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Trends and climate
What is the current state of the M&A market in your jurisdiction?
An upturn was recorded in the transaction market in 2016, with the number of takeovers increasing by 2.9% compared with 2015. The three biggest deals of 2016 were responsible for almost half the value of the year’s transactions (around €5 billion). With the acquisition of Conwert, German residential real estate group Vonovia invested some €2.93 billion, while the merger of refractory firm RHI with Brazilian competitor Magnesita was worth approximately €1.17 billion.
As a result of these mega-deals, the average volume of all M&A transactions with an Austrian participation rose from €13.7 million to €30.2 million in 2016.
Transactions involving financial investors were the exception in Austria in 2016, while strategic investors clearly set the tone: in 95% of all takeovers, buyers were able to strengthen their own business model by buying or opening up new business areas. The number of deals by strategic investors rose from 313 to 336. By contrast, in 2016 only 18 transactions involved financial investors as buyers. In 2015 there were still 31 private equity deals with Austrian participation.
Have any significant economic or political developments affected the M&A market in your jurisdiction over the past 12 months?
The Austrian M&A market is supported by low interest rates and the strong cash position of industrial buyers.
Are any sectors experiencing significant M&A activity?
There was significant activity in the real estate sector in 2016. Investors are hoping for a good return from real estate, especially in the low interest rate environment, and have focused on companies in this sector. In 2016 the technology sector had the second-highest total volume of M&A activity: a total of €1.8 billion was invested in 65 company sales.
Are there any proposals for legal reform in your jurisdiction?
No significant proposal for legal reform relating to M&A deals exists in Austria.
What legislation governs M&A in your jurisdiction?
In Austria, no specific legislation relating to the acquisition of business entities exists. Therefore, the general laws concerning civil and commercial contracts and the various types of company, employment regulations and merger control rules apply. Most notably, these include:
- the Civil Code;
- the Commercial Code;
- the Act on Limited Liability Companies;
- the Act on Stock Corporations;
- the Employee Act;
- the Labour Constitution Act;
- the Employment Adaptation Act;
- the Cartel Act; and
- the EU Merger Control Regulation (139/2004).
If M&A transactions are followed by an exclusion of minority shareholders, the Act on Minority Shareholders Squeeze-Out Act may be relevant.
In case of listed companies, the Stock Exchange Act and the Capital Market Act apply. The Takeover Act applies to takeovers of Austrian stock corporations listed on a regulated market.
How is the M&A market regulated?
Previously, there were rules specifically concerning acquisitions. The Austrian Financial Market Authority supervises transactions relating to and information disseminated by listed companies. In case of a takeover bid, the Austrian Takeover Commission supervises compliance with the applicable legislative framework. In many transactions, merger clearance by the European Commission or, if the transaction has no EU dimension, the Austrian Federal Competition Authority will be required.
Are there specific rules for particular sectors?
Specific sectors are protected, including those relating to Austria’s internal and external security – in particular, the defence equipment and security services industries – as well as sectors relating to public order, safety and procurement and crisis services.
Types of acquisition
What are the different ways to acquire a company in your jurisdiction?
The main types of transaction are asset and share deals.
Asset deals When a business is sold (in whole or in part) in an asset deal, the buyer acquires individual assets and liabilities of the target company. This kind of deal structure is often used if the buyer is disinterested in acquiring the whole business. Tax aspects may also be relevant to the decision. The key aspects of an asset deal are as follows:
- The asset purchase agreement must describe and define the assets and liabilities being sold and transferred to the buyer specifically and completely (eg, extensive lists of the assets to be sold are attached in an annex to the agreement).
- The respective creditors and the contracting parties may object to the transfer of accounts payable and of contracts. In certain circumstances, such transfer requires the consent of the respective creditor and contracting party.
- Where the buyer wants to ensure that no unknown liabilities are transferred in the course of the transaction, this must be excluded. Such exclusion must be published.
- Public licences and permits relating to the operation of the business (eg, building permissions and operating licences) will be transferred to the buyer. Conversely, licences and permits relating to a specific person – in particular, if their knowledge or expertise was a pre-condition to granting the licence – cannot easily be transferred from the seller to the buyer, but must be reissued.
- Pursuant to Section 3a of the Employment Adaption Act, the employment relationships of all employees belonging to the sold business are transferred to the buyer by operation of law.
Share deals In a share deal, the buyer acquires all or a certain percentage of shares in the company that operates the business. As a share deal does not affect the ownership of the company's assets, the buyer acquires the company with all its assets, receivables, liabilities, obligations (even those of which it is unaware), contracts and, in principle, public licences and permits. The possibility for the buyer to continue the business as is may be the decisive argument for carrying out a share deal.
