Advisory Board

  • Cai Hongbin
  • Peking University Guanghua School of Management
  • Peter Clarke
  • Barry Diller
  • IAC/InterActiveCorp
  • Fu Chengyu
  • China National Petrochemical Corporation (Sinopec Group)
  • Richard J. Gnodde
  • Goldman Sachs International
  • Lodewijk Hijmans van den Bergh
  • De Brauw Blackstone Westbroek N.V.
  • Jiang Jianqing
  • Industrial and Commercial Bank of China, Ltd. (ICBC)
  • Handel Lee
  • King & Wood Mallesons
  • Richard Li
  • PCCW Limited
  • Pacific Century Group
  • Liew Mun Leong
  • Changi Airport Group
  • Martin Lipton
  • New York University
  • Wachtell, Lipton, Rosen & Katz
  • Liu Mingkang
  • China Banking Regulatory Commission (CBRC)
  • Dinesh C. Paliwal
  • Harman International Industries
  • Leon Pasternak
  • BCC Partners
  • Tim Payne
  • Brunswick Group
  • Joseph R. Perella
  • Perella Weinberg Partners
  • Baron David de Rothschild
  • N M Rothschild & Sons Limited
  • Dilhan Pillay Sandrasegara
  • Temasek International Pte. Ltd.
  • Shao Ning
  • State-owned Assets Supervision and Administration Commission of the State Council of China (SASAC)
  • John W. Snow
  • Cerberus Capital Management, L.P.
  • Former U.S. Secretary of Treasury
  • Bharat Vasani
  • Tata Group
  • Wang Junfeng
  • King & Wood Mallesons
  • Wang Kejin
  • China Banking Regulatory Commission (CBRC)
  • Wei Jiafu
  • Kazakhstan Potash Corporation Limited
  • Yang Chao
  • China Life Insurance Co. Ltd.
  • Zhu Min
  • International Monetary Fund

