competition Authority is subject to paying a notification fee, which is calculated based on the combined Portuguese turnover of the companies involved in the concentration in the previous financial year. The notification fee is €7,500 if the combined turnover is less than €150 million; €15,000 if the combined turnover is greater than €150 million but less than €300 million; or €25,000 if the combined turnover is greater than €300 million.