Due diligence requirements
What due diligence is necessary for buyers?
Formalised due diligence procedures with document disclosure made in virtual or physical data rooms have become the rule in private Austrian M&A transactions. As regards asset deals, the review will usually focus on:
- whether contracts can be taken over or must be terminated; and
- the requirement for third-party consent.
As to share deals, key review items will include change of control clauses and, particularly in the case of minority stake acquisitions, shareholder arrangements.
What information is available to buyers?
Certain information is available to buyers as it comes from publicly accessible sources (eg, the documents filed with commercial registers, published financial statements and stock exchange filings). The scope of disclosure and due diligence will usually be determined by the transaction’s size and the relevant industry.
What information can and cannot be disclosed when dealing with a public company?
When dealing with a public company, no insider information may be disclosed to a potential buyer. Insider information is information of a precise nature which:
- has not been made public;
- relates directly or indirectly to one or more issuer or financial instrument; and
- would, if made public, likely have a significant effect on the prices of those financial instruments or the price of related derivative financial instruments.
How is stakebuilding regulated?
Stakebuilding is governed for companies which have a corporate seat in Austria and are listed on a regulated market. Section 91 of the Stock Exchange Act determines that if persons directly or indirectly acquire or sell shares in a company listed on a regulated market, they must inform the Austrian Financial Market Authority, the exchange operating company and the issuer immediately (at most, within two trading days) if, as a consequence, their share in voting rights reaches, exceeds or falls below:
- 75%; or
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.
Foreign law and ownership
Can agreements provide for a foreign governing law?
Under Austrian private international law, parties are free to choose the law governing an asset or a share purchase agreement. However, rights in rem and the so-called ‘modus’ (ie, the requirements governing the transfer of the shares and other assets if located in Austria or otherwise subject to Austrian law according to Austrian private international law rules) must comply with local, and thus Austrian, law. As such, agreements governed by foreign law will need some localisation and/or local implementation.
What provisions and/or restrictions are there for foreign ownership?
Generally, there are no direct Austrian inward investment restrictions. Under the Foreign Trade Act, acquisitions of 25% or more of the controlling interests in an Austrian enterprise by non-EU and non-European Economic Area/non-Swiss investors require advance approval by the Ministry of Economic Affairs if the Austrian target belongs to a specific protected industry (ie, industries which protect public safety and order).
Valuation and consideration
How are companies valued?
Various valuation methods are available. The objectified enterprise value represents a value largely independent of individual views and assumptions. It represents a core element of the applicable Austrian Standard KFS/BW 1 of the Austrian Chamber of Public Accountants and Tax Advisers. It is a value derived from expected future earnings, which is based on the going concern assumption and represents a value based on the current strategic concept of the company, as well as on the company’s financial position and market opportunities and risks. The enterprise value is objectified by using a market-based approach and is therefore, to a certain extent, comparable to the market value. In listed companies, the share price is also a major component for valuing a company.
What types of consideration can be offered?
As consideration for the acquisition of a business or company, the parties usually choose a cash payment, a share-for-share swap or a combination of these types of consideration.
What issues must be considered when preparing a company for sale?
First, the seller should set up a deal structure – in particular, the seller must decide whether a share or an asset sale is preferable. The decision can be linked to the tax effect or need for third-party approvals. In certain circumstances, it is advisable to perform a vendor due diligence. Such a due diligence can help to identify certain risks and respond to such in the course of the transaction.
What tips would you give when negotiating a deal?
It is advisable to obtain professional advice at an early stage of the transaction, particularly if the transaction is complex.
It is important to identify each party’s priorities and interests. It is particularly helpful for a buyer to identify the target’s seller. In small or medium transactions, an aggressive acquisition strategy is in many cases unhelpful, as the owner will normally have a strong emotional loyalty to the business. An important goal should thus be to convince the owner that the business will be in good hands when transferred to the purchaser.
Are hostile takeovers permitted and what are the possible strategies for the target?
In general, all public bids aiming to acquire shares admitted to a regulated market on an Austrian stock exchange and issued by a stock corporation having its corporate seat in Austria (the offeree company) are subject to the Takeover Act. As a basic principle, the takeover rules do not apply to non-public bids and bids for shares which are not listed on a stock exchange. There is no distinction between hostile or friendly takeovers under Austrian law. Hostile takeovers are therefore allowed, but rarely occur.
Pursuant to Section 12 of the Takeover Act, the offeree company’s management and supervisory board may not take any measures – with the exception of the search for competing bids – that might prevent the successful outcome of the public bid without prior approval by the shareholders’ meeting.