Legal Roundtable

  • Dimitry Afanasiev
  • Egorov Puginsky Afanasiev and Partners (Moscow)
  • William T. Allen
  • NYU Stern School of Business
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Johan Aalto
  • Hannes Snellman Attorneys Ltd (Finland)
  • Nigel P. G. Boardman
  • Slaughter and May (London)
  • Willem J.L. Calkoen
  • NautaDutilh N.V. (Rotterdam)
  • Peter Callens
  • Loyens & Loeff (Brussels)
  • Bertrand Cardi
  • Darrois Villey Maillot & Brochier (Paris)
  • Santiago Carregal
  • Marval, O’Farrell & Mairal (Buenos Aires)
  • Martín Carrizosa
  • Philippi Prietocarrizosa & Uría (Bogotá)
  • Carlos G. Cordero G.
  • Aleman, Cordero, Galindo & Lee (Panama)
  • Ewen Crouch
  • Allens (Sydney)
  • Adam O. Emmerich
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Rachel Eng
  • WongPartnership (Singapore)
  • Sergio Erede
  • BonelliErede (Milan)
  • Kenichi Fujinawa
  • Nagashima Ohno & Tsunematsu (Tokyo)
  • Manuel Galicia Romero
  • Galicia Abogados (Mexico City)
  • Danny Gilbert
  • Gilbert + Tobin (Sydney)
  • Vladimíra Glatzová
  • Glatzová & Co. (Prague)
  • Juan Miguel Goenechea
  • Uría Menéndez (Madrid)
  • Andrey A. Goltsblat
  • Goltsblat BLP (Moscow)
  • Juan Francisco Gutiérrez I.
  • Philippi Prietocarrizosa & Uría (Santiago)
  • Fang He
  • Jun He Law Offices (Beijing)
  • Christian Herbst
  • Schönherr (Vienna)
  • Lodewijk Hijmans van den Bergh
  • De Brauw Blackstone Westbroek N.V. (Amsterdam)
  • Hein Hooghoudt
  • NautaDutilh N.V. (Amsterdam)
  • Sameer Huda
  • Hadef & Partners (Dubai)
  • Masakazu Iwakura
  • TMI Associates (Tokyo)
  • Christof Jäckle
  • Hengeler Mueller (Frankfurt)
  • Michael Mervyn Katz
  • Edward Nathan Sonnenbergs (Johannesburg)
  • Handel Lee
  • King & Wood Mallesons (Beijing)
  • Martin Lipton
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Alain Maillot
  • Darrois Villey Maillot Brochier (Paris)
  • Antônio Corrêa Meyer
  • Machado, Meyer, Sendacz e Opice (São Paulo)
  • Sergio Michelsen Jaramillo
  • Brigard & Urrutia (Bogotá)
  • Zia Mody
  • AZB & Partners (Mumbai)
  • Christopher Murray
  • Osler (Toronto)
  • Francisco Antunes Maciel Müssnich
  • Barbosa, Müssnich & Aragão (Rio de Janeiro)
  • I. Berl Nadler
  • Davies Ward Phillips & Vineberg LLP (Toronto)
  • Umberto Nicodano
  • BonelliErede (Milan)
  • Brian O'Gorman
  • Arthur Cox (Dublin)
  • Robin Panovka
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Sang-Yeol Park
  • Park & Partners (Seoul)
  • José Antonio Payet Puccio
  • Payet Rey Cauvi (Lima)
  • Kees Peijster
  • COFRA Holding AG (Zug)
  • Juan Martín Perrotto
  • Uría & Menéndez (Madrid/Beijing)
  • Philip Podzebenko
  • Herbert Smith Freehills (Sydney)
  • Geert Potjewijd
  • De Brauw Blackstone Westbroek (Amsterdam/Beijing)
  • Qi Adam Li
  • Jun He Law Offices (Shanghai)
  • Biörn Riese
  • Jurie Advokat AB (Sweden)
  • Mark Rigotti
  • Herbert Smith Freehills (Sydney)
  • Rafael Robles Miaja
  • Robles Miaja (Mexico City)
  • Alberto Saravalle
  • BonelliErede (Milan)
  • Maximilian Schiessl
  • Hengeler Mueller (Düsseldorf)
  • Cyril S. Shroff
  • Cyril Amarchand Mangaldas (Mumbai)
  • Shardul S. Shroff
  • Shardul Amarchand Mangaldas & Co.(New Delhi)
  • Klaus Søgaard
  • Gorrissen Federspiel (Denmark)
  • Ezekiel Solomon
  • Allens (Sydney)
  • Emanuel P. Strehle
  • Hengeler Mueller (Munich)
  • David E. Tadmor
  • Tadmor & Co. (Tel Aviv)
  • Kevin J. Thomson
  • Barrick Gold Corporation (Toronto)
  • Yu Wakae
  • Nagashima Ohno & Tsunematsu (Tokyo)
  • Wang Junfeng
  • King & Wood Mallesons (Beijing)
  • Tomasz Wardynski
  • Wardynski & Partners (Warsaw)
  • Rolf Watter
  • Bär & Karrer AG (Zürich)
  • Xiao Wei
  • Jun He Law Offices (Beijing)
  • Xu Ping
  • King & Wood Mallesons (Beijing)
  • Shuji Yanase
  • OK Corporation (Tokyo)
  • Alvin Yeo
  • WongPartnership LLP (Singapore)

Founding Directors

  • William T. Allen
  • NYU Stern School of Business
  • Wachtell, Lipton, Rosen & Katz
  • Nigel P.G. Boardman
  • Slaughter and May
  • Cai Hongbin
  • Peking University Guanghua School of Management
  • Adam O. Emmerich
  • Wachtell, Lipton, Rosen & Katz
  • Robin Panovka
  • Wachtell, Lipton, Rosen & Katz
  • Peter Williamson
  • Cambridge Judge Business School
  • Franny Yao
  • Ernst & Young

Poland

POLISH UPDATE – Polish protection of strategic companies and new rules of administering state assets

Editors’ Note:  This article was contributed by Tomasz Wardyński, founding partner of Wardyński & Partners and a member of XBMA’s Legal Roundtable, and Izabela Zielińska-Barłożek, head of Wardyński & Partners’ Mergers & Acquisitions Practice. Mr. Wardyński co-authored this article with Maciej Szewczyk, senior associate, and Wojciech Szopiński, associate, from the firm’s Mergers & Acquisitions Practice.

