I OVERVIEW OF M&A ACTIVITY
As a recent study in M&A Review Issue 1-2/2018 reports, Austria saw approximately 409 deals in 2017, an increase of 4.9 per cent from 2016. This makes 2017 one of the top years since 1988, with the years 2000 to 2007 being the strongest, peaking in 2005 with over 500 deals. According to the EY M&A-Index Austria 2017, deal volume rose from €10.7 billion in 2016 to €14.7 billion in 2017, such rise being mainly driven by:
- the takeover offer by Vonovia to BUWOG shareholders (€5.6 billion);
- the acquisition of UPC Austria by T-Mobile Austria (€1.9 billion);
- the acquisition of a stake in the Russian gas field Yuzhno-Russkoye by OMV (€1.7 billion); and
- the acquisition of a real estate portfolio of RFR-Holding GmbH by SIGNA (€1.5 billion).
Due to these large transactions, the average deal volume of all M&A transactions involving Austria rose from €30.2 million to €42.7 million.
The statistics published in M&A Review show that in 2017:
- 31 per cent of the deals were domestic (compared to 37 per cent in 2016);
- 33 per cent were outbound (acquisitions of foreign targets by Austrian investors, compared to 44 per cent in 2016);
- 24 per cent were inbound (acquisitions of Austrian targets by foreign investors, compared to 17 per cent in 2016); and
- 11 per cent involved only an Austrian seller, but a foreign target and a foreign buyer (compared to 3 per cent in 2016).
According to the EY M&A-Index Austria 2017, 28 per cent of inbound acquisitions were made by German investors, while 32.6 per cent were made by investors from other European countries. Thus, 60.6 per cent of all foreign investors were European. In terms of transaction volume, European investors accounted for 90.3 per cent, and German investors for 86.8 per cent.
II GENERAL INTRODUCTION TO THE LEGAL FRAMEWORK FOR M&A
The main corporate law statutes are the Stock Corporation Act and the Limited Liability Company Act for corporations, and the Enterprise Act for partnerships. The Takeover Act and the Stock Exchange Act are relevant for listed companies (in relation to, public takeovers, stake-building, ad hoc disclosures, insider trading, etc.), whereas for private companies they do not apply. Merger control issues are governed by the Cartel Act, unless the EU Merger Regulation applies. In relation to corporate reorganisations, such as mergers, spin-offs and squeeze-outs, in particular the EU Merger Act, the Demerger Act, the Shareholder Squeeze Out Act and the Transformation Act complement the general corporate law statutes, while from a tax perspective the Reorganisation Tax Act provides for roll-over treatment under certain conditions. From a general tax perspective, the Corporate Income Tax Act as well as the Individual Income Tax Act are of most relevance, with, inter alia, transfer taxes being primarily subject to the Stamp Duty Act and the Real Estate Transfer Tax Act. In the employment law area, the Labour Constitution Act and the Act on the Amendment of Employment Contracts (AVRAG) are to be taken into account. In addition, for specific industries, sector-specific laws apply, such as the Banking Act, the Insurance Supervisory Act or the Telecom Control Act.
III DEVELOPMENTS IN CORPORATE AND TAKEOVER LAW
AND THEIR IMPACT
In 2017 and early 2018, the amount of public M&A activity had been substantial. Some of the transactions are covered below, in particular relating to the real estate sector. Among others, the increase in partial takeover bids has been notable in recent years. These aim to stay below the formal control threshold of 30 per cent (unless lowered in the articles of association, as implemented by several Austrian companies in particular in the recent past), which triggers a mandatory bid obligation for all shares in the target, or are even limited to only 26 per cent, which is the ex lege cap of exercisable voting rights (unless another shareholder holds voting rights in excess of that threshold or a bid is launched). Often, though, they are followed by subsequent bids, which usually trigger a mandatory offer.
Another recurrent topic is access to documents and information to conduct due diligence. In this context, certain differences depend on the legal form in which the target is established.
