Sunday, 10 May 2015

SPA Series Part 8: How To Negotiate M&A Deals In Finland - Earn-Outs



Dear All,

I know it would be interesting to read a bit about bulletproof earn-out clauses but I first have to tell some news from our firm. These days, we have a new website that we are very proud of (see here). In addition, another issue is that we are nominated among the noted M&A firms in Chambers Europe 2015 for the first time. I first of all would like to thank all of you who have voted for us. It is an honour to be in the same category with the leading heavyweight transaction law firms. Already this year we have represented clients in several deals, such as acquisition of Sports Tracking Technologies Oy by Amer Sports Corporation (link to press release) or divestment of private cloud business of F-Secure to Synchronoss Technologies for 60MEUR (link to press release), not to mention energy sector deals with Vapo relating to acquisition of district heating systems (link to press release). Anyway, we have been very fortunate and blessed with great team, which is now expanding with a new member joining to our ranks by the end of summer. The name I will still keep as a secret but this way we ensure that we are able to serve our growing clientele even better. But to the real thing, do you know how to write bullet-proof earn-out clauses? If your answer is no, then you came to the right place!

An earn-out clause is a payment structure, which means that part of the purchase price is connected with the future performance. So typically there is an initial payment on completion of the acquisition and a number of subsequent deferred payments, which are spread over an agreed period post-completion. In a sense this mechanism is contingent for certain events taking place, which creates a challenge for the drafter. One example could be the following: 

“The Purchaser shall pay the Purchase Price in a following manner: ….Provided that the agreed financial targets are reached in the Company, the Seller shall be entitled to an additional payment for the Shares of the amount of EUR____________ (Earn-Out). The Earn-Out shall be calculated in accordance with Appendix X.

The calculation of the Earn-Out shall be based on the annual accounts of the Company for the financial year X, which accounts shall be prepared in accordance with the Accounting Principles. The Earn-Out shall be paid by the Purchaser to the Seller in euros in immediately available funds within X days following the date when the determination of the Earn-Out is deemed final and binding.” 

And naturally there should also be a mechanism to solve disputes if there are disagreements.

What are the advantages and disadvantages of an earn-out? The main point probably is that earn-out enables more precise valuation of the target. This comes with the prices as the control that buyer can exercise during the earn-out period is typically limited. So there is an interesting balancing exercise to be made between the short and long term plans of the Company but for the seller this mechanism might enable higher price even in a situation when there are doubts as to the actual profitability and performance by the contemplated buyer.

Some points on drafting these clauses:

  • The Earn-Out is most often calculated by reference to EBIT, but turnover or net assets could also be used. Not very common though;
  • If you are using several purchase price mechanics simultaneously, see that there is no overlap, e.g., if the project closing is delayed (like overlap between adjustments and earn-out);
  • Profits should be carefully calculated and considered and one issue that relates to this is that accounting principles should be precisely defined. This is a point that the seller and buyer see differently and, as an example, the buyer may want the one-time so-called windfall profits to be taken out; 
  • For the seller, it is preferable to have a model in which there is no "all or nothing" approach but carry-forwards and backs between years if there is a longer period;
  • The responsibility as to who prepares the accounts is also relevant and here we refer to a price adjustment blog that we already discussed;
  • There almost certainly must be provisions relating to the management of the business during the earn-out period and some typical vetoes could include, for example, the right to hire new employees, the right to use subcontractors, board structure, remunerations, the right to promote employees according to the Company’s performance evaluation process. On the other hand, the buyer typically wishes to ensure that capital expenditure is not deferred to drive short-term performance;
  • How synergies are treated is also an important and difficult issue, such as more affordable access to capital, insurances. Buyers may resist these due to the fact that these are difficult to quantify;
  • The relationship with the overall structure of the representations and warranties and indemnities should be defined. So what happens if an event is a warranty claim, indemnification and affects an earn-out in the same time. A point worth considering whether there is a possibility for double-recovery;
  • Also set-off criteria is worth considering and whether there is a need to have withholding rights to expand the scope of set-off that would be ordinarily available under law; and
  • Taxation is something that should always be considered and in particular if you connect the earn-out with employment condition to avoid unpleasant employer payment surprises.

Hope this gives you a head start if you have been unfamiliar with these earn-outs in the past. Next I will focus on escrow payments and new posting coming by the end of this month. We have also started a book project around these M&A themes which will be released in the autumn, but more information on that to follow.

Lovely beginning for your spring week and hope to be in touch with you soon,

            Jan

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