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Study on M&A standards and practice in Spain

13 September 2016

What is the standard in Spain? We're often asked this question when working with foreign players investing in Spain – particularly when negotiating an SPA.

Study on M&A standards and practice in Spain

Unlike other countries, where research on the content of M&A agreements has become increasingly widespread, in Spain only a few court decisions provide limited clues as to the characteristics of Spanish acquisition agreements and how they operate in practice. 

To address this situation, together with IE Business School, we conducted a study on Spanish M&A agreements.  

Our analysis revealed that in many cases corporates and private equity funds operating in Spain use similar standards to other European countries when executing Spanish M&A transactions. However, this is not always the case. 

Corporates vs. private equity funds 

Our study found that: 

Locked box: Spanish corporates tend not to use this mechanism. It is, however, widespread in transactions involving private equity funds. Statistically private equity funds use it in two out of three transactions. The reason behind this may be that private equity funds prefer to invest in companies with stable and predictable cash flows (e.g. car parks, motorways, energy production plants), which are accordingly very well suited to locked box completion mechanisms.   

Earn-outs: Earn-outs are used frequently in Spain but there are extensive differences between the applicable terms employed by corporates and those typically required by private equity fund buyers. While private equity funds set the duration of the earn-out period at two years or less in 70% of transactions, more than 60% of earn-out periods used by corporates last at least three years. Corporates prefer to focus on the medium term. This is demonstrated by the fact that in nine out of 10 of their transactions the length of the earn-out exceeds one year. The main reason for this difference is that private equity funds place more emphasis on maximizing business performance quickly after closing, whereas corporates prefer a longer term approach.   

MAC clauses: The MAC clause was enforced in 10% of the deals reviewed as part of the study. However, none of these deals were executed by private equity buyers.   

Liability caps: Private equity fund sellers tend to agree a liability cap of 25% to 50% and only occasionally decide for it to coincide with the purchase price. Transactions where the cap exceeds half of the purchase price or where it is simply not stated are almost exclusively associated with corporate sellers. Despite this, both corporates and private equity funds establish that, in relation to certain matters, caps do not apply.   

Security for warranty claims: R&W insurance still is not used much but it is becoming increasingly common, particularly in transactions involving private equity funds.   

Seller's liability on due diligence: Private equity fund sellers will typically deliver the due diligence replies and information for information purposes and only the disclosure schedules in the SPA will contain the contractual exceptions to/are deemed disclosed against the R&W (60% of deals). On the other hand, in 60% of transactions where the seller is a corporate, the entire documentation which was made available to the buyer in a physical or electronic data room operates as a general disclosure to the R&W.   

Non-solicitation of employees: Clauses stopping the seller from soliciting the target's employees are frequently required, especially by private equity fund buyers. The typical duration of these restrictions is one to two years. Only in 16% of the deals studied was this extended beyond two years.   

Dispute resolution: Private equity funds prefer to use arbitration to resolve their disputes (in 80% of transactions). Conversely, corporates appear a little less enthusiastic about arbitration and tend, in equal measure, to settle matters arising from their SPAs before the courts or an arbitration tribunal.   

Strategies specific to private equity funds   

Apart from the differences described above, for private equity funds, the success of their investment depends on the performance of the management team, so management incentives are normally provided for. On the other hand, when they decide to exit, they must do so seamlessly. So, how do SPAs address these issues in Spanish deals?   

Incentives to management teamsRatchets are typically used by private equity funds to incentivize management teams of portfolio companies. Generally speaking, the purpose of a ratchet is to increase the managers' equity stake in the acquired company provided that certain targets (profitability, exit price, etc.) are met. In the case of the so-called "exit ratchet", if targets are met, when the managers sell their stake in the company the price received for their shares will be proportionately higher than the one they would have received for their actual percentage of equity stake in the company.    

Private equity funds also incentivize managers through bonus share issues and options to purchase additional shares.   

Drag-along rightsDrag-along rights, where minority shareholders may be forced to sell their stake in the target when the private equity fund decides to exit, are common. Another popular approach is for the managers to grant call option rights in favor of the private equity fund.   

As a security for any drag-along right, it is commonplace for managers to pledge their shares and, to a lesser extent, vest the company with opt-out rights.   For more information, please see our full report.

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