As a general rule, third parties do not have a right to obtain information from the stock corporation besides those pieces of information that are publicly available. A board is thus not obliged to disclose confidential information to a prospective buyer. Even shareholders have very limited information rights. They can request financial statements, including the management report, as well as the supervisory board report. Furthermore, shareholders have an individual information right at the shareholders' meeting in relation to the agenda, and to the extent such information is necessary to properly assess an agenda item. Given that such information will usually not suffice for the purposes of due diligence by a potential investor, shareholders will often request the management to disclose additional information. The decision on the disclosure of confidential information, and thus the decision on the admission or refusal of a due diligence, is a management measure, and thus generally does not require the consent of the supervisory board or the shareholders. The management has to avoid any damage to the company, and must consider all potential advantages, risks and disadvantages. Positive impacts may include, for example, new or cheaper means of financing, access to new customers or markets, access to product or technical know-how, and advantages for the company's production or procurement. Negative impacts could arise if, for example, a competitor or a major supplier or customer of the target can access the information. The decision to allow due diligence is not necessarily an 'all-or-nothing' decision; the greater the interest of the company in due diligence, the more sensitive the data that can be disclosed. The interest of shareholders also has to be taken into account by the management, whereby shareholders should generally be treated equally in equal situations. Another aspect to consider is the time frame. The more advanced the stage of the acquisition process, the more comprehensive and detailed the information that can be made accessible to the buyer. Due diligence will mostly only be permitted if the buyer's intention to commit to a purchase has become more concrete, for example by signing a letter of intent. At the same time, the prospective buyer should also sign a nondisclosure agreement.
The situation for limited liability companies is generally comparable to that of stock corporations. Although its shareholders have only limited access to information rights, the Austrian Supreme Court states that every shareholder has to be granted a comprehensive information claim. Therefore, managing directors are, in general, obliged to provide requested information to shareholders. However, this information claim does not apply without restriction. The purpose of the comprehensive information right is to monitor managing directors, to control the business situation of the company and to prepare for general meetings. This information claim should thus only be used for these objectives. Accordingly, there is some legal argument in Austria that the information claim would not include a due diligence for the sale of shares; meanwhile, others argue that managing directors may not deny access to documents or information for purposes of a due diligence. Overall, a due diligence claim by a shareholder of a limited liability company must be honoured, if and to the extent that it is essential for selling the shares to a potential buyer, and the shareholder's request is not a misuse of the law (e.g., if the shareholder intends to avoid disclosure of the information to a prospective buyer), but only to the extent that is necessary to sell the shares, and only insofar as the interests of the company are not negatively affected. Regarding the question of what information the seller is allowed to share with a potential buyer, the company's confidentiality interests must be carefully weighed against the shareholder's interests in the dissemination of information, and will often require a shareholder resolution (at least in scenarios in which the sale of the shares is subject to shareholders' approval). The shareholders of a limited liability company are subject to the duty of loyalty to the company and to the other shareholders. The nature of such duty of loyalty among the shareholders means paying due regard to the legitimate interests of the other shareholders even when exercising their voting rights.
M&A data protection is also in the spotlight. The General Data Protection Regulation (GDPR) came into effect on 25 May 2018. For the seller side in an M&A process, there are important GDPR concerns to be aware of. During a due diligence, there are potential risks of data and privacy breaches, when sensitive information is shared between potential buyers and the seller company. For the buyer side, the company's GDPR compliance or readiness must be taken into account during the due diligence process if the potential acquisition target does business in Europe or deals with data related to European citizens, even if the company does not have a physical office location in the EU. The GDPR is a comprehensive set of rules and regulations, and there are several important steps organisations must carry out in order to comply, such as a classification of all personal data being processed by a company, performance of risk assessments, implementation of specific processes, and notifications of the competent authorities and – in some scenarios – the individuals who have been affected by a breach. Further, individuals have important rights under the GDPR (such as the right to be informed, the right of access and rectification, right of data portability, etc.). To avoid fines for non-compliance, companies will need to have an in-depth understanding of where personally identifiable information is stored and processed throughout the organisation and will have to transfer such information into a record of all processing activities. Various opening clauses provide Member States with discretion to introduce additional national provisions to further specify the application of the GDPR. In this context, the Austrian legislation provides that declarations of consent to the processing of personal data lawfully obtained according to the current data protection framework shall remain valid under the GDPR if such declarations also comply with the new regulations of the GDPR. As Austrian case law has already been rather strict in this respect in the past, it can be expected that the need to adapt existing declarations of consent may be lower in Austria compared to other European countries. Compliance can potentially be very expensive, and these costs should be considered very carefully when it comes to the purchase price of a target company. Further, fines related to non-compliance with the GDPR can be very high – in some cases up to 4 per cent of the company's prior year worldwide revenue or up to €20 million. Based on the announcement that the staff of the Austrian data protection authority will be increased significantly, it can be assumed that breaches of the GDPR will soon be dealt with seriously.
