When M&A markets slowed down in the second half of 2022, the positive spin from dealmakers was that at least they got a little respite after the heady heights of the post-pandemic 2021 deal boom.

But when the lull continued and 2023 turned into a year that set all the wrong records in terms of deal values and volumes, any attempts at positive spin were a lot less convincing.

But now, at the halfway point in 2024 and with inflation falling, M&A partners are once again optimistic that things could be about to turn. Certainly, Q1 deal values suggest a market moving in the right direction, even if deal volumes are still lagging.

In the 2024 M&A Yearbook, in association with Taylor Wessing, we speak to leading corporate partners at UK and US firms to find out their thoughts on the year ahead and the way the prolonged slowdown in activity has changed the way deals have to be done in order to go ahead.

It’s a reality that Slaughter and May partners Victoria MacDuff and Richard Hilton grappled with when they advised on one of the biggest announced deals of 2023 – the planned £15bn combination of Vodafone and CK Hutchison’s Three. It’s a deal that will create the biggest mobile network in the UK, if it gets competition clearance. They tell Legal 500 London editor Cameron Purse all about their role for Vodafone.

With competition authorities around the world taking an increasingly aggressive stance towards M&A, and governments worldwide being more protectionist, it’s the perfect time for Legal 500’s US editor Barnaby Merrill to take an in-depth look at what’s happening in the world’s busiest M&A market – the US. He speaks with some of New York’s top antitrust lawyers in our feature.

Elsewhere, in ‘Stress test’ Elisha Juttla speaks to partners at firms from Milbank to Hogan Lovells and Freshfields to Simpson Thacher about the reality of a life under pressure and finds out their tips for staying calm in the midst of a deal. We also have a trio of interviews with market-leading M&A partners Jennifer Bethlehem at Freshfields, Melissa Fogarty at Clifford Chance and Lorenzo Corte at Skadden.

In addition we have updates from partner firms in Argentina, Belgium, the UK and the Philippines.

We hope you enjoy it!

Georgina Stanley

The post M&A Yearbook – Editor’s Letter appeared first on Legal Business.

After two subdued years, global M&A activity is showing signs of recovery. Though large-ticket M&A and private equity deals have been suppressed, Q1 2024 recorded the highest number of large deals per quarter in nearly 24 months¹.

Market sentiment is turning positive as macroeconomic conditions improve. There have been spikes, but the inflation that soared in 2021/22 and spooked investors and business leaders now seems to be heading in the right direction. Interest rate cuts have been delayed, but officials have indicated they’re on the cards if inflation rises have peaked, which will also provide reassurance.

Although it’s taken longer than many expected, there’s definitely a feeling that the market is going to heat up again.

There will always be global events that affect confidence – the recent geopolitical tensions in the Middle East are just one example. But overall, we expect a significantly better deal-doing environment later this year, and an increase in M&A volumes.

We’re not alone in this view. At our recent M&A Summit, when polled 59% of the market experts, intermediaries and investors attending indicated they believe we’ll see an increase in deal volumes by the end of 2024. Although it’s taken longer than many expected, there’s definitely a feeling that the market is going to heat up again.

The market outlook

It’ll be a very different market to that of 2021. As activity picks up, we’ll see a smaller number of deals, but they’ll be high-value ones, as opposed to a larger number of low- to mid-value ones like we saw during the pandemic.

Buyers have had time during the downturn to do more thorough due diligence and identify high-quality targets. Although venture capital funds and private equity firms are under pressure to deploy dry powder, we’ll see more targeted acquisitions of assets that fit their strategies, rather than the backing of multiple horses which we saw in 2021.

We also expect to see longer negotiation periods on deal terms. During the pandemic there was a real push to get deals done, and high multiples were more easily accepted. Now, there’s still a mismatch in buyer/seller expectations, with companies that have held off selling to wait for better conditions wanting the best terms possible.

This may change as private equity firms that need to realise liquidity for their investors (especially with anticipated fundraising aims), and companies with dwindling cash reserves or leaders keen to sell to focus on other strategic imperatives, come under pressure. We’ll likely see parties in some cases forced to the negotiating table and distressed assets coming up for sale.

Another trend we’ve seen recently is antitrust and foreign direct investment concerns becoming more common in deals. There’s a lot more scrutiny now than the last time we had a large market upswing, and all parties involved in M&A will want to make sure they understand what’s required of them in advance of any negotiations. For those doing higher enterprise value and cross-border deals, regulator activity is now perceived as business as usual, and these transactions are typically building regulatory considerations into the process.

Active sectors

Companies in the technology, life sciences and clean energy sectors are currently receiving a lot of interest, and this is likely to continue. Resilience is a big theme. Acquirers are identifying assets that will help future-proof their business models and help them adapt to megatrends like artificial intelligence (AI), clean energy and data infrastructure.

Given recent technological developments, AI is especially high on target lists for the C-suite. We’re not seeing a lot of M&A involving AI businesses at the moment. But given the interest in the sector, and as businesses with promise mature, you can see a pipeline of activity developing for 2025 and 2026. Acquirers would do well to familiarise themselves with the due diligence areas required in advance, especially as M&A in this sector will be the fast-track to developing their own generative AI platforms.

Notes

1. https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/large-m-a-deals-come-to-market-defying-regulatory-headwinds-80891717

For more information contact

Hill House
1 Little New Street
London EC4A 3TR
T: 020 7300 7000
www.taylorwessing.com

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In the wake of recent advances in generative artificial intelligence (AI), AI has shot to the top of the board agenda. No one wants to miss out on this transformative technology – but businesses need to ensure FOMO doesn’t lead to bad investments. Jonny Bethell and Jo Joyce of Taylor Wessing explore the potential pitfalls to avoid in AI acquisitions

The launch of OpenAI’s ChatGPT in November 2022 took a flamethrower to the last AI winter. As users explored the chatbot’s wide-ranging generative AI capabilities to answer questions, draft copy, write code and more, it dawned on many businesses that this technology could be a game changer for how they operated. The challenge is pinpointing how, given the unprecedented frontier, to embark on the journey with eyes open to the risks associated with this new technology.

ChatGPT also lit a fire under leadership teams. After years of pitching AI as the future, suddenly they were under pressure to demonstrate they had been preparing for that future. A flurry of activity followed as companies raced to reassure investors they were on top of the issue and had their own revolutionary AI tech ready for deployment.

A wave of product launches, investment announcements and strategic alliance arrangements swept the globe, accompanied by a never-ending stream of media coverage on what AI could mean for the way we live and work.

