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Místo na název prezentace
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Financial Assistance
∕ The regulation of financial assistance must be taken into account when structuring
many M&A transactions
∕ Financial assistance is assistance provided by a target company for the acquisition of
its shares by means of
a loan, or
security (collateral)
Introduction
∕ Financial assistance provided in connection with the acquisition of shares in public
limited companies has been subject to regulation by Community law since the 70s
∕ Originally financial assistance was entirely prohibited
∕ Argument: the capital of public limited companies representing creditors’ security
would be reduced by financial assistance (which in fact constitutes fictitious capital)
∕ 2006: shift to less restrictive regulation of financial assistance in Community law
∕ 2012: subject to certain conditions and an approval procedure within the company
(whitewash procedure), the new Council Directive permits public limited companies to
provide financial assistance
Community Law
∕ Regulation of financial assistance in the Czech Republic is based on EU legislation
(outlined previously)
∕ In addition to public limited companies (joint-stock companies, or akciové společnosti
in Czech (AS)), Czech law also regulates financial assistance in relation to limited
liability companies (in Czech: společnosti s ručením omezeným (SRO))
∕ Czech regulation of financial assistance allows an AS and an SRO to provide financial
assistance subject to the fulfilment of certain conditions and the completion of the
whitewash procedure
∕ The requirements are different in respect of the AS and SRO
Czech Law
∕ Financial assistance with respect to an SRO goes beyond the EU requirements
∕ Generally allowed and subject to less strict conditions
∕ May be provided subject to the statutory conditions specified in the Act on Business
Corporations
∕ An SRO’s Memorandum of Association may contain further conditions
Financial Assistance: SRO
∕ Must be provided on an arm’s length basis (interest, security, etc.)
∕ The company must not become insolvent (bankrupt) as a (immediate?) result
∕ No uncovered accumulated losses in the financial statements of the company
SRO: Statutory Conditions
∕ Executives must prepare a written report containing
Risks and benefits for the company
Description of the terms under which the financial assistance is to be provided
Explanation why the financial assistance is not in conflict with the interest of the
company
∕ The report must be published in the Commercial Register
∕ The provision of financial assistance must be approved by the general meeting of the
company
SRO: Whitewash Procedure
∕ Differing opinions on the consequences of failing to comply with the requirements
∕ All agreements made contrary to any of these requirements may be invalid
∕ Some experts believe that the failure to comply would only result in the liability of the
directors and should not negatively affect the position of a third party acting in good
faith
SRO: Sanctions
∕ Implementation of the rules of Community law
∕ More requirements in place and its regulation is stricter than that relating to SROs
∕ Generally prohibited unless explicitly permitted by the company’s Articles of
Association
Financial Assistance: AS
∕ The company must not become insolvent (bankrupt) as an immediate effect of the
provision of financial assistance
∕ Financial assistance must be provided on arm’s length terms (interest, security, etc.)
∕ Financial assistance must not result in the company’s equity dropping below the
amount of the subscribed capital increased by reserve funds which the company
must not use for payment to shareholders
∕ The company must create a special reserve fund in the amount of the provided
financial assistance; the company may only use retained profit or other funds for the
creation of this fund
AS: Statutory Conditions
∕ Financial assistance must be approved by the company’s general meeting (by a two-
thirds majority)
∕ The board of directors must prepare a written report containing
A description of the proposed financial assistance and its form
The risks and benefits for the company
A description of the terms under which the financial assistance is to be provided
An examination of the creditworthiness of the beneficiary
An explanation why it is in the interest of the company
∕ The report must be published in the Commercial Register before the general meeting
∕ If financial assistance is to be provided to related individuals/entities, the report must
be examined by an independent expert (appointed by the supervisory board) who
must confirm that the provision of financial assistance is not contrary to the company’s
interests
∕ The expert’s report must be published in the same way as that of the board of
directors
AS: Whitewash Procedure
∕ Lenders usually require security from the target company for financing provided to the
purchaser of the shares in the target company
Especially when the acquisition company is an SPV
∕ A pledge of the acquired shares only is usually not sufficient
∕ The target is required to provide security on its assets and cash-flow, including
mortgage of real estate
pledge of assets
security assignment of receivables
security assignment of accounts
∕ Providing security by the target company qualifies as financial assistance
Acquisition Finance
Summary of Key Indicative Terms and Conditions
(Syndicated Amortising Term Loan)
Facility A Syndicated Term Loan Facility (the „Facility“).
