Private M&A Comparative Guide

• Published date: 10 October 2023
• Subject Matter: Corporate/Commercial Law, M&A/Private Equity, Corporate and Company Law
• Law Firm: SIRIUS lawyers
• Author: Mr Anders Kj'r Dybdahl and Olaf Ehrenskj'ld

1 Deal structure

1.1 How are private M&A transactions typically structured in your jurisdiction?

A M&A transaction can be structured in many ways - most commonly as either a share purchase or an asset deal.

When transferring the shares of a company to a new owner, the main document is a share purchase agreement setting out the terms for transferring the shares of the target from the seller(s) to the buyer.

In an asset deal, certain assets of a company are individualised and transferred to a new owner. The transfer often involves the transfer of both rights and obligations relating to the asset. An asset transfer can consist of the sale of a brand and all activities, rights and obligations relating to that specific brand.

Completion is achieved by transferring ownership and other rights and obligations relating to each asset and liability.

1.2 What are the key differences and potential advantages and disadvantages of the various structures?

The main difference is that a share transfer deal involves the transfer of an entire company, as only the ownership of the shares changes hands. The target and its assets and liabilities remain unaffected. The share transfer deal is formalised by updating the company's register of shareholders; and usually no consents to the transfer are required from third parties or government institutions.

When transferring liabilities, as part of an asset deal the consent of the opposing party to the liability is required. The transfer of employees takes place pursuant to mandatory law and the transfer of asset can usually take place without consent; however, it often recommended to notify the counterparty of the asset (eg, a counterparty to a contract). An asset transfer often allows for the buyer to cherry-pick assets in agreement with the seller. In both structures, due diligence is conducted; however, the scope and thoroughness will vary depending on the structure.

1.3 What factors commonly influence the choice of transaction structure?

When choosing a transfer structure, key factors usually include:

• tax considerations; and
• considerations that limit the transfer of liabilities and debt.

Therefore, cooperation with tax advisers is of great importance when planning a transfer.

Also, considerations relating to the business portfolio and the expansion of certain areas of a target's activities can dictate whether it would be more attractive to acquire activities to supplement in-house business or to acquire an entire standalone company.

Finally, other factors that may influence the choice of transfer structure include:

• the interest in goodwill;
• company-specific licences;
• employees; and
• technical knowledge.

1.4 What specific considerations should be borne in mind where the sale is structured as an auction process?

When preparing a transaction process, the seller can choose to subject the potential buyers to an auction process, allowing it to generate competition and thus potentially obtain the highest possible purchase price based on prepared sales material.

An auction is typically a more complex process involving significant preparation by legal and financial advisers - including an information memorandum, vendor due diligence reports and other relevant sales material - to allow bidders to form a qualified opinion on the value of the target. Conducting an auction process with several interested parties also puts considerable strain on an organisation. An effective auction process relies on having several interested potential buyers - preferably both industrial and financial parties. Therefore, not all companies will be fit for auction; it may be a better option to enter into a letter of intent with one preferred buyer and have a bilateral process.

2 Initial steps

2.1 What agreements are typically entered into during the initial preparatory stage of a private M&A transaction?

The first document entered into between the parties is most often a non-disclosure agreement/confidentiality agreement (NDA).

NDAs are commonly concluded for all businesses when initiating transfer negotiations. They allow the parties to share sensitive information without fearing that it will end up in the hands of competitors.

In Denmark, there are no specific requirements regarding the content of an NDA. However, the main issues usually covered by an NDA include:

• what is considered confidential information and the handling hereof;
• the duration of the confidentiality obligation;
• a non-solicitation clause regarding employees (special limitations apply in this regard under Danish law); and
• the choice of law in case of a dispute relating to the NDA.

An NDA can be prepared as either:

• a unilateral declaration of the potential buyer; or
• a mutual non-disclosure agreement.

In a bilateral process, it is common to enter into a term sheet or letter of intent setting out the terms of the potential transaction. This document is not legally binding.

In an auction process, the potential bidders will often be requested to provide an indicative offer in order for the seller to be able to shortlist the interested parties.

2.2 Which advisers and stakeholders are typically involved in the initial preparatory stage of a private M&A transaction?

In the initial preparation stage, the key advisers will be tax advisers, financial advisers (auditors and corporate finance house) and legal advisers. These advisers help the seller to structure the transaction.

Also, advisers with specific knowledge of the target business or the market - including the geographical market - and technical, strategic and IT advisers may be involved in structuring the transfer.

2.3 Can the seller pay adviser costs or is this limited by rules against financial assistance or similar?

In the Danish market, the seller can pay advisers' costs without limitation by rules against financial assistance. If the costs were to be paid by the target, however, the situation would be different. As a main rule, the target is not allowed to pay for adviser costs unless the company directly benefits from the advice.

3 Due diligence

3.1 What due diligence is typically conducted in private M&A transactions in your jurisdiction and how is it typically conducted?

Due diligence is most often conducted electronically through an online data site provided by the seller/target. The professional data sites available have the advantage of including all necessary features, such as:

• ensuring access mapping
• redaction tools; and
• handling and structuring Q&A sessions.

The most common issues included in the due diligence process include (depending on the transfer in question):

• corporate;
• accounting and financing;
• management and employees;
• contracts;
• related-party matters;
• operating equipment;
• real property;
• insurance;
• disputes;
• IP rights;
• information technology;
• data protection;
• public permits and other licences, regulatory matters etc;
• tax and value added tax; and
• environment.

The due diligence process most often results in the buyer's advisers preparing a due diligence report, including findings and recommendations. The due diligence report often serves as the basis for further negotiations with the seller.

3.2 What key concerns and considerations should participants in private M&A transactions bear in mind in relation to due diligence?

When conducting due diligence, the buyer may uncover issues that cannot be fully clarified or mended. In this scenario, the parties will have to agree on commercial solutions such as:

• agreement on risk specific warranties
• specific indemnities provided by the seller;
• a reduction in the purchase price; and/or
• an earnout mechanism.

The parties should also be aware of the possibility of obtaining warranty and indemnity insurance covering all unknown liabilities under the warranties (ie, issues not discovered during due diligence), ensuring that the seller will not be met with claims after closing of the transaction.

3.3 What kind of scope in relation to environmental, social and governance matters is typical in private M&A transactions?

Environment, social, and governance risks are considered non-financial risks. Each company will have a different risk profile and must develop its own internal control system and embed this into business processes.

Currently, we are witnessing a shift in focus from a sole financial focus to an additional focus on non-financial risks. Due to this change in focus, there is also increased interest during an M&A process on:

• clarifying the non-financial risks in a target; and
• evaluating whether the target has an effective risk management process in place.

4 Corporate and regulatory approvals

4.1 What kinds of corporate and regulatory approvals must be obtained for a private M&A transaction in your jurisdiction?

Usually, a sale and a purchase transaction require the corporate approval of the boards of directors of both seller and buyer. Sometimes, a sale requires a change in the object of the company, which can require approval from third parties or authorities.

From a regulatory perspective, approval may be required from authorities under:

• the merger control regime;
• the financial regulatory regime; and/or
• the new regime for the screening of foreign investments and...