The allocation of risk in the design of contracts for mergers and acquisitions continues to favour sellers in Europe. The selling side is in a much stronger negotiating position – that is the conclusion of the eighth CMS European M&A Study. Last year, sellers were more often able to incorporate lower liability caps and shorter warranty periods into agreements, in addition to negotiating other advantageous risk allocation arrangements. “The ongoing terrorist threat, interest rate rises in the US, the growth slowdown in China and the refugee crisis made uncertainty a defining feature of 2015. It is all the more impressive that Europe’s share of the global M&A market remained constant at 25%,” said Stefan Brunnschweiler, partner at CMS in Zurich and head of the worldwide CMS Corporate/M&A Group.
For the study, CMS reviewed 2,770 M&A deals relating to non-listed public and private companies on which it advised between 2007 and 2015. Of this total, 391 deals were conducted in 2015. “The study provides unique insight into the legal provisions of merger & acquisition (M&A) agreements, makes comparisons between Europe and the US and identifies market trends,” said Dr Maximilian Grub, partner and head of the Corporate and Transactions practice at CMS Germany. For the first time, this year’s study also looks at the extent to which different transaction sizes lead to different provisions in an M&A deal. “We found, for example, that in transactions worth more than EUR 100 million buyers are much more often able to cancel the deal prior to completion than is the case with smaller transactions. Similarly, fixed-price provisions are much more common in transactions worth over EUR 100 million than in smaller transactions,” explained Grub.
2015 was a record year for the M&A market in Europe in terms of deal value. “With the number of transactions down by 6%, this shows that buyers had to pay high prices to secure deals,” commented Dr Thomas Meyding, partner at CMS Stuttgart. “In view of high company valuations, contract provisions that enable the buyer to define and review the purchase price are gaining in importance again. In particular, purchase price adjustment clauses tied to the completion date, and earn-out provisions where the final purchase price depends on the performance of the target business, have become more widespread,” said Meyding. In the German-speaking countries, earn-out clauses were agreed in 25% of the deals, the highest figure for any region in Europe.
Sellers nonetheless have the upper hand, as demonstrated by the increase in a number of seller-friendly provisions. As an example, the proportion of transactions subject to locked-box clauses rose from an average of 41% in the five previous years to 56% in 2015. In addition, the share of deals with purchase price adjustments was 49% in 2015, having risen 6% compared with the previous years (43%).
As ever, there are regional differences in M&A agreements. France still has the lowest liability caps, but long warranty periods. CEE uses arbitration as the dispute resolution mechanism more often than any other region. In the UK, the preference is for higher thresholds for warranty claims (de minimis and basket provisions), although sellers’ liability caps in the UK seem to be higher than in other regions. Deals in the German-speaking countries occupy the middle ground on most issues as far as risk allocation is concerned.
A different dynamic is apparent for transactions in the US, especially with regard to the prevalence of purchase price adjustment clauses – they are included in 86% of deals in the US, but only 49% in Europe.
Other key findings of the CMS European M&A Study 2016:
• The proportion of deals with a MAC clause remains low. Only 16% of deals in Europe contained one – a significant contrast to the US, where the overwhelming majority (91%) of deals have MAC clauses.
• Locked-box clauses, in which the purchase price is usually based on the most recent audited financial statements, are most common in large transactions. This mechanism is now used throughout Europe; in Southern Europe, 75% of transactions without purchase price adjustment have a locked box.
• Liability caps show a steady downward trend. The liability cap was less than half of the purchase price in 58% of transactions in 2015, compared with 50% as the average of the previous five years.
• The use of earn-out provisions, where the final purchase price depends on the performance of the target business, fell slightly compared to the previous year in Europe and now stands at 17%.
• De minimis provisions, referring to the amount below which the buyer cannot assert warranty claims, are now standard, being included in 72% of agreements. The average over the previous five years was 64%.
• There has been another rise in the proportion of basket stipulations, which protect the seller against minor claims above and beyond the de minimis thresholds. They were agreed in 72% of cases in 2015, compared with 62% in the period 2010 – 2014.
• Buyers succeeded in safeguarding their warranty claims in 34% of cases in 2015. In the previous year, the proportion was 29%.
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