After the NFT hype of 2021 and the metaverse dominating 2022, 2023 was certainly AI’s year. There were too many notable developments to mention exhaustively here, but to name just a few:

• Microsoft announced a $10bn investment in OpenAI to accelerate breakthroughs in AI technology¹.
• Google launched its own AI chatbot, Bard, and announced a $2bn investment in large language model provider Anthropic².
• Amazon launched Amazon Bedrock, a suite of tools to help users build generative AI applications under its AWS brand³.
• Demand for Nvidia’s AI chips saw a surge in its stock price, and in May it reached a $1tn valuation⁴ .
• Professional services firms PwC and Accenture announced investments of $1bn and $3bn respectively into generative AI⁵ .
• US President Joe Biden signed an executive order on AI to foster innovation while avoiding AI risks⁶.
• The EU agreed the EU Artificial Intelligence Act, the first-ever legal framework on AI that will come into force in 2025⁷.

It did feel like at one point or another, everyone got a little swept up in the AI wave.

Big money, low volume

Interestingly though, AI’s resurgence in popularity didn’t translate into M&A activity. Indeed, after a huge upswing in AI M&A between 2019-21, last year M&A dealmaking in the sector declined 31%, with only 190 deals compared to 276 in 2022 according to Crunchbase⁸.

There were a handful of big-ticket acquisitions last year. These included:

• cloud data platform Databricks purchasing MosaicML, an infrastructure company for training models, for $1.3bn in June;
• Thomson Reuters acquiring AI legal research tool Casetext for $650m in August; and
• Travelers Insurance announcing the acquisition of Corvus Insurance, a company which uses AI to predict and prevent cyber risks, for $435m in November (which completed in January 2024).

That said, overall, M&A activity in 2023 was significantly lower than previous years. Given the various macroeconomic factors at play – most economies were suffering rising inflation and increasing interest rates, as well as geopolitical uncertainty and conflicts – perhaps this is understandable. All of these components suppressed market confidence and valuations.

Now the economic outlook is stabilising and becoming more positive, we’re expecting an upswing in M&A activity later this year. As companies look to make strategic acquisitions to future-proof their business models and enhance product offerings, AI is going to be an increasingly active vertical within the tech sector, particularly as investors chase the elusive unicorn – both in terms of pure AI businesses, of which there are a limited number, and companies that create AI-enabled products and services.

Targets and risks

We expect AI-driven businesses focused on the following areas to be the most sought-after acquisition targets:

• productivity and the automation of software development;
• drug discovery and personalised medicine;
• predictive analytics and data analysis;
• content creation, recommendation algorithms and consumer engagement analysis; and
• agriculture and sustainable farming.

Many acquirers will be operating in unfamiliar territory though. AI and machine learning are not new, but the rapid pace of their development is. The explosion of chatter around AI technologies and the shift in development focus from a few big players to a much broader range of participants means it can be hard to assess which products and companies are actually going to have a positive impact vs which are well-polished (and expensive) vaporware.

There is a risk that in racing to make an acquisition to avoid being left behind, or to beat others to an in-demand target, businesses unfamiliar with AI technologies either don’t take the time to do proper due diligence or know what constitutes ‘proper’ diligence, meaning that they end up with a bad investment. Given the complexity of the technology, diligence providers are still learning what to look out for and what constitutes a ‘red flag’ issue. Demonstrating a track record may not be possible, and identifying what the threats to the future of the business being acquired might be (whether commercially, legally or regulatory) is harder to achieve.

Buyers are also having to navigate the fact a lot of companies are being less than honest about their capabilities. There has been a surge in businesses positioning themselves and their products as ‘AI-powered’ in order to ride the AI wave when they don’t actually incorporate AI technology. This ‘AI washing’ has reached such a level that regulators have promised more scrutiny to ensure companies aren’t misleading consumers and investors.

In December US SEC chair Gary Gensler warned businesses against making false AI-related claims, and the SEC hasn’t hesitated to take action. In March it charged two investment advisers with making false and misleading statements about their use of AI, resulting in $400,000 in fines⁹. The US Justice Department’s top prosecutor in San Francisco, Ismail Ramsey, has also indicated he’ll be on the lookout for AI and other start-ups that defraud investors before they go public.

So… a transformative technology. But many potential pitfalls to avoid to take advantage of it. If you are planning to make an AI-related acquisition later this year, there are a number of areas you should pay particular attention to in due diligence to ensure you avoid a bad investment and are able to enjoy the benefits of innovation.

AI acquisition due diligence

Verify the technology

This may sound obvious – but then again, Theranos was able to raise $700m in funding after weaving a web of secrecy about its supposedly revolutionary tech – which didn’t actually work.

If you are planning to make an acquisition to gain technology that you think will give you the edge, make sure you are given an opportunity to actually thoroughly test it. A hands-on demonstration with testing conducted by your own or independent third-party specialists can be a very simple way to test if flashy promises are grounded in reality and avoid a potentially disastrous investment.

Assess the team

When making an acquisition, you are not just investing in the business but also its people. You should assess the quality of the target company’s leadership team to ensure they have a background in AI or relevant qualifications and to make sure there are no red flags or past instances of overpromising and underdelivering. Look for diversity wherever possible. Diverse development teams are less likely to develop AI-driven tools that create unintendedly biased or discriminatory results.

You should also identify key personnel you want to retain for business continuity and their knowledge of the business and ensure all employment contracts are up to standard and contain appropriate confirmatory assignments of intellectual property (IP) and sufficiently attractive related benefits. It’s also important you understand what options have been granted to employees and ensure all tax considerations related to these are in order.

If independent contractors or other third parties have been instrumental in the development of the technology, check that they have assigned their IP and waived other rights.

Review accountability

To ensure AI transparency and explainability are upheld, and that regulatory concerns around bias and discrimination don’t arise, make sure any company you are interested in acquiring has robust governance frameworks in place. These frameworks should include ethical guidelines, auditing procedures for algorithms, and mechanisms to track decision-making processes.

The reporting structure and responsibility for ensuring AI accountability within an organisation will depend upon its size and operational focus. But whether the individual responsible for accountability is the chief ethics officer, chief privacy officer or general counsel, they should have a direct reporting line into the board and ideally should be independent of the development or engineering team.

Monitor regulatory risk

As we’ve mentioned, AI is an area that regulators are paying increasing attention to. You need to stay informed on the evolving regulatory landscape and ensure you are prepared for regulations that might impact you, like the EU’s incoming Artificial Intelligence Act.

Although general (as opposed to sector-specific) AI regulation is relatively new on the scene, UK regulators are already investigating AI-driven businesses (and those claiming to be so) and have been for some time. In line with its innovation-first approach, the UK government has instructed a number of regulators including the Information Commissioner’s Office (ICO) and the Competition and Markets Authority (CMA) to direct their focus towards AI risks falling within their competence. As regulators consult and engage on the use of AI in areas within their purview, there may be advantages for businesses to seek positive regulatory engagement at an early stage.

