Monday, 16 February 2015

SPA Series Part 7: How To Negotiate M&A Deals In Finland - Purchase Price and Adjustments


So there have been some delays in my writing but now it is time to continue. This time I will discuss some key issues to consider when using a fixed purchase price model, some main principles behind net debt and net working capital and their interplay, as well as the idea behind a purchase price adjustments clause. The reason for the delay has been purely due to some interesting projects we have had a pleasure of doing in the final quarter of 2014 and beginning of this year in security, telecom, cleantech and energy sectors which definitely seem to be active in Finland (see more from here).
Right, to our real topic. Next in our series we head toward one of the most critical clauses in a Share Purchase Agreement, namely the purchase price. There are many options and variation, and I will first try to cover some of these most common models below and then focus on fixed price and preliminary purchase price with purchase price adjustment (PPA). It goes without saying that this is not only a legal exercise but should also be discussed with financial advisors and the client.
We could start with a fixed price model which is typically a type of a derivative from the target’s balance sheet. Naturally it needs to be understood which date is in question but there is also a connection to warranties or conduct of business prior to closing, namely, that the seller should be prevented from taking action which would be outside the ordinary course of business. This is not the only issue to consider if you are a purchaser, as that would just make life too simple. There is a possibility that the seller might wish to take funds or assets out of the company or distribute dividend after the fixed date, which naturally might be outside the ordinary scope of business but not necessarily. If you have a representation or warranty regarding conduct of business before closing or another clause to this effect, one should also keep in mind that if there is a leakage, should a de minimis clause (relating to limitations of liability, such as like individual claims or baskets) apply or not.
Secondly, a fixed purchase price does not always work and sometimes a preliminary purchase price payable at closing with the later purchase price adjustment is the way forward. Three key points to remember here:
  • Connection between net debt and net working capital – if there is net debt and it increases, then the net working capital should decrease and the other way around
  • Could you use net debt only? Well you could, but that increases the seller’s possibilities to manipulate the purchase price by decreasing debt and therefore consequently increasing the purchase price.
  • So if these work together, the seller’s possibilities to influence price mechanisms are limited.
The financial models do not always follow these legally simplest ways of dealing with purchase price adjustments, and you could have a situation where there is only net debt without working capital. If this is the case one should only have an additional clause preventing seller from manipulating the net working capital (and therefore decreasing the net debt).
Well, how, then, is the adjustment actually calculated? Typically the buyer wishes to control the calculation and there are limitations to the seller’s objections. In the simplest form the clause could state:
"These net debt and net working capital calculations will be prepared by us as the buyer. When preparing these, we use the closing statements as basis and prepare these with the company’s auditor. We promise to deliver these to you within X days after closing has taken place. If we fail to deliver these to you, you are allowed to prepare these."
Further, the clause should state how disputes are solved if the parties fail to agree on this.
We will continue next time with payment clause, escrow and earn-out but in the meanwhile splendid winter season!

Tuesday, 25 November 2014

Martin Blomqvist - case - milloin voi puuttua verkossa myytäviin tuoteväärennöksiin?

Työkiireet ovat hieman haitanneet kirjoittamasta, mutta ajattelin pitkästä aikaa raapustaa jotain. Juttu on itse asiassa julkaistu viimeisimmässä IPR-Infossa tänä syksynä hieman muokatussa muodossa. Kyseessä on ehkä hieman vähemmälle huomiolle jäänyt unionin tuomioistuinratkaisu viime keväältä, Martin Blomqvistv Rolex SA and Manufacture des Montres Rolex SA (Rolex), on parantanut selvästi mahdollisuuksia puuttua verkossa myytäviin tuoteväärennöksiin erityisesti yhdessä uuden tuoteväärennösasetuksen uudistusten myötä.
 