Group SPVs, Parent, Sponsor
Acquisition Acquisition of X% shares of TARGET by SPV owned by the Group
Target Target
Guarantor for Facility A
Tranche 2 Guarantor
Permitted Merger The merger of SPV/Borrower and Target
Facility Amount Up to CZK X divided into Facility A and Facility B as set out below.
Currency CZK
MLA/Underwriter Bank A, Bank B, Bank C (together „MLA“)
Lenders MLA and other 1- 2 banks selected by the Borrowers and MLA
Term Loan Facility (Facility A)
Borrower SPV - incorporated in the Czech Republic , 100% owned by X (directly or indirectly)
Facility A Amount
Up to CZK X:
Tranche 1: up to CZK Y
Tranche 2: up to CZK Z
Purpose Tranche 1: Financing of the Acquisition and related costs
Tranche 2: Financing of the Acquisition and related costs
Equity
Cash equity invested by the sponsor: min. X% of the acquisition price in the form of registered
capital or a shareholder loan fully subordinated to the Facility (i.e. in the amount of min. CZK
X)
Non-cash equity: min. X% stake in the Target (direct or indirect)
Interest Rate PRIBOR + Margin
Margin Before the permitted merger:
Tranche 1: 4,20 % p.a.
Tranche 2: 3,50 % p.a.
After the merger: the Margin grid Senior Debt/EBITDA according to half-year financial
statements and audited financial statements and will be applicable for Tranche 1 (TBD, pro-
forma consolidation)
bank debt/ Tranche 1
EBITDA
D/E≥4,00 4,2
3,00≤D/E<4,00 3,9
2,50 ≤D/E<3,00 3,6
1,75 ≤D/E<2,50 3,3
D/E<1,75 2,9
Term Loan Facility (Facility B)
Borrower Target
Facility B Amount Up to CZK X
Purpose Refinancing of existing loan
Interest rate PRIBOR + Margin
Interest period 1 or 3 months
Margin X% p.a.
Common Conditions for Both Facilities
Security Before Merger:
Facility A
1. pledge of 100% shares of Borrower/SPVs in Group
2. unconditional and irrevocable guarantee issued by Parent will cover the Tranche 2 amount plus
accessories
3. pledge of accounts
4. pledge of receivables
5. pledge of enterprise
Facility B
1. selected immovable assets
2. pledge of insurance benefit
3. pledge of shares of X
4. pledge of trade marks of Borrower
5. pledge of bank accounts
6. blank promissory note
7. notarial deed on direct enforcement title
8. pledge of enterprise
After Merger:
Facility A and B:
1. pledge of 100% shares of X
2. irrevocable guarantee issued by Parent will cover the Tranche 2 amount plus accessories
3. selected immovable assets
4. pledge of insurance benefit
5. pledge of trade marks of Borrower
6. pledge of bank accounts
7. blank promissory note
8. notarial deed on direct enforcement title
9. pledge of enterprise
Mandatory Prepayment 1) Ownership clause
2) Illegality
3) The permitted merger is not completed within 12 months from signing, the SPV shall
prepay all amounts borrowed under Tranches 1 and 2 of the Term Facility together with all
interest
4) Excess cash (X%) will be used for Tranche 2 until its full repayment, after that for Tranche
1 and Facility B pro rata as long as Debt/EBITDA will be X or higher
∕ The whitewash procedure set up for an AS is complicated, time consuming and the
statutory conditions are very strict and limiting
∕ Financial assistance may be provided only up to the amount of equity
distributable to the shareholders of the AS and a special reserve fund must be
created in this amount
∕ The security limited by such amount is rarely acceptable for the provider of acquisition
financing
∕ The provision of financial assistance by an SRO using the whitewash procedure may
be a suitable alternative to the more traditional structure with a merger
Limits of Financial Assistance
∕ Upstream merger
The target company merges into the purchaser after the acquisition
