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.

This Agreement and all appendices hereto including the Disclosure Letter.

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.

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 or call +358408236031) - hope to see you there!



Monday, 28 July 2014

Brian JM Quinn, Albert Choi and advise on earnouts and purchase price adjustments

Dear all,

I though that I this time write a few words about blogger Brian JM Quinn who might be better known as the "M&A professor". He has a blog on M&A related issues and in this case M&A issues only, while we focus also on IP and technology issues as you have possibly seen so slightly narrower focus. 

Well few words about Brian, he works at Boston College Law School in 2008. He teaches Corporations, Corporations Lab, Mergers & Acquisitions, Mergers & Acquisitions Lab, as well as Deals: The Economic Structure of Transactions. He constantly writes about M&A related themes and if you are not following him yet, it might be worth considering. In his latest blog he is referring to Albert Choi's recent study on facilitation of Mergers and Acquisitions with Earnouts and Purchase Price Adjustments (June 30, 2014) which was published in Virginia Law and Economics Research Papers (Available at SSRN: or

Choi's paper examines how post-closing contingent payment (PCP) mechanisms (such as earnouts and purchase price adjustments) can facilitate mergers and acquisitions transactions. By relying on verifiable information that is obtained after closing, PCPs can mitigate the problems of asymmetric information over valuation and, in contrast to the conventional understanding, this benefit applies to both earnouts and purchase price adjustments. When both the acquirer and the target are aware that there is a positive (but uncertain) surplus from the transaction, PCPs function more as an imperfect verification, rather than a signaling, mechanism and a pooling equilibrium is possible, in which all parties adopt a PCP. 

According to the summary: "When the parties are uncertain as to whether a positive surplus exists, on the other hand, PCPs function as a separating device, in which the seller with a positive surplus successfully signals its valuation with a PCP. The paper also addresses the problems of post-closing incentives to maximize (or minimize) the PCP payments. When such a moral hazard is a concern, the paper shows that (1) the PCPs will be structured so as to minimize the deadweight loss and a separating equilibrium is more likely to result; and (2) when the deadweight loss is sufficiently large, the parties will forego using a PCP mechanism altogether."

I strongly recomment you to follow M&A Professor and also read Choi's paper and personally I found this argumentation very convincing. Let me know if you disagree!



Friday, 4 July 2014

TRUST on IP Litigation - Most Interesting IP Cases from Spring 2014

Dear All,

I am almost on vacation, but before that I though that I write a post to wrap up some interesting IP cases from this spring. I have tried to outline in the update both practical advise and some theory from IP and technology litigations which I think might be relevant for companies operating in the Nordic region. This is not an exhaustive list of cases by any means, but just some cases which caught my attention and containing all my favourite field from IT to cleantech or energy and further to pharmaceutics.

Otherwise, we have had a splendid spring at TRUST so far. I have earlier said that our focus at TRUST. is actually more on the transactional side, which is partly true, but now when we have done IT disputes, corporate disputes and now we have two patent litigations in the pipeline commencing possibly next autumn, we must reconsider whether this was a very accurate statement in the first place. As a famous Finnish politician said, “I think I was wrong but then it turned out to be an error”. At the end of the day, these are the core sectors that we are passionate about—and litigations are the best possible “legal duels” left in our modern society and so this time we focus slightly more on litigations and disputes.

So as a summary, Hi hotel –case is about copyrights and jurisdictional matters, Svensson – case is about linking, Blomqvist vs Rolex focuses on brand protection and counterfeiting in online environment, followed by two recent patent-related interim injunction cases involving Neste vs UPM and Ranbaxy vs Pfizer, and finally we talk about data protection in light of Google decision and “the right to be forgotten”. We also have a practical drafting sector and this time we talk about one relevant theme in IT agreements which I think all customers should consider in their procurement policies and of which we have heavily negotiated this spring in connection with some business-critical ERP projects. Hope you enjoy reading this!

Pleasant and relaxing summer vacation to everyone!



Saturday, 14 June 2014

The Asphalt Cartel Decision and the Transfer of Liabilities in Business Purchase Situations

Dear All,

Our associate Kiira Lehtonen has reviewed the latest asphalt cartel case (decision L 09/49467 of the Helsinki District Court on 28 November 2013, “Decision”) and wrote an analysis of this remarkable case focusing on the aspect of transfer of liabilities in business transfers. This is perhaps slightly ignored aspect of the decision but definitely a point of which all M&A lawyers such as such should be aware of. The main theses of Kiira in summary:

"While the reasoning of the Helsinki District Court behind the transfer of liabilities for damages between companies may even be well understood and accepted, it cannot be left unnoticed that Finnish law does not in itself recognize the in damages cases, but only in penalty payment cases, which, as stated above, fundamentally differ from damages cases as they are public in nature. It is in any event highly probable, if not certain, that in addition to many other parts of the Decision, this question will be discussed in further detail during the appeal proceedings. In the meanwhile, however, companies should not completely ignore the possibility of transfer of liabilities for damages in connection with transfers of businesses, as the situation still remains uncertain. Taking this possibility into account at least on some level might help to avoid unpleasant surprises in the future."

The full text of this legal update is available from: here.

Pleasant reading moments!