Mitä loukkaus edellyttää?
Tanskalainen Blomqvist tilasi 2010 kiinalaisella internetsivustolla pidetystä sähköisestä kauppapaikasta Rolex-merkkiseksi ilmoitetun rannekellon. Tilaus ja maksu tapahtuivat myyjän englanninkielisen internetsivuston kautta ja varsinainen toimitus tapahtui suoraan myyjältä Hong Kongista postin kautta. 

Kun paketti saapui Tanskaan, tulliviranomaiset tarkastivat sen. Epäiltyään tuotteen olevan väärennös, he päättivät lykätä kellon luovutusta. Saatuaan ilmoituksen tulliviranomaisilta, Rolex totesi tuotteen olevan väärennös ja pyysi luovutuksen lykkäämisen lakkaamista ja Blomqvistilta lupaa kellon tuhoamiselle.

Blomqvist kuitenkin väitti ostaneensa kyseisen kellon laillisesti ja kieltäytyi tuhoamisesta. Tämän jälkeen ensimmäisessä vaiheessa tuomioistuin (Sø- og Handelsretten) ) hyväksyi Rolexin vaatimuksesta kanteen Blomqvistia vastaan.

Blomqvist valitti korkeimpaan oikeuteen (Højesteretiin), joka pohti oliko tapahtunut tuoteväärennösasetuksen soveltamista edellyttävä immateriaalioikeuden loukkaus. Asiakas oli hankkinut kellon omaan yksityiseen käyttöönsä ja väitti, ettei tämän johdosta loukannut immateriaalioikeuksia.

Oikeudenloukkaus on ollut nimenomainen edellytys tuoteväärennösasetuksen (1383/2003) soveltamiselle, joten tapauksessa olikin arvioitavana erityisesti kysymys siitä, oliko kiinalainen verkkosivusto loukannut immateriaalioikeuksia ja asiasta pyydettiin EUT:n ennakkoratkaisua.

Ostaminen riittää loukkaukseen
Pääasiassa ei sinänsä riitautettu Rolexin olevan niiden tekijänoikeuksien ja tavaramerkkien haltija, joihin se jutussa vetosi. Pääasiassa ei myöskään riitautettu sitä, että kello oli väärennetty ja laittomasti valmistettu tavara. 
Kolmansista maista peräisin olevat tavarat, jotka ovat EU:ssa teollis- tai tekijänoikeudella suojatun tuotteen jäljitelmiä, voivat loukata näitä oikeuksia ja niitä voidaan siten luonnehtia väärennetyiksi tavaroiksi, jos näytetään, että ne on tarkoitettu saatettaviksi myyntiin unionissa. EUT:n mukaan tästä on näyttönä erityisesti se, että tavaroita on myyty asiakkaalle unionissa tai niistä on osoitettu myyntitarjous tai mainontaa kuluttajille unionissa. 

Se, että myynti on tapahtunut internetsivustolla pidetyssä sähköisessä kauppapaikassa kolmannessa maassa, ei pelkästään ole esteenä sille, että myydyn tavaran tavaramerkkioikeuden haltija saa tuoteväärennösasetuksen mukaista suojaa. EUT:n mukaan ei ole lisäksi tarpeen tutkia sitä, onko tämä tavara ollut ennen myyntiä kuluttajille unionissa kohdistetun tarjouksen tai mainonnan kohteena. 

EUT:n  ratkaisun mukaan tuoteväärennösasetusta onkin tulkittava siten, että oikeudenhaltija saa sen mukaista suojaa jo tavaran ostamisen perusteella, vaikka sähköinen kauppapaikka sijaitseekin kolmannessa maassa, mutta tuotteet päätyvät jakeluun unionin alueella, jossa ne on suojattu tavaramerkkien ja/tai tekijänoikeuden perusteella.  

Pienille lähetyksille tulossa erityinen menettely
Jutun alussa mainittiinkin, että aiempi tuoteväärennösasetus on korvattu vuoden alusta  uudella asetuksella (608/2013), jolla on saatu Suomessakin voimaan kauan kaivattu yksinkertaistettu hävitysmenettely. Pieniin lähetyksiin soveltuu tietyin edellytyksin vieläkin yksinkertaisempi menettely, jossa tulli ilmoittaa suoraan hävitysaikeesta tavaranhaltijalle.