Subsequent provision of security for acquisition financing by the purchaser (which
has become the successor of the target company)
Practical Approaches
1) PRE - MERGER
CREDITOR BUYER
TARGET
PARENT
SUBORDINATED LOANS
PLEDGE OF SHARES
SENIOR LOAN
2) POST - MERGER
CREDITOR BUYER
PARENT
LOAN
TARGET
MORTGAGE
ASSIGNMENT
PLEDGE
∕ The prevailing opinion of law firms is that the provision of collateral by the successor
company is not considered to be financial assistance
∕ The original target ceases to exist as a result of the upstream merger and is no longer
subject to such limitation
∕ The original purchaser has never been subject to financial assistance regulation
Legal View
∕ The creditor cannot be secured using the assets of the target company until the
merger is completed
∕ Certain licenses or even contractual relationships of the target company necessary or
essential for the continuation of the target company’s business may not survive the
up-stream merger
New ICO, ISO, VAT registration etc.
Disadvantages
∕ Downstream merger
The purchaser merges into the target company after the acquisition
As a result the target company will assume the acquisition debt
Subsequent provision of security by the target company
Licenses and contractual relationships of the target company will not be affected
1) PRE - MERGER
CREDITOR BUYER
TARGET
PARENT
SUBORDINATED LOANS
PLEDGE OF SHARES
SENIOR LOAN
2) POST - MERGER
LENDER
LOAN
TARGET
MORTGAGE
ASSIGNMENT
PLEDGE
BUYER
∕ Law firms are more hesitant to confirm that providing security following a downstream
merger is not contrary to the rules of financial assistance
arg. security for the acquisition debt is provided by the target company which is
subject to financial assistance rules
∕ Other lawyers argue that there is no economic difference between an upstream and a
downstream merger
∕ The risk that the whole structure could be interpreted as being designed to evade the
rules of financial assistance is the same
Legal View
∕ The aim of the financial assistance rules is to protect the capital of the company
∕ As a result of a downstream merger the target company acquires the original
acquisition debt and will secure such debt using its assets
∕ Providing security for the company’s own debt would have no negative impact on its
capital; it is neutral and, therefore, not prohibited by financial assistance rules
If the merger is valid, security may be provided
Invalidity of Security
∕ Another aim of the financial assistance rules is to protect creditors and minority
shareholders
∕ Creditors and minority shareholders are protected during the merger process by the
Transformation Act
∕ Only the court may decide that the merger decision or the merger project are invalid
∕ Invalidity can only be declared before the merger is registered in the Commercial
Register
∕ After the registration of the merger in the Commercial Register it is impossible to
declare the merger decision invalid
change or cancel the merger project
If the merger is registered it may not be declared invalid
Invalidity of the Merger
Contacts
∕ Hungary
Millenaris Avantgarde Office Building
Fény u 16, H-1024 Budapest
Tel: +36 1 336 0443
Fax: +361 1 336 0444
E-mail: [email protected]
∕ Slovakia
Hurbanovo námestie 3
811 01 Bratislava
Tel: +421 232 333 232
Fax: +421 232 333 222
E-mail: [email protected]
∕ Czech Republic - Prague
Jáchymova 2, 110 00 Prague 1
Tel: +420 221 430 111
Fax: +420 224 235 450
E-mail: [email protected]
∕ Czech Republic - Ostrava
Stodolní 3, 702 00 Ostrava 1
Tel: +420 558 272 505
Fax: +420 569 112 306
E-mail: [email protected]
PRK Partners