Executive summary

Legal restrictions concerning companies operating in certain strategic sectors of the economy and state companies were enacted in Poland. The Polish regulations track similar limitations already functioning in some other countries in the European Union and elsewhere. Under these restrictions, the Polish authorities can object to numerous transactions involving companies deemed to be key entities. A planned transaction was blocked for the first time on this basis in late 2016. On 1 January 2017, new rules also entered into force concerning trading in shares belonging to companies in which the State Treasury holds an ownership stake, providing among things for a requirement to include limitations on alienation of share rights in the articles of association of the companies in question. The scope of these limitations is broad and the consequences of violating them are severe. First and foremost, failure to follow the procedure provided for a transaction involving a key company will render the transaction void. Violation of restrictions on alienation of shares held by state companies included in the company’s articles of association will not invalidate the transaction but will expose the persons involved in the transaction to liability in damages.

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Polish protection of strategic companies and new rules of administering state assets

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

 

POLISH UPDATE – M&A in Poland: Eastern Gateway to the European Union

Editor’s Note: This update comes from Tomasz Wardyński, founding partner of Wardyński & Partners and a member of XBMA’s Legal Roundtable.  The author of this article is Weronika Pelc, partner, member of Wardyński & Partners Mergers & Acquisitions Practice and head of Energy Law Practice.

Executive Summary: Poland’s developing economy and entrepreneurial society with investor-friendly government policies create many interesting M&A opportunities.  There is a wide variety of companies which are directly or indirectly controlled by the state, or part of global corporations as well as small and medium firms owned by local or European entrepreneurs.  Except for privatisations, which are regulated separately and entail such requirements as concluding agreements guaranteeing employment to workers, M&A transactions generally follow accepted world standards.  Due diligences carried out on companies that have been in existence in Poland for more than 25 years, or have operated before the fall of the Iron Curtain, require an assessment of the risks associated with the change of the system.  The article below is a brief description of specific legal requirements and the typical procedure in a Polish M&A transaction.

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M&A in Poland: Eastern Gateway to the European Union

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

Polish Update – The Risk of Inaccurate Statements in Representations and Warranties

Editor’s Note: This update comes from Tomasz Wardyński, founding partner of Wardyński & Partners and a member of XBMA’s Legal Roundtable. The authors of this article are Dominika Stępińska-Duch and Paweł Mazur, members of Wardyński & Partners Dispute Resolution & Arbitration Practice.

Executive summary: In transactions involving the sale of shares in companies in Poland, as well as agreements on sale of enterprises or significant assets, the representations and warranties of sellers are becoming more and more extensive.

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The notion of representations and warranties was adopted from common law systems and has become part of Polish legal practice. Although they are not specifically regulated in the Polish codes, they are commonly used in transactions on the basis of freedom of contract.

Representations and warranties may concern both legal and financial aspects of the enterprise being sold. From the buyers’ perspective, it is particularly important to obtain assurances that the financial reports of the entity they are acquiring accurately reflect the true financial condition of the target. It should be borne in mind that indicators such as EBIDTA generally serve as the basis for valuation of an enterprise and in the parties’ negotiations are fundamental for determining the final sale price. It is thus not surprising that the contract will often require the owner of the enterprise or a controlling stake of shares to provide assurances that the balance sheet and the profit and loss account accurately reflect the company’s results and all of its material obligations as of the date of the transaction.