Asetuksessa ’pienellä lähetyksellä’ tarkoitetaan posti- tai pikalähetystä, joka sisältää kolme yksikköä vai vähemmän tai on bruttopainoltaan vähemmän kuin kaksi kilogrammaa. Määritelmän piiriin kuuluvat esimerkiksi juuri edellä mainitussa tapauksessa käsitellyt yksittäiset tuotetoimitukset, kuten kellot tai vaikkapa korut tai pienelektroniikka.

Tavaranhaltijan nimenomaista suostumusta ei enää edellytetä, vaan pienten lähetysten hävittäminen on mahdollista, jos sitä ei vastusteta 10 työpäivän kuluessa. Pienten lähetysten hävitysmenettelyn osalta oikeudenhaltija on aina kuluvastuussa tullin vahvistaman maksutaulukon mukaisesti eikä siitä voi tapauskohtaisesti kieltäytyä.

Tervetullut ratkaisu
Oikeudenhaltijat ovat jo ottaneet ratkaisun tervetulleena vastaan. Yhdessä uuden tuoteväärennösasetuksen kanssa se parantaa mahdollisuuksia puuttua verkossa liikkuviin tuoteväärennöksiin.

Ratkaisun osalta on huomattava, että mikäli ostoa ei ole tapahtunut tai eri osapuoli vastaa myynnistä tai toimituksesta, on loukkauksen edellytyksenä edelleen tarjouksen tai mainonnan kohdentaminen kuluttajille kysymykseen tulevassa valtiossa (kts. muun muassa L’Oréal ym., C-324/09) tai Donner, C-5/11).

Vastaavasti pieniä lähetyksiä koskevasta menettelystä kiinnostuneiden tulee huolehtia tullivalvontahakemuksen jättämisestä ja asianmukaisen kohdan valinnasta hakemuksessa.

Seuraavaksi palaan taas M&A-aiheisiin, joista lisää lähiviikkoina - hauskaa pikkujouluaikaa!

Yt.

Jan

Thursday, 4 September 2014

ITechLaw, Interim Injunctions and TRUST's M&A Seminar Date Confirmed

Greetings, I have some really exciting news to share with you today.

As the recently elected Co-Chair of ITechLaw's IP Committee, a worldwide organization representing lawyers and other professionals in the technology sector, we gathering together our troops and planning activities for this autumn term. For this purpose, we would appreciate suggestions for topics that you might consider interesting or relevant, and our Committee will organize our program so that we will arrange webinars and telephone conferences on these themes on a monthly basis.

The organization's global membership spans six continents and embodies a spectrum of expertise abroad making this a very unique opportunity to exchange ideas with some of the brightest minds in the field of technology and IP law. Also speaker opportunities are available for those of you who might be interested, please let us know if this is something you could do!

As regards some other issues, we were asked to write an expert commentary to the distinguished World Intellectual Property Review's (WIPR) Life Science News Letter on a recent decision of the District Court of Helsinki (Decision of the District Court of Helsinki L 10/6838, June 4, 2014) regarding a rare decision on damages for unnecessary interim injunctions. The lessons of this case are generally applicable to all interim injunction cases, while the case itself regarded a field belonging to one of our main expertise areas, namely, patent litigation and pharmaceutics. This case constitutes a strong reminder of the fact that there is a real and considerable risk related to unnecessarily sought interim injunctions, and we have also  taken this into account when planning litigation strategies. The article can be found behind the below link, please let us know what you think!

To read article click here

Finally, our autumn's seminar will focus on M&A and be organized only after ITechLaw's meeting in Paris and IBA's conference in Tokyo, so exceptionally in November, on 12 November 2014 to be exact. Please save the date already!

Have a wonderful beginning for the autumn!