IV FOREIGN INVOLVEMENT IN M&A TRANSACTIONS
Under the Foreign Trade Act, the acquisition of an interest of 25 per cent or more, or a controlling interest in an Austrian business by a foreign investor (for the purposes of this law, that is an investor domiciled outside of the EU or the EEA and Switzerland; if the investor is resident in these regions or country, no advance approval is required, but ex officio investigations can be initiated without time limit) is subject to advance approval by the Austrian Minister of Economic Affairs where that business is involved in internal and external security (e.g., defence and security services) or public order and security, including public and emergency services, such as hospitals, emergency and rescue services, energy and water supply, telecommunications, traffic or universities and schools. Transactions subject to approval cannot be completed pending approval. Failure to obtain approval is subject to imprisonment and criminal penalties.
The acquisition of ownership and certain lease interests in real estate by non-EEA nationals or the acquisition of control over companies owning such interests is subject to notification or approval by the local real estate transfer commission. What interests are covered and whether notification or approval is required varies among the pieces of legislation of the nine states in Austria. Where the real estate is used for commercial rather than residential purposes, approvals are usually granted.
In regulated industry sectors (e.g., banking, insurance, utilities, gambling, telecoms or aviation), the acquisition of a qualified or a controlling interest is typically subject to advance notification to, or approval of, the competent regulatory authority. Sanctions for failure to notify or obtain approval in advance range from monetary penalties to a suspension of voting rights or a partial or total shutdown. Although such rules also apply to domestic investors, they usually are a more burdensome hurdle in the cross-border context.
V SIGNIFICANT TRANSACTIONS, KEY TRENDS AND HOT INDUSTRIES
i Real estate
In 2017, activity in the real estate sector continued to be remarkably busy. Most notably, Vonovia made its takeover offer to BUWOG shareholders, the largest announced transaction in Austria in 2017. The takeover offer was accepted by over 70 per cent of the shareholders by early 2018. Listed company S IMMO was also in the spotlight: investor Ronny Pecik acquired a total of 21.86 per cent of S IMMO shares in two tranches, and SIGNA, Austria's largest privately owned real estate company, acquired options on these shares. Rather surprisingly, Ronny Pecik and SIGNA sold their shares to listed Immofinanz, which also owns 26 per cent of CA Immo, but which has abandoned its plans to merge. In Germany, SIGNA launched a takeover offer for Kaufhof for €3 billion. Recently, Starwood Capital Group launched tender offers for a 26 per cent stake in CA Immo and a 5 per cent stake in Immofinanz.
Besides the public M&A segment, many private transactions regarding real estate companies can also be reported. SIGNA has shown significant deal activity: it sold the office construction project 'The Icon Vienna' to Allianz Real Estate for over €500 million. Further, SIGNA sold three office buildings belonging to 'Austria Campus' to PGIM Real Estate for €530 million. In buy-side transactions, SIGNA acquired, inter alia, a real estate portfolio in Germany from RFR for €1.5 billion comprising assets in Berlin, Hamburg, Frankfurt and Munich.
ii Financial services
There were some major financial services transactions in 2017. easybank, a subsidiary of BAWAG, purchased the Austrian credit and pre-paid card business from financial service provider Six to continue the business under the brand 'Paylife'. Walser Privatbank sold its subsidiary Raiffeisen Privatbank Liechtenstein to Hong Kong-based Mason Group for 58.6 million Swiss francs. Arca Capital acquired a 61 per cent stake in publicly listed Wiener Privatbank for €36.9 million, with closing expected to occur in 2018. Liechtensteinische Landesbank AG (LLB) agreed to acquire Semper Constantia Privatbank from Hans Peter Haselsteiner and other investors for a consideration of €185 million. Closing is expected to happen in July 2018, and Semper Constantia will thereafter be merged with LLB. Austrian retail bank Volksbank Wien AG acquired Austrian cooperative bank SPARDA-BANK AUSTRIA eGen. Austrian pension fund VBV-Pensionskasse AG acquired EVN-Pensionskasse Aktiengesellschaft, an Austrian pension fund manager, from listed Austrian energy company Energie-Versorgung-Niederösterreich AG. Finally, Chinese HNA Group agreed to acquire an 88.1 per cent stake in C-QUADRAT Investment AG, an Austrian asset management company.
iii Telecoms, media and IT
There were several telecoms and media transactions in 2017. Most notably, T-Mobile Austria, a subsidiary of Deutsche Telekom, acquired UPC, an Austrian company providing broadband internet, cable television and telephony services, from Liberty Global for €1.9 billion. Other telecoms companies were busy as well: Hutchinson Drei acquired its competitor Tele 2 for €95 million, thereby expanding its offering to many business clients. Telekom Austria, which is majority-owned by telecoms giant América Móvil, increased its participation in its Macedonian subsidiary one-Vip to 100 per cent by acquiring a 45 per cent share previously held by Telekom Slovenije for €120 million.