As AI is one of the sectors classified as ‘high risk’ under the National Security and Investment Act, you may also need to inform the UK government of your acquisition to ensure compliance if it falls within the Act’s scope.

Consider competition law

It’s worth considering how antitrust authorities might view strategic acquisitions and consolidation in the AI sector. The European Commission has raised concerns¹⁰ about both AI facilitating collusion between algorithms and the AI sector itself raising competition concerns, as companies with cloud services facilities and vast amounts of data and unique data sets may be incentivised to favour their own AI systems.

In the UK, after launching a review of AI large language models last year, the CMA has published a set of guiding principles¹¹ relating to the development of AI technology which you’ll need to consider.

Understand intellectual property and patentability

Understanding the scope and protectability of AI-related patents requires a nuanced approach given the abstract nature of some AI concepts. You should work closely with intellectual property lawyers familiar with current trends in patent protection law as they pertain to software and algorithms to ensure you understand what you are acquiring the rights to. Patents, if sought in one jurisdiction, are likely to come at the expense of preserving trade secrets everywhere, since the trade-off for patent protection is publication of the details of the underlying invention. Careful consideration of the expected geographical scope of the business’s proposed operations should be undertaken before applications are filed.

Whether the business wishes to rely upon trade secrets or patent protection, it must first have maintained the confidentiality of its IP. If the company has not been careful in protecting its developments, it may find its only real advantage will come from being first to market and you may find that it is a less appealing investment as a result.

Review data protection

Data is one of the essential components of any AI system, fed in so it can learn and deliver useful outputs. In many cases that data will be personal data. You should engage with legal counsel who specialise in data privacy to ensure that any acquisition target has adhered to data protection laws including the European GDPR/UK GDPR and that the acquisition doesn’t introduce risks concerning personal data, data protection governance and accountability.

Privacy compliance is as much about record keeping as it is about handling personal data properly. Any target company using personal data in its AI operations should be able to provide copies of data privacy impact assessments, records of data processing, policies and procedures, and evidence of privacy training for staff. The company should have a clear privacy notice which explicitly addresses its use of personal data for AI development.

Not all small businesses need to have appointed a data protection officer but if a company is processing personal data for AI training or development purposes, it is imperative that a senior member of the team takes the lead on privacy compliance.

Helping you make the right choice

We have a long history of advising clients on how to introduce AI into their business while steering clear of risk. We’ve helped developers create the technology in accordance with regulation, advised companies how to introduce it in their business, and helped investors sort the hype from the real opportunities.

If you are planning to make an AI acquisition or investment and need legal advice, please let us know if we can help.

Notes

1. www.bloomberg.com/news/articles/2023-01-23/microsoft-makes-multibillion-dollar-investment-in-openai
2. www.axios.com/2023/10/30/google-invests-2-billion-anthropic-openai
3. www.aboutamazon.com/news/aws/aws-amazon-bedrock-general-availability-generative-ai-innovations
4. www.theguardian.com/business/2023/may/30/nvidia-chipmaker-value-ai-chip-shares-artificial-intelligence#:~:text=Nvidia%20becomes%20first%20chipmaker%20valued%20at%20more%20than%20%241tn%20amid%20AI%20boom,-This%20article%20is&text=US%20chipmaker%2
5. www.consultancy.uk/news/34492/accenture-to-invest-3-billion-in-ai-over-next-3-years#:~:text=This%20investment%20from%20Accenture%20follows,collaboration%20with%20Microsoft%20and%20OpenAI.
6. www.whitehouse.gov/briefing-room/statements-releases/2023/10/30/fact-sheet-president-biden-issues-executive-order-on-safe-secure-and-trustworthy-artificial-intelligence/
7. www.taylorwessing.com/en/insights-and-events/insights/artificial-intelligence-act
8. www.news.crunchbase.com/ai/artificial-intelligence-startups-mergers-acquisitions-vc-funding-data/
9. www.fortune.com/2024/03/18/ai-washing-sec-charges-companies-false-misleading-statments/
10. www.competition-policy.ec.europa.eu/system/files/2023-11/20231108_VI-Lisbon-Conference_Olivier-Guersent_speech.pdf
11. www.gov.uk/government/news/proposed-principles-to-guide-competitive-ai-markets-and-protect-consumers

For more information contact

Jonny Bethell
Partner
E: j.bethell@taylorwessing.com

Jo Joyce
Of counsel
E: j.joyce@taylorwessing.com

Return to M&A Yearbook 2024 contents.

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Why did you decide to become an M&A lawyer, and has it lived up to expectations?
M&A was the fourth seat of my training contract at King & Wood Mallesons. Until then, I was going to be a litigator.

I’ve always been swayed by people more than anything else. During my fourth seat I was supervised by the incredible Alison Lansley – a leading M&A partner in Australia. She is inspirational… and the decision to qualify in M&A was an easy one.

What’s been your most memorable deal and why?
Definitely Citi’s sale of EMI in 2012. It was a unique deal – from pre-pack to business separation to sale… it was incredibly challenging and thrilling at the same time.

It gave me the opportunity to work with the great Matthew Layton, Daniel Kossoff (both now retired from the firm) and Rob Crothers. Rob and I remain the closest of mates and partners to this day.

And it also introduced me to the team at Citi, from which a wonderful professional relationship and many close friendships have developed. I am so very grateful for that opportunity. 

If it’s different – what’s been the most memorable deal you’ve completed during difficult market conditions?
It’s not exactly difficult ‘market’ conditions, but certainly the O2 and Virgin Media merger was done in challenging ‘life’ conditions at the beginning of lockdown in 2020. We acted for our longstanding client, Telefonica, on that transaction.

What impact did those conditions have on the transaction and what did you learn from it?
It was probably one of the first big deals in this market to be done totally virtually, with everyone having to adjust to life working from home. I had home schooling happening in the background and, through the screen, a large team at Clifford Chance who were all having their own challenges during those early days of Covid. We forget how terrifying that period was for many of us.

I’m still in awe of the teams on both sides of that transaction – our collective resilience and camaraderie was very uplifting to see. I’m grateful to the teams at A&O and Herbert Smith Freehills as it was a lovely example of how to execute a deal with great doses of positivity and collaboration.

How has the role of an M&A partner changed since you started out?
There have been many positive changes in our working lives since then. To name a few: agile working, shared parental leave, a greater focus on mental health, greater diversity in our teams and a stronger focus on creating a truly inclusive workplace.

We have so much more progress to make of course, but there have been so many important developments.

Would you recommend a career in M&A law? Why?
Absolutely!!!! I pinch myself (most days!).