Jan

Tuesday, 2 September 2014

Cloud Guidelines for EU Businesses, IT2010 Update Needs and Fundamental Cloud Question for Lawyer

Us lawyers involved in ICT and disputes, it is very common to talk about data protection and privacy, but in reality cloud computing is much more complex phenomenon. As an example if we look at the issue from business perspective, we can see enormous potential for cost savings. As an example according to data available from the Commission, cloud computing "....allows individuals, businesses and the public sector to store their data and carry out data processing in remote data centres, saving on average 10-20%". 

The cloud computing guidelines have been developed by a Cloud Select Industry Group which is part of the Commission’s European Cloud Strategy. One interesting part relates, perhaps for someone surprisingly, not to the privacy, but SLA terminology and metric. For those interested in SLA or not familiar with the term, please look from here. The key elements include:
  • The availability and reliability of the cloud service,
  • The quality of support services they will receive from their cloud provider
  • Security levels
  • How to better manage the data they keep in the cloud.
I have personally disagreed with European Commission Vice-President @NeelieKroesEU several times in the past in particular in connection with the pharmaceutical sector-inquiry and software patents, but from customers point of view this statement is most likely welcome: "This is the first time cloud suppliers have agreed on common guidelines for service level agreements. I think small businesses in particular will benefit from having these guidelines at hand when searching for cloud services". From suppliers' point of view there are of course challenges if the existing operating models are harmonized to meet requirements of this proposed model so the question remains whether these costs are taken into account while calculating the above cost savings figure? I would assume no.

As a next step there is a privacy aspect involved as the European Commission will test these guidelines with SMEs and these will be presented to the Article 29 Data Protection Working Party (European Data Protection Authorities) as well, but this is not the whole story. According to the Commission, the next step is to find out fair terms on which the firms could deal with each other and this work has been started already by the Expert Group on Cloud Computing Contracts and this is fascinating. We also have some national initiatives in Finland pending as an update is planned to IT2010, and it remains to be seen whether there is a need to update these IT2010 Agreement on service delivered via data networks. Personally I think the most needed changes concern these terms and then I would draft specific terms for agile projects. Clearly we can see that there are some similar clauses and considerations in these contract types, but of course differences as well. Personally I would concentrate IT2010 update efforts to agile and wait for European-wide harmonization to influence on these cloud terms before implementing another set of terms for domestic terms and conditions for services delivered via data networks. Now I have to advertise that we already have these "Specific Terms for Agile Projects" done and ready in our models at TRUST as we needed to draft those for one specific project to be used with IT2010 - got you interested? Please send an e-mail and we are pleased to share these.

In conclusion, there is one final issue that should be noted, in many case if one is talking about cloud for SMEs or consumer clouds there is one point above all that cannot be solved by "fair contract terms" and that is the dichotomy between harmonization (means less revenues for suppliers) and business risks and damages in worst possible case scenarios (means bigger risks for customers). This emphasizes the importance of collaboration between legal, technical and business units and also lawyers' understanding of the technical solutions available.

Regards,

                  Jan


Thursday, 31 July 2014

SPA Series Part 5: How To Negotiate M&A Deals In Finland - Some Words on Definitions


Dear All,

After relaxing summer and some of the spring's corporate transactions it is time to start this autumn and what would be a better way to do this than to publish a new chapter in our SPA blog series. The total reader amount of the blog has exceeded the respectable 5.000 of which I am very grateful and special thanks for everyone who has visited my site!

During the spring we managed to close some interesting deals at TRUST including, e.g., financing rounds of Sportsetter Oy (of the deal see more from here) or sale of Alkali Oy to Alma Mediapartners (part of Alma group, of the deal see more from here) not forgetting our IP & Technology practise. There we advised, e.g., in one IP infringement for a listed Finnish forestry sector company and in business-critical ERP project in Norway negotiating plenty of IT procurement agreements in a multivendor environment. So just the kind of case we love doing! Unfortunately, it also meant that I had to postpone my blogging in this SPA series, but I try to be more active during these coming few months although I must say a warning word that we are also contributing to some other publications on cleantech sector investments, private equity and M&A so we'll see.