Media transactions included Dentsu Aegis' acquisition of media.at GmbH, Austria's second-largest media agency, from A1 Telekom, Österreichische Lotterien, Österreichische Post, BAWAG and Industriellenvereinigung. Media house Kurier acquired the regional television station Schau-TV from Schau Media Wien.
Swiss pharmaceutical giant Roche acquired Austrian app provider MySugr, thereby increasing its presence on the diabetics market. Following the sales of Runtastic and Shpock, the MySugr transaction was the third large sale of an Austrian app provider within two years. Insight Venture acquired a majority stake in Vienna software company Tricentis. The investment was made by the subscription of new shares and by the purchase of existing shares from existing shareholders. Dialog Semiconductor Plc, a listed UK supplier of mixed signal and system level integrated circuit solutions for wireless, automotive and industrial applications, acquired the Austrian LED backlight technology and product portfolio of ams AG, a listed Austrian designer and manufacturer of high-performance analogue and mixed signal solutions. Listed German XING AG acquired Prescreen GmbH, an Austria-based developer of HR recruiting software, from Kizoo Technology Ventures. Listed France-based Schneider Electric SA acquired nxtControl GmbH, an Austrian developer of automation software and hardware, from Austrian private equity firms TecNet Equity and eQventure. Listed German Bechtle AG agreed to acquire Ulbel & Freidorfer GmbH, an Austrian provider of IT solutions. Private equity firm Castik Capital acquired a majority stake in inet-logistics GmbH, an Austrian software provider for transport management, freight costing, container management and transportation analytics, from transport and logistics company Gebrüder Weiss Gesellschaft mbH.
Austrian Siemens subsidiary Convergence Creators, a provider of digital transformation solutions, was acquired by French IT service provider Atos. German Autoscout24 GmbH, a subsidiary of Scout24 group, acquired the Styrian advertising portal gebrauchtwagen.at. Recently, THQ Nordic AB, a Swedish developer and publisher of PC and console games, acquired Koch Media GmbH, an Austrian producer and marketer of digital entertainment products and accessories, from private investor Lars Wingefors for a consideration of €121 million.
iv Machinery and plant engineering, industrial goods
Swiss plant manufacturer ABB acquired the Austrian automation specialist Bernecker & Rainer for US$2 billion. RHI Magnesita sold two dolomite rock plants in Italy and Spain to German Intocast AG. The transaction was made to fulfil merger-control requirements imposed by the European Commission in connection with the RHI/Magnesita merger. In another deal, RHI sold its subsidiaries in Italy and Russia to Livia. In a buy-side transaction, RHI Magnesita acquired Swedish Agellis Group, thereby expanding its offering in measurement technology. TowerBrook Capital Partners acquired pulp manufacturer Schweighofer Fiber from Schweighofer group. Listed UK company Synthomer plc agreed to acquire the Austrian Styrene Butadiene Rubber business of listed German chemical company BASF SE for a consideration of €30 million. Germany-based KSG Leiterplatten GmbH acquired Häusermann GmbH, an Austrian manufacturer of printed circuit boards and input systems. PIA Automation Holding GmbH agreed to acquire M&R Automation GmbH, an Austrian developer and manufacturer of custom-made production lines and testing systems for the automotive, electronics, consumer goods, pharmaceutical and medical industries, from German private equity firm Quadriga Capital. German private equity fund DPE Deutsche Private Equity Management III GmbH acquired a 70 per cent stake in VTU Holding GmbH, an Austria-based engineering company that designs plants for the processing industry. Recently, listed ALTEN Group acquired the Austrian engineering company Kämmerer GmbH through its German subsidiary ALTEN Europe.