Liability for the accuracy of representations and warranties may be analysed in terms of both civil law and criminal law.

From the point of view of civil liability, it is important to determine whether the representations and warranties are given on the basis of fault or risk. If the latter, the seller’s liability will be unconditional, and the seller will not be able to release itself from liability by proving that it used due care in preparing or verifying the financial statements. In practice, it may happen that the owner does not serve on the management board or supervisory board of the company, and must make representations and warranties in reliance on information provided by the company authorities, accountants and auditors. Nonetheless, the seller is still contractually liable, and the effectiveness of recourse claims against the individuals guilty of negligence in such cases appears doubtful in practice. The scope of the seller’s liability will obviously depend on the nature and details of the transaction, but often it represents a significant proportion of the overall value of the transaction, resulting in an obligation to pay the buyer millions in damages.

In terms of criminal liability, there is no separate offence of making false representations and warranties. Nonetheless, making representations and warranties that do not reflect the true state of affairs may be viewed under criminal law as a species of fraud if the other party acts to its disadvantage in reliance on the representations and warranties. Making inaccurate representations and warranties concerning legal or financial circumstances material to the transaction involves creation of a false picture of reality, misleading the other party. Thus, if as a result of the inaccurate impression on the buyer’s part based on inaccurate representations and warranties by the seller, the buyer decides to acquire an enterprise or a stake of shares (which then proves to be a less favourable transaction than could be expected on the basis of the seller’s representations and warranties), there are grounds for a finding of fraud.

It should be pointed out, however, that making false representations and warranties may result in criminal liability only if it is proved that the seller knowingly and intentionally made false statements in order to induce the buyer to enter into an unfavourable transaction.

Nonetheless, it is increasingly common for businesses injured as a result of inaccurate representations and warranties to file a criminal complaint in addition to pursuing civil claims.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

Polish Update – The Importance of Analyzing Legal Title to Shares in the Acquisition of Polish Companies

Editor’s Note: This update comes from Tomasz Wardyński, founding partner of Wardyński & Partners and a member of XBMA’s Legal Roundtable.  The co-authors of this article: Izabela Zielińska-Barłożek, co-head of the Mergers & Acquisitions Practice, and Jarosław Grykiel, PhD, specialize in Polish corporate law in cross-border transactions.

Executive summary

Before the transaction, the buyer usually performs a legal examination of the company whose shares are to be traded (directly or indirectly, for example through the acquisition of shares in the parent company). When assessing the legal importance of examining the legal title to shares it should be kept in mind that in Polish law there are no general legal remedies that allow the buyer acting in good faith to acquire ownership of shares where the seller is not the owner of such shares.  As a consequence, only a proper examination of the legal title to the shares will allow the investor to properly assess the situation (in particular the right of the seller to dispose of the shares) and to guard against possible adverse effects of irregularities in the acquisition of shares by the seller or his legal predecessors.

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The vast majority of transactions on the Polish market (including some international transactions involving Polish companies) are “share deal” transactions, i.e., transactions which consist of the acquisition by the investor of share rights in a company belonging to the seller.

Before the transaction is signed, the buyer usually performs a legal audit of the company whose shares are to be traded directly or indirectly (for example through the acquisition of shares in the parent company). The scope of the legal audit covers many different areas, often dependent on the objects of the company. As more and more often we observe the practice of investors limiting the scope of the due diligence examination or even skipping this step in the transaction altogether, we haste to point out that there exist certain issues whose proper examination is always necessary in this type of transactions, and that it is in the best interests of the investor. One example is precisely the examination of the seller’s legal title to the shares. It consists of determining whether the seller (or the company that is acquired, in the case of more complex international transactions) has sufficient legal title to shares in the Polish company, and therefore whether the seller is their rightful owner.

