The risk distribution in M&A deals in Europe again tends to favour sellers. At the moment they have noticeably better chances of asserting their positions, concludes the CMS European M&A Study 2015.
Last year, sellers succeeded more often in enforcing lower liability caps for warranty violations than in the year before. Moreover, warranty claims of buyers more frequently required exceeding certain threshold values (de minimis and basket clauses).
For the study, CMS analysed 2,414 transactions involving non-listed companies that the law firm advised on between 2007 and 2014. Uniform criteria were applied to evaluate various industries and European regions. The study includes a total of 346 transactions that were carried out in the year 2014 alone.
“This study offers a unique insight into the market, also regarding regional and industry-specific particularities in deal structures”, says Peter Huber, Managing Partner and head of the transactions team at CMS in Vienna. “Last year, we witnessed transactions that were comparable to pre-crisis levels in number and size. At the moment all signs suggest that this development will continue.”
The higher level of activity benefits sellers: in addition to lower liability caps, de minimis and basket clauses, also the increase in other provisions favouring sellers are indicative of a seller-friendly market. Two pro-seller mechanisms, warranty and indemnity (W&I) insurances as well as locked boxes to determine the purchase price based on the most recent audited financial statements available, were increasingly included in contracts in 2014. “Moreover, MAC clauses with a right of withdrawal for the buyer and non-compete clauses remain relatively rare.
Limitation periods for warranty claims are also getting shorter”, explains Peter Huber.
There are still regional differences in company deal structures.
Transactions in German-speaking countries were the least likely to have a short limitation period (only 14 percent have periods of up to twelve months); earn-outs continued to be popular with 22 percent of deals containing respective provisions. Locked-box clauses increased from 46 percent in 2013 to 53 percent in 2014, basket clauses saw a decline from 64 to 63 percent, and de minimis provisions rose from an average of 60 percent in the previous seven years to 67 percent.
“Transactions in Central and Eastern Europe saw an increase in the use of MAC clauses with a right of withdrawal for the buyer between the signing of the deal and the date it takes effect”, states Johannes Trenkwalder, a partner at CMS in Vienna responsible for M&A and head of the CMS office in Kyiv. “38 percent of the deals included such clauses”, he specifies. In German-speaking countries, merely 10 percent of the concluded transactions contained a MAC clause.
There is also a noticeable difference in contract design used in Europe and the US, especially with regard to purchase-price adjustment clauses – in the US the share of contracts containing them reached 85 percent, in Europe it was only 45 percent. “The European share could, however, increase in the course of the year as currency risks are increasingly hedged again”, predicts Alexander Rakosi, a partner in the transactions team at CMS Vienna, who also has several years of experience in advising on M&A deals at a renowned US business law firm. “The surprising decoupling of the Swiss franc from the euro in January 2015 and the further economic and political development of the euro will probably further this trend.” According to the current study, the number of deals with purchase-price-adjustment mechanisms has slightly increased from 2013 to 2014, reversing the trend of the last couple of years.
We are happy to send the full version of the study to journalists upon request.