Yes, there are other days when the going gets really tough. But I like the challenge and that no day is the same and I love working with such talented people both on the client side and within Clifford Chance.

What are your top tips for success for those who want to follow in your path? 
The deal is really important – of course you need to get that right. But understanding the broader context for your client, and supporting them either side of the deal, is where the real joy lies.

It’s also where relationships grow. So, my top tip is to broaden your focus – reframe your role. I try to encourage our team not to think of themselves as ‘public M&A’ or ‘private M&A’ specialists, but rather corporate advisers.

What’s the single biggest change that you think needs to happen in law?
There is a lot more progress to be made in creating an even more inclusive and supportive environment within law firms. And we need to continue to embrace advances in technology and evolve our ways of working.

But I also meditate a bit on what I hope will remain the same: the intrinsically collaborative culture, the rich ‘on the job’ learning and development we provide to
our teams, and the strong focus on serving our clients (during and between the deals).

Melissa Fogarty is co-head of corporate, London at Clifford Chance.

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Multiple signs are pointing to an increasing momentum around M&A activity. If you’ve been holding out for better conditions to sell your business, now is the time to make sure you’re exit ready. Taylor Wessing’s Emma Danks, Suzy Davis and Siobhán Langwade outline key areas of focus and practical matters

After record highs in 2021, global M&A activity in 2022 and 2023 fell significantly, both in terms of deal volumes and deal values (with different sources recording varying degrees of the proportional drop, but some reporting up to half year-over-year). Though disappointing, this is understandable given the impact of macroeconomic factors at play, including: a sharp increase in interest rates (after many years of sustained low percentages), geopolitical uncertainty and conflicts, supply chain disruption, soaring energy prices, and high inflation.

All of these factors combined to suppress market confidence, leading to a drop in multiples which resulted in valuation gaps between sellers’ expectations and what buyers were prepared to pay (particularly given the stark contrast within certain sectors to the multiples that were being achieved in 2021).

From early on last year, where sellers had the ability to exercise discretion, many were opting to wait until market conditions improved. As the year passed, expectations for when those improvements would materialise kept being pushed out. Now (at the time of writing), at the end of Q1, it doesn’t feel like we are on the precipice of a ‘floodgate’ M&A moment. But green shoots are emerging and market momentum is building:

• Stabilising interest rates: though the US Fed declined to cut interest rates in March, it indicated that three rate cuts are coming this year as it expects inflation to continue cooling. Similarly, the Bank of England has indicated that there will be cuts to interest rates if inflation continues to fall – it is now at 3.4% in the UK¹, the lowest level in almost two and a half years. While we shouldn’t expect interest rates to drop back to where they were in 2021, the general consensus in the market is that we are past the peak. As the debt markets stabilise, buyers (particularly private equity sponsors) who rely on debt to part-fund transactions can put greater reliance on what the rates will be in the coming months and adjust their models accordingly.
• Political change: countries making up about half of the world’s GDP are holding elections this year. The threat of a change in government within the UK has, in the past, driven deal activity because of a fear of changes to tax rates (especially to capital gains tax (CGT)) or general uncertainty as to what the future would hold. That is not the case for the current impending election (the outcome of which is generally being treated as an inevitability) and it does not seem to be driving or stunting deal activity. Labour’s statement that it has noplans to raise CGT is likely salving sellers’ jitters. The geopolitical turmoil that may ensue following the US election outcome is of greater concern – but any fallout from that is likely to be less immediate.
• Supply chain re-establishment: while there are still ripples of disruption flowing as a result of the war in Ukraine, the initial shock factor has passed. The various supply chain issues have started to settle, companies have found alternative sources of goods or components, the increased costs have been passed on to customers and the spike in energy prices exacerbated as a result of Russia’s invasion has eased as markets rebalance.
• Record amounts of dry powder: after several years of burgeoning fundraising rounds, private equity investors are sitting on over $2tn of dry powder² which needs to be deployed. The drop in the number of assets coming to market, and the deal-doing hesitancy of the past couple of years, means that capital is burning a hole in sponsors’ pockets.
• Aged investments: private equity sponsors have held off on bringing assets to market pending improvements in market valuations and are reportedly sitting on a record 28,000 unsold companies worth more than US$3tn, globally³. The pressure to sell these aged investments and return capital to their investors is building. Furthermore, investors need to demonstrate their ability to deliver returns in order to raise further capital.
• Consolidated platforms: the lower end of the market has been less suppressed over the past couple of years. Companies have taken the opportunity to ‘buy and-build’ by acquiring complementary businesses to supplement their offering. Those that have effectively consolidated and integrated operations will have increased their overall value.
• Future-proofing: all businesses are looking at megatrends like AI and climate change, and working out how their models and plans need to change to future-proof their business whether organically or via acquisitions.

While we can anticipate an uptick in deal-doing activity, there is still a general hesitancy hanging over the market. Buyers have had time to reflect on the (at times, hasty) decisions they made two years ago and are likely to re-enter the market with greater caution. We can expect diligence to be more thorough, additional time taken to consider and assess the risks, and less vulnerability to getting swept up in the excitement.

That means sellers who have undertaken a fulsome vendor due diligence exercise, spent time getting their house in order and focused on, and can clearly articulate, what value their business can provide to a buyer, will be a much more attractive acquisition target for buyers. That will facilitate a much more efficient sales process and minimise the risk of process-failure.

Who’s looking to buy?

There are three types of buyer who are going to be most active in the UK market:

• Private equity: private equity buyers will be, and are, looking to make acquisitions. With the stabilising of interest rates and record amounts of dry powder to deploy as discussed above, private equity buyers will be keen to put their funds to work.
• Strategic corporates: trade buyers’ acquisition goals can vary, but typically include: securing new technological capabilities and integrating assets and operations with a view to realise costs or other synergies; gaining new customers, talent or intellectual property to enhance market position; expanding product lines and offerings; and/or accelerating growth in new markets. Trade buyers often make acquisitions for strategic rather than purely financial reasons, however as discussed earlier the stabilising of interest rates and the availability of aged investments will likely reignite their acquisition focus.
• US buyers: US buyers will be looking at the acquisition market for reasons similar to strategic buyers. Coupled with the relative strength of the US dollar and the perceived discount at which UK targets trade relative to their US peers, this means we will see increasing amounts of US acquirers taking an interest in UK companies, in particular ahead of this year’s US election.

Are you exit ready?

If you have been considering a sales process, and assuming you don’t have a functioning crystal ball to tell you when the best time to sell will be, the best we can advise is to ‘be ready’. It’s a time-consuming process to collate the necessary financial, tax, commercial and legal information required for a sales process and that needs to be balanced with ensuring sufficient time is dedicated to continuing to run the business.