Regarding our actual topic, next in this SPA our blog we’ll go forward and move to definitions. I will not comment on some of the definitions that are more self-evident, such as “Parties” (or group companies and subsidiaries) or similar, but the most critical ones should be here. This is not to say that definitions not included in this blog would be irrelevant. As an example, if the deal involves minority ownerships or a joint venture, it is very important to have a sufficiently wide subsidiary definition. Another point is that these group company and subsidiary definitions should be drafted with care to ensure that obligations of the agreement document are allocated to the right companies and that, say, warranties are given by appropriate parties.

First, let me show you some of the main principles behind definitions:

- One should really pay effort to draft definitions, as these are the core terms of the agreement and in its interpretation.
- Always maintain consistency. So if you have a capitalized term, do not use it without capital letter or don’t use a different word to describe the same thing you have already defined.
- Understand the rules of interpretation in the applicable jurisdiction; if these are modified in the definitions section, check how you change the situation in case of dispute, e.g., to the allocation of burden of proof, in dubio contra stipulatorem or similar.

Let’s go through some more detailed definitions and comments to these. So, in very simple transactions these definitions could take the following form. This is actually a kind of a negotiation result of an earlier deal, so please note that this is not optimized for either the buyer or the seller as a starting position of the negotiation.

Term                   .
Meaning                                                                        .

Accounting Principles
The accounting records kept by the Company have been kept on a proper and consistent basis and contain all matters required by applicable law to be entered in them.

Agreement
This Agreement and all appendices hereto including the Disclosure Letter.


Completion
The consummation of the Agreement as described in section X.

Disclosure Material
All information on or related to the Company that has been made available during the Due Diligence Review to the Purchaser or its advisors, the negotiation process or otherwise, whether orally or in writing, as well as all information on the Company in the public domain.

Due Diligence Review

The meaning set forth in section X.

Financial Statements
The profit and loss statement and balance sheet of the Company for the financial period ended on 31 December 2013 together with the auditors' statement thereon.


Material Adverse Effect
Any material adverse change on the assets or financial condition of the Company, exceeding EUR X other than any change or effect (a) relating to the economy of the world or any geographic area in general, (b) relating to the industry in which the Company operate in general, (c) arising out of the announcement or pendency of the transaction contemplated by this Agreement, (d) arising out of compliance by the Seller with the terms of this Agreement or (e) arising out of any action taken or announced by the Purchaser or taken or announced by the Seller, the Company at the request or direction of the Purchaser or any inaction or failure to act by the Seller, the Company at the request or direction of the Purchaser.


Purchase Price
The meaning set forth in section X.

Seller's Knowledge
The actual knowledge of any of the following individuals: XXX and YYY.

No duty of investigation shall be implied on the persons referred to above for the purpose of the transaction contemplated by the Agreement and the giving of the representations, warranties and undertakings thereunder.


Shares
All of the issued and outstanding shares of the Company.



Then, few words about some of the most critical definitions and additional points:

“Accounting Principles” & “Financial Statements”

First an organisational point which relates to the group structure of the target. If the target is a group, then accounting principles could be defined, e.g., as follows: “…the financial statements of the Company and the Subsidiaries as at and to the Balance Date, comprising the individual accounts of the Company and the Subsidiaries, and in the case of the Company, the consolidated group accounts of the Company and the Subsidiaries…”. In the above model, the target was merely a single entity.

Why, then, are these definitions critical? Well, the answer is simple: in almost all transactions the purchase price will be based on the target’s (or its group’s) accounts. Of course, goodwill and similar “assets” are excluded for the previous statement to be valid as these are not visible from the accounts. Consequently, it is very important to understand what the standards applied are when these where drafted, what the latest financial documents available are and how much reliance can be posed to these. From the seller’s point of view, the other side of the coin is that it needs to provide a warranty for the accounts so that these are accurate so if there are any shortfalls or inaccuracies, then it might result a warranty claim afterwards.