v Retail and food
MTH Retail Group acquired Swiss office supplies company OWiba AG from Migros-Genossenschafts-Bund. Austrian supermarket chain Spar purchased the Croatian Billa supermarkets from German REWE Group. AVAG Holding SE, a German owner and operator of automotive dealerships, acquired eight automotive dealerships from Austrian car dealer Wiesenthal. Food producers were also sought-after targets. Vivatis purchased frozen food producer Frisch & Frost from Lamb Weston/Meijer and Raiffeisen Ware Austria. Hannover Finanz acquired a stake of over 30 per cent in Sporternährung Mitteregger, a producer of food supplements for athletes. Ankerbrot purchased a 65 per cent stake in wholesale bakery Linauer & Wagner. The sale of BackWerk Group by private equity investor EQT to Swiss strategic investor Valora also had a local angle, since Austria is one of its five markets outside Germany. In the retail sector, the takeover bid by Chinese Fosun Group for the listed lingerie specialist Wolford attracted much attention. In this transaction, Fuson outbid private equity investor OpCapita in the final stage of a process initiated by Wolford majority shareholders in connection with a restructuring plan. In connection with such purchase, a public takeover bid for all outstanding shares in Wolford had been launched. On the sell side, OpCapita is expected to sell fashion retailer NKD Group through an auction process involving Austria and other CEE jurisdictions, as these are among their main markets outside Germany.
Listed Austrian oil and natural gas group OMV acquired a 25 per cent stake in the Russian gas field Yuzhno-Russkoye for €1.7 billion. In another large transaction, OMV sold its Turkish service station chain for €1.37 billion to VIP Turkey Enerji, a company of the Vitol Group. Furthermore, OMV acquired a 40 per cent stake in SMATRICS GmbH & Co KG, a provider of charging points for electric cars, from listed Austrian energy company Verbund AG. Chinese listed United Energy Group acquired Pakistan oil and gas assets through the purchase of an Austrian subsidiary of OMV.
vii Transport and traffic
Austrian national railway company ÖBB and Swiss rail vehicle manufacturer Stadler Rail set up a joint venture for the maintenance and repair of the Westbahn rail vehicles. F List, a producer of aircraft equipment, expanded its business by acquiring the assets of OHS Aviation Services, a German company, under insolvency proceedings. Vueling Airlines SA, a Spain-based airline, agreed to acquire NIKI Luftfahrt GmbH, an Austria-based provider of airline services, in an insolvency and auction transaction, which had been contested and eventually led to the purchase of NIKI by its former founder and Formula One legend Niki Lauda. In another transaction, Niki Lauda agreed to sell a 75 per cent stake in LaudaMotion GmbH, an Austria-based airline operator, to listed Irish low-cost carrier Ryanair Holdings Plc. Wanfeng Aviation Industry, a China-based aviation company, acquired Diamond Aircraft Industries GmbH, an Austrian manufacturer of general aviation aircraft and motor gliders, from the Austrian investor Christian Dries.
viii Construction and the construction materials industry
Wienerberger has had a busy year with regard to acquisitions: the Austrian construction materials company expanded its brick business in Romania by acquiring a 98.3 per cent stake in Brikston Construction Solutions SA from ADM Capital. In the United States, Wienerberger purchased facing brick producer Columbus Brick through its subsidiary General Shale. SEMMELROCK International GmbH, a subsidiary of Wienerberger, agreed to sell its Austria-based paver business to Südbayerisches Portland-Zementwerk Gebr Wiesböck & Co GmbH, a Germany-based manufacturer of cement, concrete, sand and gravel. Listed Austrian construction company PORR AG agreed to acquire G Hinteregger & Söhne Baugesellschaft mbH, an Austrian construction company, from Brandstetter and Hinteregger families, for a consideration of €29.8 million. Austrian building materials manufacturer Schmid Industrieholding AG agreed to acquire w&p Baustoffe GmbH, an Austria-based company that manufactures plaster, mortar, screeds and paints for building construction, from Austrian cement producer WIG Wietersdorfer Holding GmbH. Sweden-based incubator Sdiptech AB agreed to acquire a 51 per cent stake in Aufzüge Friedl GmbH, an Austria-based company engaged in the installation and servicing of elevators, and ST Liftsystems GmbH, an Austria-based company engaged in manufacturing compact lifts. Saudi Arabian Amiantit Company Group, a construction company manufacturing pipe systems, tank systems, valves, water wells, manholes and rubber components, and Austrian cement producer WIG Wietersdorfer Holding GmbH, agreed to form a 50:50 joint venture.