Legal due diligence

Here are a few of the key areas that you will need to focus on in terms of the daily business activities to get exit ready and ensure a smooth transaction process:

• Commercial contracts: ensure you have formally documented, and signed, contracts with commercial counterparties (such as suppliers, customers, agents and distributors). Familiarise yourself with the termination and amendment terms, and whether they require notification to the counterparty of potential M&A transactions. Do they permit your counterparty a right of first offer or refusal if a buyer takes control of the company? Are there any material/key agreements which are coming to the end of their term or have been terminated, which would impact the company’s value?
• Intellectual property, know-how, trade secrets and brands: can you evidence that the company either owns, or has the right to use, any IP necessary and/or relevant to the business? Also, confirm whether you have measures to manage and protect these assets from infringement or unwanted onward disclosure, and if not, consider whether such measures should be implemented.
• Disputes: monitor, assess and manage actual and/or potential disputes and investigations to minimise their impact on the value of the business. Resolution of a dispute before the sale process begins may not be possible but it’s important to conduct a proper assessment of relevant risks and to maintain clear records of decision-making processes.
• Employment: maintain good employee records, eg by regularly updating the company’s policies and employee handbook, and ensure detailed records are kept of any disciplinary and grievance procedures that are undertaken.
• Contractors and self-employed workers: do you have documentation and working practices in place to reflect the correct status of any independent contractors or self-employed workers (as misclassification presents a number of risks)?
• Immigration: do you have proper evidentiary records that your employees have the right to work in the jurisdiction they work in?
• Options: where tax-favoured options (eg enterprise management incentives or company share option plans have been granted and will be exercised in connection with a transaction, buyers will want to see that the company has followed HMRC rules and guidance in granting such options and operating the scheme. Any failures in this respect can affect, or result in the loss of, CGT treatment and/or other tax-favourable treatment for option holders, with their option exercises instead being subject to income tax and national insurance contributions on the full gain.

Transaction-specific considerations

As well as preparing for a due diligence process, there are a number of practical matters you will need to consider in order to get a deal over the line:

• Regulatory approvals: the global regulatory framework is multifaceted and becoming more extensive:
  • Antitrust/competition: regulating businesses to avoid a market dominance and preserve competition has been an element of M&A for many years. There are more than 100 countries with merger rules based on turnover, market share and asset tests. Analysis will need to be undertaken to determine whether your transaction will be caught or (subject to who the buyer is) may be caught.
  • Foreign direct investment (FDI) and national security: an increasing number of jurisdictions are implementing some form of FDI or national security regime, requiring transactions to be notified to regulators. Furthermore, several are now refining and adapting their requirements as their understanding of the application of the rules to transactions in practice changes.
  • Regulated businesses: those businesses whose activities are regulated will typically need consent from, or a notification will be triggered to, the relevant regulatory body in the event of a transaction. This will depend on the nature of the transaction, the rules of the body and the conditions attached to the authorisation.
• Shareholder communications: particularly relevant for a share sale, the timing for when to communicate the details of the transaction (and even the fact a transaction is proposed) is a delicate balancing act when there is a wide shareholder base. Enough time will need to be given to allow sellers to consider (and get advice on) the proposed terms of the sale and the negotiations will need to be sufficiently well progressed for the terms to be explained. If there are any shareholders with whom the company has not maintained contact, or with whom there has been past animosity, this can further complicate the process, both in terms of when and how to send the communications, and whether they will sign and deliver the documents necessary to implement the transaction.
• External lenders/debt providers: if you have any third-party lenders, it’s likely that their consent will be required for the transaction or the transaction will trigger a repayment obligation. Buyers typically expect an unencumbered asset to be delivered by the sellers, and co-ordinating the repayment of debt, the release of security and completion of the transaction to the buyer requires careful orchestration.

Help is at hand

An M&A transaction can be complicated, time consuming and daunting if it’s an unfamiliar process. We are here to help you get exit ready. We’ve released a new ‘Exit Guide’ which distils our experience from countless deals to help companies prepare and successfully navigate an M&A sale process. To get a copy, please get in touch.

Notes

1. www.bbc.co.uk/news/live/business-685815261
2. www.ft.com/content/079ccde6-3c3d-4791-953b-6e3e8203ef12
3. www.bain.com/insights/topics/global-private-equity-report/

For more information contact

Emma Danks
Partner
E: e.danks@taylorwessing.com

Suzy Davis
Partner
E: s.davis@taylorwessing.com

Siobhán Langwade
Partner
E: s.langwade@taylorwessing.com

Return to M&A 2024 contents.

The post Getting exit ready appeared first on Legal Business.

The Legal 500’s London M&A rankings are among the most competitive across the entire UK guide, with high-profile dealmakers vying for position among the upper echelons of the market, national practices competing for recognition in the mid-market, and smaller, specialist teams hoovering up lower-value – but just as complex – transactions for acquisitive clients.

As well as providing a full rundown of the firms with the most individual rankings, this data feature looks at how the rankings have shifted over the past decade, looking at who’s in and who’s out across all three value bands, and also how the gender balance has vastly improved as increasing numbers of female dealmakers come to the fore in a market traditionally dominated by men.

Return to M&A Yearbook 2024 contents.

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Gorriceta Africa Cauton & Saavedra lawyers led by Mark S. Gorriceta (managing partner), Kristine T. Torres (partner) and Kathleen T. Guiang (mid level associate) explore the challenges, cross-border elements and post acquisition disputes for M&A transactions in the Philippines

Can you describe your expertise with M&A transactions within the Philippines? How does the Philippine legal and regulatory framework influence your approach?

Our firm, Gorriceta Africa Cauton & Saavedra, a top-tier full-service law firm in the Philippines, has extensive experience in providing legal and transactional advisory services for M&A deals, representing either the buy or sell side in all types of domestic and cross-border acquisitions, investments and divestments of businesses across a wide spectrum of industries.

We are highly regarded and trusted for our advice on all stages of transactions, specifically in due diligence, structuring, drafting of definitive agreements, negotiating and closing M&A transactions. Through our team’s vast experience, we have developed industry-specific knowledge in public and private deals and cross-border transactions, as well as equity investments and divestments.

Currently, we have been very active in representing sell and buy side parties in equity investments of foreign investors; acquisition of highly regulated entities such as those with secondary licences from the Securities and Exchange Commission, Philippine Central Bank and Department of Information and Communications Technology; as well as holders of permits and licences from the Department of Energy and other regulatory bodies.

In structuring and negotiating deals, we always make sure that our advice is a result of a thorough review of relevant legal and regulatory frameworks, including taxation, corporate, securities, intellectual property and civil law, to ensure adherence to laws while optimising shareholder benefits and protection in the deal’s arrangement. Moreover, we also conduct legal analysis of the potential regulatory issues that might surface concerning the acquisition or transaction.