Warranties and indemnities
Scope of warranties
What do warranties and indemnities typically cover and how should they be negotiated?
Austrian statutory rules on warranties and damages exist, 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 claim damages which are contractually agreed on and limited in scope and amount.
Representations and warranties can be designed as independent guarantees or straightforward representations and warranties. The catalogue of typical representations and warranties is in line with international standards and refers typically to the following matters:
- the seller’s capacity;
- title to shares or assets;
- the company’s status;
- due incorporation;
- the target company’s valid existence under Austrian law;
- the absence of bankruptcy or dissolution;
- financial statements;
- the absence of material adverse change;
- compliance with laws and regulations;
- material contracts;
- intellectual property;
- real property;
- litigation and proceedings;
- competition law; and
- the environment.
Sellers will usually try to limit the scope of many representations and warranties to their shareholders’ best knowledge, whereas buyers will want them to be broad.
Limitations and remedies
Are there limitations on warranties?
The negotiations on the limitations of warranties are crucial in an M&A transaction. The seller may make certain disclosures in order to limit its contractual liability under the representations and warranties. Usually, the seller wants to exclude everything from the warranties that was included in the data room or any public information. Alternatively, the parties may opt for a separate disclosure or a disclosure letter in which the seller discloses any specific issues of which it is aware.
Other limits typically used are time limitations, de minimis limitations and baskets and caps.
The representations and warranties may be qualified as being only to the seller’s best knowledge. The scope of this limitation largely depends on how the term ‘to the best knowledge’ is defined in the transaction documents.
What are the remedies for a breach of warranty?
Austrian law contains no special rules for a breach of contract concerning the acquisition of companies. On the basis of Austrian statutory law, if a warranty turns out to be incorrect, the purchaser will generally have the option to:
- receive subsequent performance;
- pay a reduced purchase price;
- rescind the agreement; or
- claim damages for non-performance.
In practice, the right of rescission is usually excluded.
Most of the available statutory remedies are impractical. Therefore, the seller normally must restore the buyer's situation to how it would have been had the warranty been correct, on the basis of a regular claim for damages and subject to a number of limitations.
Are there time limits or restrictions for bringing claims under warranties?
As to limitation periods, the minimum general time limit a buyer will usually seek is two years from closing, allowing the buyer to have at least one full year of operation and subsequent audited balance sheet and sufficient time for claims, if any, to unravel. In seller-friendly contracts, the general time limit for contractual warranty claims may be as short as one or one-and-a-half years from closing. However, for tax (including social security) claims, it is usually agreed that the applicable legal statute of limitation will apply; for title warranties and environmental warranties, specific periods of between five and 30 years are usually agreed.
Tax and fees
Considerations and rates
What are the tax considerations (including any applicable rates)?
If the seller on a share deal is a domestic corporation, capital gains are subject to corporate income tax. The tax rate is 25%. Capital gains in relation to the participation can be offset only by the seller’s loss carry-forwards. Capital gains from the disposal of a qualified foreign participation are exempt from corporate income tax. A share deal is not subject to value added tax (VAT). If more than 95% of the shares are sold, real estate transfer tax may arise.
In case of an asset deal, any capital gains are subject to corporate income tax (25%). The seller may offset the capital gains realised on the asset sale against loss carry-forwards. The buyer benefits from the higher depreciation value. Loss carry-forwards will remain with the seller. An asset deal is subject to VAT. Further, real estate transfer tax and stamp duty may arise.
Exemptions and mitigation
Are any tax exemptions or reliefs available?
Capital gains from the disposal of a qualified foreign participation are exempt from corporate income tax. No exemptions or reliefs are available for an asset deal.
What are the common methods used to mitigate tax liability?
Capital gains from the disposal of a qualified foreign participation are exempt from corporate income tax. No exemptions or reliefs are available for an asset deal.
What fees are likely to be involved?
Typical fees incurred during transaction include legal and tax adviser fees, notary charges and administrative and financing costs.
Management and directors
What are the rules on management buy-outs?
No specific rules on management buy-outs exist in Austria. However, members of the management board must act loyally towards the target. In the case of listed companies, management must also take due care of, and act in compliance with, the insider dealing provisions.
What duties do directors have in relation to M&A?
There are no specific rules on directors’ duties in relation to M&A transactions. Managing directors and supervisory board members must perform their duties with the diligence of a prudent and conscientious manager and act in the company’s best interest.
Consultation and transfer
How are employees involved in the process?