Swiss private equity firms Capvis Equity Partners and Partners Group Holding AG agreed to acquire a majority stake in Amann Girrbach AG, an Austria-based original equipment manufacturer of laboratory equipment for dental technicians and dental laboratories, from US private equity firm TA Associates Management. Listed French company Orpea SA agreed to acquire Dr Dr Wagner GmbH, an Austrian operator of nursing homes, rehabilitation hospitals and health spa hotels. Austrian private equity firm aws-mittelstandsfonds Management GmbH, along with the management of AMI Agency for Medical Innovations GmbH, an Austrian developer and manufacturer of medical products and surgical equipment, acquired the company in a management buyout transaction.
x Other industries
Austrian packaging group Constantia Flexibles sold its labels division to US Multi-Color Corporation for €1.15 billion. Constantia Flexibles may become a target itself in 2018. Austrian binderholz Group acquires German wood manufacturer Klenk Holz from Carlyle Group. Salesianer Miettex GmbH, an Austrian provider of laundry services, agreed to acquire Wozabal Management GmbH, an Austrian textile and workwear rental company, for an estimated consideration of €70 million. French private equity firm Ardian agreed to acquire a majority stake in CCC Holding GmbH, an Austrian provider of business process and outsourcing solutions, from UK private equity firm Silverfleet. An interesting aspect of this transaction is the fact that Ardian had sold CCC to Silverfleet in 2013.
VI FINANCING OF M&A: MAIN SOURCES AND DEVELOPMENTS
Corporates have found that the financing environment has somewhat improved, in particular for those with strong financials. Banks are also more active in approaching blue-chip companies, so financing opportunities for acquisitions are rather good.
The financing environment for buyout transactions has remained more or less unchanged, and is quite different for domestic market participants (as opposed to international players), which typically seek financing from domestic banks, and international financial sponsors, which are able to tap international banks (at least on large-cap deals). Leverage levels for large-cap transactions have gone up slightly to around 5 times EBITDA, and relative debt-to-equity ratios of 40 to 50 per cent. Small to mid-cap transactions are sometimes financed through equity alone, or by domestic or German banks. Leverage levels and relative debt-to-equity ratios generally tend to be lower for small to mid-cap transactions than for large-cap deals.
Where leverage is employed on small and mid-cap transactions, there is usually only senior and institutional debt, as mezzanine structures tend to add another layer of complexity that is often not supported by the limited transaction size. On large-cap transactions, mezzanine financing is sometimes considered but, given the limited transaction size, is ultimately seldom employed. High-yield instruments are usually only considered for post-completion refinancing, as the time and cost involved tend to be disproportionate to any gains on the pricing side.
Experience shows that certain limitations under Austrian corporate law are often unexpected for foreign investors when structuring a deal, particularly in relation to intragroup (financing) transactions: Austrian law generally prohibits the return of equity to shareholders (i.e., up and side-stream transactions) of both a limited liability company as well as a stock corporation (and is applied by the Austrian courts by analogy to limited partnerships with only a limited liability company or stock corporation as unlimited partner). Based on this principle, Austrian courts have established that a company cannot make any payments to its shareholders outside arm's-length transactions except for the distributable balance sheet profit, in a formal reduction of the registered share capital or for the surplus following liquidation.
The prohibition on return of equity covers payments and other transactions benefiting a shareholder where no adequate arm's-length consideration is received in return. To the extent a transaction qualifies as a prohibited return of equity, it is null and void between the shareholder and the subsidiary (and any involved third party if it knew or should have known of the violation). It may result in liability for damages. Most of the above principles are also applied by the Austrian courts by analogy to limited partnerships with a limited liability company or stock corporation as (the sole) unlimited partner.
Austrian courts have developed case law suggesting that a subsidiary may lend to a shareholder, or guarantee or provide a security interest for a shareholder's loan, if it:
- receives adequate consideration in return;
- has determined (with due care) that the shareholder is unlikely to default on its payment obligations, and that even if the shareholder defaults, such default would not put the subsidiary at risk; and
- that the transaction is in the interest of the Austrian subsidiary (corporate benefit).
In addition, the Austrian Stock Corporation Act prohibits a target company from financing or providing assistance in the financing of the acquisition of its own shares or the shares of its parent company (irrespective of whether the transaction constitutes a return of capital). It is debated whether this rule should be applied by analogy to limited liability companies. Transactions violating this rule are valid, but may result in liability for damages.
VII EMPLOYMENT LAW
In the case of a transfer of a business within the meaning of the Act on the Amendment of Employment Contracts implementing Directive 2001/23/EC on safeguarding employees' rights on transfers of undertakings, businesses or parts of businesses (Transfer of Undertakings Directive), the employment relationships of the employees associated with the business transfer together with the business to the purchaser (Section 3 Act on the Amendment of Employment Contracts). Employees can object to the transfer of the employment relationship within one month if the purchaser does not maintain dismissal protection pursuant to a collective bargaining agreement or take over pension commitments based on a single contract. This does not apply if the seller ceases to exist (e.g., in the case of a legal merger).