Our approach in providing transactional advice is impacted by the developments in the legal and regulatory framework relating to M&A in the Philippines. These considerations include: (i) restrictions on foreign investments, (ii) antitrust regulations and compulsory notification thresholds under the Philippine Competition Act, (iii) environmental, social and governance principles, and (iv) potential tax exposures, among others.

We provide transaction-specific advice and offer out-of-the-box solutions that consider both the legal and regulatory requirements in closing a deal, and the business and commercial considerations of our client.

What do you see as the most significant challenges and opportunities for M&A in the Philippines today?

The Philippines continues to open up its economy to more diverse investors with recent legislative amendments, encompassing the amendment to the implementing rules and regulations of the Renewable Energy Act of 2008 which effectively removed the foreign ownership restriction on the renewable energy sector; the amendments to the Public Service Act which now allow 100% foreign ownership in public services entities; the amendments to the Foreign Investments Act which reduce the required minimum paid-in equity capital for foreign investors in micro and small domestic enterprises; and the amendments to the Retail Liberalisation Act which lower the minimum paid-up capital requirement for foreign investment in the retail sector to Php25m.

The continued accelerated digitisation and the current licensing moratorium on certain industries imposed by regulatory agencies also open up a wealth of opportunities for M&As and investments particularly in the fintech, technology, banking and lending spaces.

Nevertheless, while the Philippines strives to position itself as open to foreign investments with the significant regulatory changes that will drive M&A and investment opportunities in these sectors, high interest rates, geopolitical tensions, stagnant capital market activities and limited IPO exit opportunities, coupled with heightened regulatory requirements, may introduce intricacies and challenges to M&A deals.

Our reputation and expertise allow us to assist our clients in navigating these challenges. We guide them through providing out-of-the-box solutions and deal structuring options which are compliant with regulations with minimised exposure to these roadblocks, while still being able to achieve the client’s goals and objectives for the transaction.

The Philippines has seen an increase in cross-border M&A activity. Can you share your experience with these types of transactions?

We have a proven track record in assisting clients in transactions with cross-border aspects, including foreign private equity and venture capital investments in companies in the Philippines, spanning a diverse range of sectors.

Cross-border transactions are highly complex and sophisticated in nature, especially when a number of jurisdictions are involved. We render a full spectrum of legal advisory services to help our clients resolve issues or mitigate risks, on cross-border investment rules, foreign exchange controls and compliance with securities laws and investment limitations. We closely liaise and collaborate with foreign counsel to navigate and comply with varied legal frameworks, laws and business environments prevalent in the jurisdictions involved.

Due diligence is crucial in any M&A transaction. How do you tailor your due diligence process to address the unique aspects of the Philippine market?

Our approach in conducting due diligence depends on the type of the deal; the purpose, size and complexity of the transaction; the parties involved; the risk profile; tolerance; and background of our client. The industry the target company belongs to is also a factor in strategising for diligence work, since the legal and regulatory considerations and areas of focus would be different.

Most of our recent deals involved acquisitions in highly regulated companies with secondary licences, or imbued with public interest. These types of transactions require more extensive and specialised due diligence as they have specific requirements under special laws, and change-in-ownership requirements.

We have a number of M&A deals which took a relatively longer timeline to close and some which did not push through due to diligence issues. In some deals where the main objective was to acquire the target companies because of the licences they possessed, the fact that there were material issues on the licence status and compliance which were uncovered during our due diligence, among others, became a dealbreaker for our clients. We also have deals which fell apart because of financial and valuation issues, and accounting practices of the target company.

After the deal closes, integration and potential disputes pose new challenges. How do you support clients in the post-acquisition phase, especially in ensuring smooth integration and handling any disputes that arise?

It is during post-acquisition integration that challenges often emerge, ranging from exposures and risks that were not possible to uncover during the diligence exercise, or consequences that arise from pending litigation or administrative proceedings.

As transaction counsel, we assist and provide advice to clients throughout the lifecycle of the transaction including post-acquisition integration. Our M&A team also implements a proactive approach in monitoring post-closing compliance from both buy and sell sides to ensure a smooth transition and effective integration in the business operations of the target company.

We provide post-merger integration support by assisting our clients with their tax structuring, restructuring and corporate reorganisation, and providing legal advisory and consultancy services.

Where disputes have arisen after a deal has closed, we work alongside our client to look for solutions and to effectively handle these disputes without going through litigation. Unfortunately, some deals gave rise to disputes that were elevated to courts. In such cases, our M&A team together with our litigation group continues to assist our clients in providing strategic advice to resolve these disputes.

For more information contact

Mark S. Gorriceta
Managing partner; head of corporate and TMT practice groups

Kristine T. Torres
Partner; head of project finance and ESG

Kathleen T. Guiang
Mid-level associate

E: counselors@gorricetalaw.com

Return to M&A Yearbook 2024 contents.

The post Capitalising on opportunities in the Philippines appeared first on Legal Business.

Rafael Salaberren Dupont, Juan Manuel Campos Álvarez, and Diego D’Odorico of SyLS discuss the processes, challenges, and prospects for M&A in Argentina

Can you outline the primary legal framework governing mergers and acquisitions in Argentina? How does it differ from other major jurisdictions?

The Argentine Civil and Commercial Code, the Companies Act and the Securities Act (when dealing with public companies), govern the main aspects of M&A transactions in Argentina. It is important to note that parties are free to choose a foreign governing law and agree on international arbitration or jurisdiction, provided there is a reasonable point of contact.

Acquisitions of private companies can be structured by way of share purchases or asset purchases: (i) share purchases provide the advantage for the acquiror of having access to a company already structured and operating, only requiring a registration of the transfer of the equity; on the other hand, thorough due diligence is required for the identification and analysis of the assets, liabilities and contingencies of the target. From the point of view of the seller, this type of deal provides certainty as to the taxes applicable to the sale; and (ii) an asset purchase is usually more complex as it requires transferring different types of assets, which have a different tax treatment, and which assignment may require a third party’s consent.

With regards to acquisitions of public companies, the most relevant provision of the Securities Act is the obligation for the purchaser to conduct a mandatory tender offer whenever control is acquired, as well as the disclosure obligations imposed on the target company.

In transactions of economic concentration, authorisation must be sought from the National Antitrust Authority. There are exceptions to this prior authorisation requirement, which should be analysed on a case‐by‐case basis.

Have there been any recent legal or regulatory changes in Argentina that significantly impact M&A activities?

The change of government that took place in December 2023 brought a paradigm shift in the political and social sphere, which is evidenced in several substantial modifications to local regulations that are taking place, with a view to less state intervention, expansion of the scope of individual and market freedoms, and greater administrative and bureaucratic simplification. Several of these modifications have already been implemented during the first quarter of 2024, and additional substantive modifications are expected during the coming months.