If the target is a group, the definition should refer to consolidated accounts. It is also advisable to include individual accounts as some items like intra-group transactions might not be included in the consolidated accounts.

When are these accounts too old? As everyone can guess, there is no standard rule for this. In any case, we could speak about a period of three months, and information older than these might quite surely be outdated. Management accounts, on the other hand, are a completely different story and these will be typically drafted on a monthly basis. If these accounts are too old, then naturally there might be a need to produce new ones for the closing or completion date, but taking into account that these naturally might take some additional time. In any case, there is always a relationship to the warranties as said above and every share purchase agreement should contain warranties not only as to the accuracy of the financial statements but also management accounts and financial position thereafter. We will return to these warranties later.

“Disclosure Material”

This definition relates to the core mechanics of the share purchase. If an issue is described in the disclosure materials, then the purchaser cannot claim that there would be a breach of warranty unless the parties have agreed on specific indemnity to cover a known risk.

More limited versions of this could be, e.g., “…shall refer to all written material listed in Schedule X made available by the Sellers to the Purchaser or its Advisors in connection with the Due Diligence Review.

“Material Adverse Change”

Also one of the key definitions. This definition may be used in connection with the conditions to closing or in connection with the warranties. If we look at the former, in practise if there is “no material change” clause used as a condition for closing and such an event is realized, then the buyer may walk out of the deal.

One alternative wording to the above mentioned quite detailed text is naturally to use a more general definition such as the following:

“..shall refer to any occurrence, event or change which materially and adversely affects or could reasonably be expected to materially and adversely affect the  Business, assets, liabilities, financial conditions, financial results of operations or prospects of any Group Company”.

The usage slightly depends on the how the definition is used in the documentation. As a seller, one does not want to permit an “easy exit” for the buyer to walk out of the deal and as a condition for closing this kind of express wording with reference to, say, political and other more general-level financial risks could be appropriate. There can also be a monetary limit that could be expressly specified or it could be defined quite freely. One possibility is to define it as percentage of the consolidated revenue, EBITDA or net worth levels.

“Seller’s Knowledge”

As discussed earlier, representations and warranties are often heavily negotiated between the parties. These clauses serve for several purposes but one is to allocate risks and force the seller to share information on the possible risks associated with the target business. When negotiating an SPA, the seller has an incentive to keep its representations and warranties as narrowly drafted as possible. On the other hand, the buyer, naturally, wants those representations and warranties to cast as wide net as possible.

One way for a seller to achieve its objectives is to qualify the representations and warranties to its “knowledge.” Let’s take an example that there is a security arrangement over the assets that the seller’s CEO failed to disclose and which is not recorded. Even if this item is covered by a warranty and the seller might be “on the hook” in this respect, the seller might escape liability if such defined person making disclosures did not have “actual knowledge” about the security. Similarly, the buyer, on the other hand, wants the seller’s representations and warranties to be unqualified. In connection with the specific warranties, we look at specific representations and warranties and how and when to qualify warranties.

If we once again provide an alternative from the other end of the negotiation spectrum:

“…shall refer to the actual knowledge of the individuals listed in Schedule 3.46 or the knowledge of such persons, had they acted diligently in view of their positions.”

So next we go to purchase price mechanisms, a very interesting topic, and I try to provide that within the next few weeks.

I wish you all an energetic autumn on behalf of TRUST's M&A team and looking forward to being in touch with you after these relaxing vacation weeks! Another matter before I forget, I was elected as the Co-Chair of ITechLaw's IP Committee and let me know if someone is going to European conference to be held in Paris as it would be my pleasure to meet there. Or alternatively, if you are going to IBA in Tokyo, that would be another alternative (send an e-mail jan.lindberg@thetrust.fi or call +358408236031) - hope to see you there!

Regards,

Jan