When assessing the legal importance of examining the legal title to shares it should be kept in mind that in Polish law there are no general legal remedies that allow the buyer acting in good faith to acquire ownership of shares in a situation where the seller is not owner of such shares. A general principle applies in this respect according to which no one can transfer on another party more rights than he himself possesses. Thus, if the seller of the shares or any of his legal predecessors has not properly acquired the title to the shares (has not become their owner), then the buyer also cannot effectively acquire that title.

Contrary to the frequently repeated erroneous opinion, listing the given entity as a shareholder in a publicly accessible enterprise register kept by a Polish court will not protect the buyer acting in good faith in a way that, for example, a buyer of real estate is protected in connection with listing the seller in the land and mortgage register kept for that real estate. Polish law does not provide for a warranty of public credibility of enterprise registers in the meaning in which this concept operates in relation to land and mortgage registers. Besides, protective instruments contained in the rules governing entries in the enterprise register (including the inability to evoke certain facts by the entity listed in the register, the presumption of common knowledge of register entries and the presumption of veracity of data subject to entry in the enterprise register) have been settled rather vaguely and are the subject of controversy both in doctrine and in jurisprudence. For this reason alone, public enterprise registers cannot form the basis for the formulation of clear-cut conclusions in this area. In addition, as mentioned above, in the case of the acquisition of shares, Polish law does not provide for the so-called warranty of public credibility of enterprise registers modeled on the regulations governing land and mortgage registers.

The need for the presentation of the legal title to shares received in a correct manner from legal predecessors makes it so that only a thorough examination of the full “history” of the turnover of shares in a limited liability company, covering all transactions that involved those shares since the company’s foundation until their latest disposal, can give a complete picture of the legal title to shares in the company and answer the question whether (i) the seller is authorized to sell those shares or (ii) the divested company actually owns shares of the Polish company in its assets. Without such thorough examination of the legal title to shares, their buyer can never be sure if he had effectively acquired those shares from the seller (even if the seller has 100% interest in the company and is listed as the sole shareholder in the enterprise register). As the trend in the past few years has been for investors to limit the scope of the legal examination, it should be emphasized once again that is not enough to investigate the legal title to shares only in the given period (e.g., during the course of five years before the planned transaction). For if before that period certain irregularities have taken place (e.g., shares were transferred ineffectively), those irregularities will have an impact on the disposal of those shares at a later date.

It does not matter how long ago share sale irregularities occurred. In contrast to objects (movable or immovable), Polish law does not provide for the possibility of acquiring the ownership of shares in a limited liability company through acquisitive prescription. In practice there have been cases where an entity would act in the company as the sole shareholder for over a decade, when in fact it never successfully acquired the ownership of shares in that company since agreements under which those shares were acquired by its legal predecessors proved to be invalid.

In analyzing the issue of legal title to shares it should also be noted that there are many different conditions provided for in Polish law which can determine the invalidity of the acquisition of shares in a limited liability company. They relate both to the form required for an effective transfer of shares, consents required for such transfer (e.g., in the form of a resolution of the general meeting of shareholders or of the company supervisory board), or to general prohibitions on alienating or acquiring shares under certain circumstances. Some conditions are often very difficult to grasp. For example, the general prohibition on the acquisition of shares owned by limited liability companies also applies to the acquisition of shares in the parent company by a subsidiary (Art. 200 of the Commercial Companies Code). A violation of this prohibition invalidates the acquisition. It should be remembered that the relationship of dependency and domination is treated very broadly in Polish law and is by no means limited to share dependencies. For example, companies on the boards of which sit the same people are mutually dominant and dependent (in the absence of other links referred to in Art. 4.1.4 of the Commercial Companies Code).

In summing up our considerations it can be concluded that, in the absence in Polish law of relevant legal remedies allowing the acquisition of shares in a limited liability company from an unauthorized party by a buyer acting in good faith, only a proper examination of the legal title to the shares will allow the investor to properly assess the situation (in particular the right of the seller to dispose of the shares) and to guard against possible adverse effects of irregularities in the acquisition of shares by the seller or his legal predecessors. If the transaction concerns shares in a Polish limited liability company, simply dealing with the absence of the legal title or with its defectiveness by way of the seller’s representations and warranties or claims for damages available to the buyer is totally inadequate. These issues are certainly important to every investor planning to acquire shares in a Polish limited liability company and contemplating the need to conduct a legal examination.

