SPA Series Part 13: Corporate and Share matters, Capitalisation

Now we focus on corporate and stock matters which cover several issues such as corporate organizations, capitalisation, title to shares and required corporate decisions. 

Some of these are easy like the one stating that the seller is a corporation duly organised and existing and having necessary corporate power and authority. In case of shares, capitalisation is similarly one of the key issues. This concept covers issues like number of shares, the requirement that these are validly issued, outstanding and fully paid. Similarly, these warranties contain statements that in the closing good and valid title to the shares is transferred without any liens or encumbrances and that there are no convertible loans, options or other special rights entitling to shares. All these serve one purpose only, to ensure that the buyer ends up having full hundred percent ownership in the company. Sometimes there might be warranties saying, for example that "...liens or encumbrances except for lien of the bank released upon closing...". This warranty requires that the seller has received from his or her bank a statement to this effect.

One issue to keep in mind is that options may require a separate treatment. These might be converted into shares as a condition precedent to the closing or these could be purchased directly upon closing in which case the purchase price would be lowered respectively. Both methods are being used and even if the conversion route is selected it might be advisable to have double security to ensure that if there remains any unconverted option rights at the closing which can be redeemed by the buyer (by waiving condition precedent if applicable), then the purchase price will be adjusted respectively. There some tax aspects or differences between these models that need to be taken into account in the tax sections of the agreement.

Also if the seller fails to disclose option rights the buyer will have an indemnification claim against the seller, but effectively the option holder may have the right to claim conversion of the option rights (if possible under the terms) and there might be a minority that might be annoying, but gladly the redemption process under the Chapter 18 of the Companies Act will normally help. If there are additional concerns in this respect that there might be more undisclosed option rights (and Chapter 18 could not necessarily help), then structuring the deal as a merger might be one solution worth investigating further. In asset deals these kind of share matters and capitalisations are not truly relevant, but some kind of statement might be good to have any ways if not for other purpose at least to ensure that the persons with whom one has been dealing with have significant ownership in the company.

In cross-border context one issue that often raises is qualification to do business. This is do to the fact that in many cases such decision is delayed until it is mandatory. This is a kind of business decision, which may lead to a potential tax liability (and if massive, of course annoying to the purchaser). Another risk that might raise and that the purchases wishes to avoid is that a material agreement is rendered unenforceable. There are solutions to these warranties that are on the "middle-ground" like one stating that "the company is qualified in all jurisdictions were it owns or leases property or has personnel". This gives some kind of "materiality" element to the representation. Another option might be to say that the company may qualify in all jurisdiction if needed without significant loss or expense. Material agreements can also be discussed separately from this qualification perspective and it could be stated for example that failure to qualify does not affect enforceability which would cover the other aspect mentioned concerning these qualifications.

Corporate decisions are the final issue to be mentioned in this posting and naturally there should be a statement that all necessary corporate approvals have been give. Normally these kind of "...subject to the approval of the Board of Directors..." qualifications should not be accepted as these give the other party an option to walk-away.

Next time we will focus on my favourite representation regarding financial statements so stay tuned and have a pleasant weekend in the meanwhile!

Regards,

Limppu

August Greetings, Security Interests over Patents and M&A Blog News

Splendid August to everyone!

I’m back at the office and full of energy after a relaxing summer break. As my one of the first things on the agenda, I thought it would be a good time to continue our M&A blog. We have had several interesting projects after our last posting, so these blogs have been slightly on hold and, as some of you might have heard, we, for example, represented management and investors in the acquisition of Suomivalimo from Componenta, as well as represented Patria Plc in the acquisition of a stake in Silverskin (Press release can be read from here). Also in the IT sector things are moving forward, and in addition to transactional work we are currently involved in a facility management outsourcing project for a banking sector client and another outsourcing for one of the leading Finnish companies in its field is also in the process—so a magnificent autumn is ahead of us!

Anyways, new M&A Blog is coming next week and this time we talk about disclosure letters. These documents and disclosure strategies are very critical in many respects. We start by focusing on basics and the relationship between disclosures and warranties. As we discussed in part 5 of the blog series in connection with the disclosure material, if an issue is described in the disclosure materials, then the purchaser cannot claim that there be a breach of warranty unless the parties have agreed on specific indemnity to cover a known risk. Then we go deeper into the exact interplay between different provisions, different disclosure types and discuss questions what, how and when to disclose as the seller.

Another matter is that as the European Commission has recently asked organizations to submit comments to the Commission consultation on an effective insolvency framework within the EU (“Consultation”) and as the issue is also discussed in the forthcoming AIPPI conference to be held in Milan in September, we wrote a few words on the security interests over patents under Finnish law and some modest proposals for improvement.For all of you who are interested in this topic, please read Kluwer Patent Law Blog from here!

We will continue from here next time and, in the meantime, let’s enjoy the last summer days of our beautiful country!