The Austrian Supreme Court has held that a dismissal of employees in the course of an asset sale (both by the seller and the acquirer) is against good morals (bonos mores) unless there are valid economic, technical or organisational reasons unrelated to the asset sale. If dismissals occur in close proximity to an asset sale, there is a (rebuttable) presumption that such exceptions do not apply. In addition, the general rules of Austrian employment law concerning appeals against dismissals apply.
There is no special protection against a dismissal in the context of a share sale (i.e., where not the business as such but the company is transferred). Only general rules of Austrian employment law concerning appeals against dismissals apply.
Another area of interest to investors is whether there are obligations to inform or consult employees or their representatives, or to obtain employee consent to a share sale or an asset sale. If a works council is established at the target company, the target company must inform the works council in accordance with Section 109 of the Labour Constitution Act, and consult with the works council on request in relation to a share deal. If no works council is established, no information or consulting requirements apply. In relation to an asset deal, the following has to be observed: the Labour Constitution Act provides for information and consultation rights of the works council in general, as well as specifically in relation to certain transactions and changes to a business. The information must be given sufficiently in advance, in writing and in a manner that allows the works council to assess the relevant transaction or change. The information must specifically include the reason for the transaction or measure, and the legal, economic and social consequences as well as any associated measures that may affect employees. The works council must be given an opportunity to comment on the transaction and propose measures mitigating adverse effects for employees. Where no works council is established, an asset sale only triggers information requirements if a transfer of a business is concerned. In that case, the seller or the purchaser must provide certain information to the employees affected. Affected employees do not, however, have consultation rights. There is no obligation to obtain the consent of the employees affected. However, where by operation of Section 3 of the AVRAG a transfer of a business results in the transfer of an employee to the purchaser together with the business, the employee can object to the transfer in certain limited circumstances (see above).
VIII TAX LAW
As there is no tax exemption for capital gains realised from the sale of shares in an Austrian company (as opposed to shares in a foreign company), foreign investors will often choose an acquisition vehicle in a foreign country with which Austria has concluded a double taxation treaty that provides that only such other jurisdiction is entitled to tax the capital gains.
On the other hand, an Austrian acquisition vehicle allows the establishment of a tax group between the acquisition vehicle that incurred the debt and the target, which enables the purchaser to offset the interest expenses for the acquisition from the operational profits of the target. In general, non-Austrian corporations may also be part of an Austrian tax group, and their respective losses may reduce the Austrian tax burden under certain circumstances.
Furthermore, foreign investors will usually opt for structures that avoid or minimise withholding tax. Dividends and interest payments are generally subject to withholding tax of 27.5 per cent. However, limitations and exemptions apply under domestic law as well as applicable tax treaties. In particular, withholding tax on dividend payments to non-Austrian investors is typically subject to the limitations under the EU Parent–Subsidiary Directive and applicable double taxation treaties. Interest payments on loans to non-Austrian lenders are, in principle, no longer subject to Austrian withholding tax, as the previously applicable withholding tax in the case of loans that were secured by real estate located in Austria has been abolished.
Debt-financed acquisitions should be structured carefully to secure the deductibility of interest as well as the offsetting of such interest expenses from business profits of the target company. A new regime provides for non-deductibility of interest expenses in Austria if the interest is not taxed at the level of the related party lender at an effective tax rate of 15 per cent or more. It is worth noting, however, that there are no statutory rules on thin capitalisation in Austria. From a practical perspective, tax authorities usually accept debt-to-equity ratios of around 3:1 to 4:1. Besides the non-deductibility, the breach of such ratio would also result in interest payments being treated as deemed dividends, which – unlike interest on shareholder loans – would be subject to withholding tax in Austria (see below). Finally, it is worth noting that there is currently no interest barrier rule providing for a general limit on the deductible amount of interest expenses paid to unrelated parties (see below).
Besides the developments mentioned above, tax audits in relation to M&A deals are becoming more common and burdensome. In particular, transfer pricing issues, for example, in relation to interest on shareholder loans or certain fees payable to related entities, are under scrutiny. Accordingly, tax rulings are also becoming more popular.