Additional articles on the legal aspects of mergers and acquisitions in Poland can be found on our Transactions Portal.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

POLISH UPDATE – Global Risks, Local Remedies: Cross-border M&A Issues in the New Europe

Editors’ Note:  This article was contributed by Tomasz Wardyński, founding partner of Wardyński & Partners and a member of XBMA’s Legal Roundtable, and Izabela Zielińska-Barłożek, co-head of Wardyński & Partners’ Mergers & Acquisitions Practice.  Ms. Zielińska-Barłożek co-authored this article with Anna Dąbrowska, a member of the firm’s Mergers & Acquisitions Practice.

Executive Summary:  The authors report from the IBA European Regional Forum conference in Warsaw on a discussion among lawyers from throughout Central & Eastern Europe on the best ways to minimise common risks encountered in international transactional practice.

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The expanded membership of the EU and the growing number of cross-border transactions in Europe have naturally led to the standardisation of M&A procedures within the member states through use of similar documentation and action lists across various EU jurisdictions. But every international project includes elements of local law that require special attention. Cultural differences can also have a bearing on the transaction.

An opportunity to exchange views on this subject was provided during the International Bar Association European Regional Forum conference in Warsaw in November 2012. Lawyers attending the conference from almost 30 different countries in CEE and elsewhere in Europe debated the opportunities and challenges for growing businesses in the new EU member states. A more detailed analysis of the issue of risks in multinational projects took place at a workshop entitled “Assessment of Risk in Cross-Border M&A Transactions.” The discussion was led by a panel of lawyers practising in Bulgaria, Hungary, Poland, Russia and Sweden.

Common risks

Knowing how to identify and deal with the risks that may arise in a given jurisdiction is vital to achieving the desired effect of an international transaction. Success depends on skilful and efficient handling of all features of the project.

There are certain risks that are common across jurisdictions, but the same risk may bear different consequences and be treated differently depending on where it arises. Indeed, as became apparent at the workshop, different approaches to a specific risk may be found even within a single country, as transactions vary and local practice does not always provide a common approach to legal problems.

For example, some of the typical risks in almost any jurisdiction concern proper title to shares (for share deals), the effect that debt of the target company may have on the transaction, proper title to real estate and the effect of disclosure in the land register, and labour law issues such as the risks connected with the use of traditional employment contracts versus alternative forms of employment. Another interesting aspect is the approach to certain information about the target company gleaned from due diligence that may pose a risk for the transaction, in the form of “sandbagging” provisions existing in various jurisdictions.

Title to shares

An assessment of whether the sellers of a limited-liability company (or equivalent in the specific European jurisdiction) hold proper title to their shares may often necessitate looking at the effect of entry of the shareholders in the commercial register or equivalent and the required form of transfer documents in the given jurisdiction.

This is especially important in some European countries, such as the Czech Republic, Germany, the Netherlands and Poland, where transfer of shares requires a more rigorous form, with notarised signatures or the form of a notarial deed. In other countries, such as Belarus, Lithuania, Romania and Switzerland, ordinary written form is sufficient to convey title to shares.

Most of the European practitioners at the workshop stressed the need to examine the source documentation behind past share transfers. This is a necessity in countries, such as Poland, where the commercial register does not provide a warranty of public reliance on the register. But also in other jurisdictions, for example Russia, where entry of the holders of title to shares is deemed to provide security to third parties, potential buyers are nonetheless encouraged to review past transactions closely.