In this sense, there is a special interest in regaining the confidence of international markets and attracting foreign investment, so the modifications to current regulations should show – in the short and medium term – greater facilities for carrying out M&A transactions in all of the relevant aspects involved, such as foreign exchange, labour and other matters.

What are the key legal considerations for foreign companies looking to engage in M&A activities in Argentina?

Argentina’s constitution and laws grant equal rights to local and foreign investors, and foreign investment is not generally subject to prior approval by the authorities. Argentina has entered into bilateral investment protection treaties with several countries, further providing for the protection of foreign investments. However, there are several regimes that regulate or limit foreign ownership of certain assets, including rural land and real estate property located in frontier zones (it is noticeable that the rural land regime for foreign acquisition has been preliminarily derogated by way of a recent decree of the president).

For the purposes of holding equity in Argentine companies or opening a branch, foreign companies need to register with the Public Registry of Commerce, by way of appointing a local representative, establishing a local domicile, and filing several documents. Once registered, the foreign company must comply with a regime to provide updated information annually in occasion of its original registration. Branches must file their annual financial statements, as well as comply with this annual information regime.

Foreign companies also need to obtain a local tax ID before the Federal Tax Agency in order to fulfil local regulations applicable to transactions and/or ownership of a shareholding in a local company.

How does the due diligence process in Argentina differ from other countries, and what unique challenges does it present?

Argentine deals require special focus in four areas: tax, labour (especially with regards to employee benefits and unregistered employees), foreign exchange, and customs regulations. Based on the characteristics of target companies (especially if they are new companies), it is not unusual that buyers choose to conduct a red flag due diligence report rather than full‐blown due diligence.

Certain specific areas, such as technology, also require focus on matters like the ownership and proper registration (if applicable) of the company’s IP. In the case of investments in startups, it is not unusual that one or more IP assets have been registered in the name of the founders.

What are the most significant challenges and risks faced by entities in M&A transactions in Argentina?

Extensive foreign exchange controls impact most inflows and outflows of funds in Argentina and are relevant for the conduct of business in Argentina. As regulations are quite extensive, complex and dynamic, and breaches are penalised, counsel advice should be sought before transactions are conducted.

Also, Argentine labour laws contain quite extensive regulations of the employment relationship with a significant pro‐employee bend. Since labour litigation is quite frequent in Argentina, a proper analysis of the employee’s situation is relevant within the due diligence process in order to minimise liabilities in this respect.

For investors inclined to more risky transactions, Argentine bankruptcy law contains certain provisions regarding acquisition of distressed assets that may be of interest and should be analysed for the specific case.

Are there specific sectors in Argentina that present unique opportunities or challenges for M&A activities?

Argentina has a vibrant technology sector, especially in the software, fintech, agtech and primary services areas. In the past few years, Argentina has seen remarkable growth in the private capital sector (it is worth noting that five Argentine technology companies have reached the stage of unicorn).

Argentina also has sophisticated human resources dedicated to the technology sector, which are more cost friendly than those of other countries.

As per the above, the technology sector continues to represent an important portion of the local M&A market, which proved to resist adverse matters that affected both the global and local market.

Based on current economic and legal conditions, what is your outlook for M&A activities in Argentina over the next few years?

It is expected that with the change of administration and the new measures that are being adopted, an ordering of the macroeconomy and, consequently, a notable economic recovery will be in place, which will be more noticeable as from the second half of this year.

Likewise, it is expected that this recovery will make the local M&A scenario more attractive, by way of greater bureaucratic simplification, lower tax pressure, specific incentives for certain activities and, ultimately, greater predictability and legal certainty.

For more information contact

Rafael Salaberren Dupont
Co-founding partner

Juan Manuel Campos Álvarez
Partner

Diego D’odorico
Senior associate

E: info@syls.com.ar

Return to M&A Yearbook 2024 contents.

The post Understanding mergers and acquisitions in Argentina appeared first on Legal Business.

Why did you decide to become an M&A lawyer, and has it lived up to expectations?
My great grandfather was a lawyer, my grandfather was a lawyer, my father is a lawyer. I told my parents when I finished high school that I was considering a career as a doctor… you can imagine the reaction…

What’s been your most memorable deal and why?
Mittal Steel’s hostile takeover offer for and subsequent business combination and merger with Arcelor (we acted for Arcelor). I was involved in the transaction from the first to the last day, 18 months later.

The deal was the most complete learning experience I could have ever hoped for at that stage in my career. You had everything: a board willing to put up a vigorous defence; a legal knight/squire (actually, at some point we had nine knights/squires lined up in six different jurisdictions); interaction with six securities regulators; a crown jewel/antitrust defence; intense media coverage; and also navigating regulatory and commercial issues that seemed to mushroom every day.

The bidder had to raise its price three times. Mittal’s last offer valued Arcelor at €26.9bn – it paid a 100% premium to Arcelor shareholders on Arcelor’s highest-ever share price (initially Mittal’s €18.6bn offer implied a 25% premium).

If it’s different – what’s been the most memorable deal you’ve completed during difficult market conditions?
In 2023, in a down year for M&A globally and in a very difficult year for tech companies and leveraged buyouts, we had the opportunity to advise online advertising company Adevinta and its special committee of independent directors in connection with the $13.2bn offer from funds advised by Permira and Blackstone, as well as General Atlantic and TCV, to acquire all of the outstanding ordinary shares in Adevinta, eBay and Schibsted.

‘Build strong relationships over your career, and start from day one. Seek mentorship and continuous learning.’

Since then, with inflation and interest rates appearing to settle, companies have started to capitalise on strategic opportunities. We have started to see a resurgence of large M&A dealmaking and a growing pipeline of M&A deals, reflecting a renewed confidence in deal making as well as the adaptability of market players.

How has the role of an M&A partner changed since you started out?
I’m not sure it has; or at least it hasn’t at my firm. Partners at my firm get stuck into transactions and work on all phases of complex deals as strategic advisers to the clients. While the pace of deals has been accelerating and technology has facilitated 24/7 exchanges with clients, M&A partners at my firm have always operated on that basis, it was just harder to do so 20 years ago, and required more physical time in the office.

What are your top tips for success for those who want to become M&A stars of the future?
Gain diverse experience – seek opportunities to work on a diverse range of M&A deals, across different industries and jurisdictions. Hone your analytical abilities to assess complex business risks and opportunities.

And then, most importantly, put yourself in the shoes of your client and ask yourself, is this work product, this email, this phone call, this advice useful to me? Is it digestible? What can I do with it?