Recent proposed changes in tax legislation, including controlled foreign countries rules and the introduction of a legal definition for abuse of law, are expected to have an effect on transaction structures. In this context, the inclusion of the existence (or non-existence) of an abuse of law in the scope of binding tax rulings is likely to have high practical relevance. In Austria, and different to other EU Member States, the introduction of an interest barrier rule foreseen under the BEPS Anti-Avoidance Directive has been deferred for now. Accordingly, financing structures with unrelated parties should not be challenged by the tax authorities. If combined with intragroup financing, limitations, in particular thin capitalisation and the arm's-length principle, have to be observed.
IX COMPETITION LAW
The following types of concentrations are subject to merger control (intragroup transactions are exempt) under the Austrian Cartel Act:
- the acquisition of an undertaking or a major part of an undertaking, especially by merger or transformation;
- the acquisition of rights in the business of another undertaking by management or lease agreement;
- the (direct or indirect) acquisition of shares, if thereby a shareholding of 25 per cent or 50 per cent is attained or exceeded;
- the establishment of interlocking directorships where at least half of the management or members of the supervisory boards of two or more undertakings are identical;
- any other concentration by which a controlling influence over another undertaking may be exercised; and
- the establishment of a full-function joint venture.
A concentration must be notified to the Federal Competition Authority (FCA) if the following cumulative thresholds, which in an international comparison context are rather low, are fulfilled (based on the revenues of the last business year): the combined worldwide turnover of all undertakings concerned exceeds €300 million; the combined Austrian turnover of all undertakings concerned exceeds €30 million; or the individual worldwide turnover of each of at least two of the undertakings concerned exceeds €5 million.
However, even if the above thresholds are satisfied, no obligation to notify exists if the Austrian turnover of only one of the undertakings concerned exceeds €5 million; or the combined worldwide turnover of all other undertakings concerned does not exceed €30 million.
For calculating the turnover thresholds, the revenues of all entities that are linked with an undertaking concerned as defined under the Cartel Act are considered one entity (thus the turnover of a 25 per cent subsidiary must be attributed fully). Indirect shareholdings only have to be considered if the direct subsidiary (of at least 25 per cent) holds a controlling interest in the indirect subsidiary. Revenues of the seller are disregarded (unless the seller remains linked with the target undertaking as defined under the Cartel Act). Specific provisions for the calculation of turnover apply for mergers in the banking, insurance and media sectors.
Transactions that are notifiable in Austria may have an EU dimension under Article 1 of Regulation (EC) No. 139/2004 on the control of concentrations between undertakings (Merger Regulation). In that case, the European Commission generally has sole jurisdiction to assess such case. However, the Cartel Act contains specific rules regarding media mergers, which require a filing with both the European Commission and the FCA.
The relevant merger authorities in Austria are the FCA and the Federal Cartel Prosecutor, collectively referred to as the official parties; and the Cartel Court.
The official parties assess notifications in Phase I proceedings. Should a notification raise competition concerns, either official party may apply to the Cartel Court to open Phase II proceedings. Decisions of the Cartel Court may be appealed before the Supreme Cartel Court. The Competition Commission is an advisory body that may give (non-binding) recommendations to the FCA as to whether to apply for an in-depth Phase II investigation of a notified transaction.
A notifiable transaction must not be implemented prior to formal clearance. Possible sanctions for the infringement of this suspension clause are that the underlying agreements or acts are declared null and void, or the undertakings may be fined up to 10 per cent of their worldwide annual turnover (by the Cartel Court on application of the official parties).
Non-compliance with remedies imposed on the parties is equivalent in seriousness to breaching the suspension clause and may lead to similar fines.
A merger must be prohibited if it is expected to create or strengthen a market-dominant position. An undertaking is generally considered market-dominant for that purpose if it can act on the market largely independently of other market participants (the Austrian Cartel Act contains a rebuttable presumption of market dominance if certain market share thresholds are achieved). Even where a merger is expected to create or strengthen a market dominant position, it must nevertheless be cleared if either it will increase competition, and therefore the advantages gained by implementing the transaction will outweigh the disadvantages; or it is economically justified and essential for the competitiveness of the undertakings concerned.
A media merger will be assessed not only against its compatibility with the competition rules, but also as to its adverse effects against media plurality.
It is rather difficult to predict the remainder of the course of 2018, due to macroeconomic developments (e.g,, Brexit) that may change the current investment environment in Europe and internationally. Generally, the first quarter of 2018 was active, based on the assumption that the economy remains stable, and the Austrian M&A market should continue its strong performance. This outlook is also supported by the fact that private equity firms hold substantial cash reserves to be invested, and that many of their portfolio companies are overdue to be sold again.
1 Clemens Philipp Schindler is a partner at Schindler Rechtsanwälte GmbH.