A panellist from Budapest explained at the IBA workshop that although in the case of a Hungarian limited-liability company (Kft) shares are transferred upon entry in the commercial register, the entry is made by the court on the basis of the list of shareholders provided by the managing director of the company, who, in turn, acquires information on the transfer directly from the new shareholder. Presentation of the document which was the basis for the transfer of shares is not mandatory. In consequence, it is not possible to rule out a risk of false or inaccurate information being entered in the company register without the court being able to verify it—hence checking the source documents for prior share transfers in the course of due diligence might be advisable.

Too much debt

It is commonly indicated that excessive debt of the target company, a situation disadvantageous for the entity itself, may also pose some risk for the buyer. Therefore certain measures should be undertaken before the transaction in order to improve the financial standing of the company, or the transaction should be structured to deal with this risk optimally.

If the target company is insolvent, the law usually requires the management board of the company to file for commencement of insolvency proceedings within a certain period. For example, in Poland there is a time limit of 2 weeks, or 30 days in Bulgaria, as pointed out by a panellist from Sofia. Creditors may also file bankruptcy petitions.

The panellist from Bulgaria went on to explain that if the target is in poor financial condition, its position may be made more secure before carrying out the sale of shares, for example by increasing the share capital through a capital increase or conversion of debt to equity, or restructuring the existing debt.

An asset deal may also be considered—provided that the assets have not been pledged as collateral, or the consent of the secured creditors is obtained. The risk of anyone challenging the transfer of assets by a distressed company may be mitigated to some extent by obtaining an independent valuation of the assets to ensure that they are being sold at fair market value.

Participants representing most of the CEE countries present at the workshop shared a common perspective in this matter.

Sandbagging

Due diligence is designed to provide the potential buyer an opportunity to identify certain risks related to the target. Once the risks have been identified, the parties can make an informed decision on whether to proceed with the transaction, and if so, how to address any risks that are identified in due diligence.

As the participants at the workshop pointed out, some risks identified in due diligence cannot be eliminated prior to the transaction, but the parties may nonetheless decide to proceed with the deal anyway, making relevant provisions to cover the risks in the transaction documents.

This raises the issue of “sandbagging.” Depending on the applicable regulations in the specific jurisdiction, the buyer’s knowledge of risks acquired prior to signing the agreement may be an obstacle to effective assertion of a claim under the contractual representations and warranties. With “pro-sandbagging” provisions, the buyer may be given the right to seek indemnity regardless of its knowledge of the risk, while “anti-sandbagging” provisions make the buyer’s right to seek indemnity dependent on the state of the buyer’s knowledge.

For example, in Sweden, according to an M&A practitioner from Stockholm, under statutory law a buyer may not assert an effective claim for an inaccuracy which the buyer had knowledge of at the time of signing. Under the principle of freedom of contract, however, the parties often include provisions in the transaction documents determining what effect the buyer’s knowledge will have on the parties’ rights. More often than not, anti-sandbagging provisions are used.

According to studies cited at the conference, in European jurisdictions anti-sandbagging provisions are perceived as more common (51% anti-sandbagging v 7% pro-sandbagging), while in the United States, pro-sandbagging provisions are more common, meaning that the representations and warranties are absolute and unaffected by the buyer’s knowledge (41% pro-sandbagging v 5% anti-sandbagging).

The participants at the workshop were evenly split on whether their home jurisdictions governed this issue by statute. There was also a split, although a positive answer seemed to be more common, on whether it was customary across different jurisdictions to include provisions in the transaction documents limiting the seller’s liability based on knowledge obtained by the buyer during due diligence.

In the case of Poland, the statutory provisions generally exclude the seller’s liability under the warranty for defects if the buyer was aware of the defect at the time of the sale. However, it is generally possible to extend, limit or exclude liability under the warranty for defects, and therefore the parties will usually address this issue in the share sale agreement.

As was clear from the discussion at the IBA conference, ultimately the success of any international transaction, large or small, will depend on proper identification of current and potential risks at the local level and the ability to deal with the risks appropriately. An issue regarded as immaterial in one jurisdiction may turn out to be a deal breaker just across the border.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

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