Build strong relationships over your career (externally and internally), and start from day one. Seek mentorship and continuous learning – this is an important one. It is also important to offer to mentor people coming up through the ranks too, always offer the hand up just as others have done for you.

Keep on the straight and narrow – clients value a strong moral compass.

Lorenzo Corte is global head of transactions at Skadden, Arps, Slate, Meagher & Flom LLP.

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Jérôme Terfve and Guillaume Charlier report on the treatment of excess cash in M&A transactions by the Belgian authorities

They say ‘you can have too much of a good thing’ and while cash is king, in a Belgian M&A context, this old saying turns out to be true.

In the context of M&A transactions involving one or more individual sellers who are tax residents in Belgium, ‘excess cash’ has become a hot topic. This results from the Belgian tax system under which, while private individuals may benefit from a full tax exemption on the capital gains they realise on shares (except under particular circumstances), a 30% Belgian withholding tax is levied on any dividends received.

In this framework, Belgian private individual sellers tend to leave amounts of cash that exceed the target companies’ operating needs (so called ‘excess cash’) on their balance sheets, hoping that the buyer will agree to take this cash into account when determining the acquisition price. This is bearing in mind that a buyer which benefits from the participation exemption in acquiring 100% of the target’s shares can – immediately or shortly after the transaction – upstream (free of tax) these funds to, eg, reimburse the acquisition debt(s).

Although these operations had been under the scrutiny of the Belgian tax authorities for several years, unless in (very) specific circumstances, it was only in 2012 with the introduction of the new general anti-abuse rule (GAAR) in the Belgian Income Tax Code that the tax administration found a legal basis for contestation.

Synthetically, the Belgian GAAR renders a legal act, or a set of acts thereof linked by a joint intent, that is constitutive of tax abuse as unenforceable against the tax administration. In such a case, the tax administration can impose the operations conducted as if the abuse had not taken place.

The application of the GAAR by the Belgian tax authorities led to the groundbreaking decision issued on 6 September 2022 by the Court of Appeal of Antwerp. In short, in this rather complex case:

• A private individual seller had transferred a part of its shares in the target group to a third-party buyer for c€14.35m while leaving ‘excess cash’ of c€6.34m on the balance sheets. The net cash position of the target group was factored in the acquisition price.
• The buyer largely financed the acquisition with bank debts that were repaid with the cash left in the target group, upstreamed inter alia through a loan (this was agreed upon between the parties before the closing).
• The individual seller was assisted in this transaction by an external adviser who considered but dismissed a distribution of the excess cash prior to the closing because of the tax costs it entailed. From the different documents reviewed by the Court of Appeal of Antwerp, including the external adviser’s report, it was clear that the financing structure was put in place to avoid the 30% withholding tax due on the distribution of the target’s cash to the individual seller prior to the closing.
• The Court of Appeal of Antwerp confirmed the joint intent between (i) the share deal, (ii) the payment of the acquisition price and (iii) the upstream of the cash and considered that these operations, taken as a whole, were constitutive of tax abuse at the level of the individual seller, even though the latter was not involved in each operation taken individually.
• As a result, based on the Belgian GAAR, the Court of Appeal of Antwerp reclassified the capital gain realised by the individual sellers as a taxable dividend received up to the amount of the target company’s cash it considered excessive.

The Belgian Supreme Court confirmed this decision in a ruling issued on 11 January 2024. In its ruling, the Supreme Court approved the Court of Appeal of Antwerp’s findings and reasoning and confirmed that for a joint intent between different operations to exist, it is not required that the taxpayer be formally part to all of them.

Now, relying on the precedents set by the Court of Appeal of Antwerp and the Belgian Supreme Court, the Belgian tax authorities are on the hunt for potentially abusive transfers of cash-rich entities by Belgian taxpayers and although it has always been a topic of discussion between sellers and buyers, excess cash is now more relevant than ever in a Belgian M&A context.

Indeed, although the seller is primarily responsible for the taxes to be paid on (deemed) dividend they receive, under the standard Belgian tax statutes of limitation the tax administration can only go back three years to claim evaded taxes from the seller, while it has a five-year window to act against the company if it considers the company should have withheld the tax due on the (deemed) dividend distributed. One cannot therefore exclude that the Belgian tax authorities try to recover the withholding tax from the company rather than from the individual seller in a scenario like the one presented to the Court of Appeal of Antwerp.

However, it is important to note that, in this case, it was obvious that the target company had excess cash and the tax authorities could prove that it was intended to be allocated to the reimbursement of the acquisition loans immediately or closely after the closing. Of course, it would be more challenging for the Belgian tax authorities to prove the existence of an excess cash issue and a court may refuse to apply the Belgian GAAR even to a sale of a cash-rich company if the debts incurred for the acquisition were serviced through the future profits of the target company’s activities and the cash was invested by the company itself (after the sale).

Finally, although the decisions summed up above do not shed much light on the concept of excess cash, which can be difficult to apprehend in practice, one can find guidance in the past Belgian Ruling Office’s decision on the so called ‘plus-values internes’/ ‘interne meerwaarden’ cases and the criteria developed and used by the Ruling Office from 2012-17 to assess the existence of excess cash.

About Tetra Law

Established in 2012, Tetra Law is a business law firm with offices located in Brussels which has rapidly emerged as a significant presence in all fields related to corporate and personal taxes, tax litigation and white-collar crime, corporate law, M&A and labour law. Tetra Law is grounded on three core principles: passion, synergy and enterprise. Passion for the firm’s unwavering dedication and commitment to clients and delivering excellence in the legal practice, synergy for its belief in maximising collaboration between different areas of expertise that mutually reinforce each other and enterprise for the firm’s dedication to providing pragmatic advice that brings added value to clients and their business endeavours. These core principles have led the firm to its current success.

About the authors

Jérôme Terfve is a highly regarded lawyer in the field of corporate and tax law and a partner at Tetra Law. Jérôme focuses on the economic activity of businesses. He advises them on tax, accounting and corporate law issues. He assists in the planning and implementation of structuring and restructuring strategies, in developing M&A operations and in setting up remuneration and planning policies intended for executives and managers. He also assists clients with obtaining advance rulings and in litigation. Jérôme is the author of various publications and a lecturer, and is frequently invited to speak at conferences.

Guillaume Charlier is a lawyer and associate at Tetra Law. He advises businesses in the fields of corporate law and corporate taxation, dealing with M&A operations, due diligence, national and cross-border corporate and tax matters, restructuring and reorganisation, tax structuring and advance rulings. Guillaume has authored several publications in his areas of expertise and is a lecturer at the Belgian Chamber of Accountants in Brussels where he teaches corporate taxation.

For more information contact

Jérôme Terfve
Partner

Guillaume Charlier
Lawyer

E: info@tetralaw.com

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