In case of an asset deal concerning a target company that has an established works council, the management board is obliged to inform the works council in advance of a contemplated change in the ownership. Such information must be provided in a timely manner that enables the works council to make appropriate and effective use of its rights – in particular, assessment of the contemplated measure and its effects on the personnel. Where no works council has been established, the old and new employers are obliged to inform the individual employees in advance about the contemplated transfer of business.
According to the prevailing view, a share deal does not trigger the information and consultation process.
What rules govern the transfer of employees to a buyer?
Asset deal Pursuant to Section 3a of the Employment Adaptation Act, the employment relationships of all employees belonging to the sold business are transferred to the buyer by operation of law.
Share deal As a share deal does not affect the ownership of the company's assets, the buyer acquires the company with all of its employees as is.
What are the rules in relation to company pension rights in the event of an acquisition?
Pension obligations, still quite common in Austria, can cause significant problems during a transaction because they often result in substantial and uncertain liability towards employees.
In the case of a share deal, the company’s identity remains unchanged and the buyer will thus be liable for the pension rights of former and existing employees.
With regard to pension obligations in an asset deal, the effects of such acquisitions are rather complex and depend on:
- whether the pension obligations are based on individual, plant or collective bargaining agreements; and
- the type of pension obligation (eg, direct commitment or a pension fund).
Generally speaking, pension obligations provided for by plant agreements generally remain unaffected. With regard to pension obligations provided for by collective bargaining agreements, it depends on whether the acquirer is subject to the same, another or no collective bargaining agreement and whether the new employer already has another pension scheme in place. However, with regard to individual pension promises, the new employer can generally refuse to accept these.
Other relevant considerations
What legislation governs competition issues relating to M&A?
The competition law aspects of M&A transactions in Austria are governed by Sections 7 et seq of the Cartel Act and, as far as transactions with an EU dimension are concerned, the EU Merger Control Regulation (139/2004).
The notion of ‘concentration’ in the Cartel Act largely corresponds with the definition provided under the EU Merger Control Regulation (ie, transactions resulting in a lasting change of control over another company or the creation of a full-function joint venture qualify as concentrations). In addition, the notion extends to the acquisition of 25% or more or 50% or more of the shares or voting rights in another company, irrespective of whether the transaction results in a change of control.
Concentrations falling under the Austrian merger control regime must be notified to the Federal Competition Authority before implementation. Austrian merger control is triggered if:
- the combined worldwide turnover of the undertakings concerned exceeds €300 million;
- the combined Austrian turnover of the undertakings concerned exceeds €30 million; and
- at least two of the undertakings concerned have an individual worldwide turnover exceeding €5 million.
Following an amendment to the Cartel Act, an additional notification threshold will become effective for concentrations implemented after November 1 2017. Under the new rules, a concentration will also have to be notified if:
- the combined worldwide turnover of the undertakings concerned exceeds €300 million;
- the combined Austrian turnover of the undertakings concerned exceeds €15 million;
- the value of the consideration for the transaction exceeds €200 million; and
- the target is active in Austria to a significant extent.
Transactions subject to Austrian merger control must not be implemented before clearance. As a result, merger approval is typically construed as a condition precedent to closing. If the Federal Competition Authority or the federal cartel prosecutor (who also has a say in Austrian merger control proceedings) have no concerns that the transaction may create or strengthen a dominant market position, the transaction will be cleared after four weeks of notification (Phase 1). If an in-depth review is required, the case will be referred to the Cartel Court (Phase 2).
If the notification thresholds contained in the EU Merger Regulation are met, the transaction must be notified to the European Commission.
Are any anti-bribery provisions in force?
In Austria, bribery is prohibited with the risk of being subject to criminal liability under the Criminal Code. Section 22 of the Criminal Code comprises “criminal offences relating to public officials, corruption and other related criminal offences”. These crimes (and others) are also relevant with regard to corporate liability, as the Act on Corporate Criminal Liability provides for the criminal liability of corporations. The most severe form of corruption is the deliberate misuse of public or private authority. To obtain an (unfair) advantage is, in that context, not a matter of fact, but usually a direct motive of delinquency. That applies to an abuse of office and a breach of trust.
What happens if the company being bought is in receivership or bankrupt?
If the target is insolvent and in receivership, the transaction will be governed by the Insolvency Act. In such case, the court will appoint an insolvency administrator who will take control of the company and its assets from the company’s management board and act as the company’s representative. The insolvency administrator has the power to decide whether to continue running the business or sell it or the company’s assets. A party that is interested in acquiring the business of a company in insolvency must contact and negotiate with the insolvency administrator. The acquisition of all or part of the company’s business will be valid only on the competent court’s approval.