No. 10, First Quarter 2007 SmartCapital Not So Green and Pleasant Land – The Importance of Environmental Due Diligence for Private Equity Investors in Europe 1 New Latham Offices in Madrid and Barcelona 3 Recent Spanish Decision on Financial Assistance 3 Latham Awarded “Firm of the Decade” 4 Modifications to the French Rules on Takeover Bids 5 REITs in Germany 6 The Benefits of Trade Receivables Securitisations 8 Latham News 9 Recent European Deals 10 Country Updates 11 European Edition—Current Legal Issues for Investors in European Businesses Not So Green and Pleasant Land – The Importance of Environmental Due Diligence for Private Equity Investors in Europe By Steven Vaughan A proactive approach to environmental risk management is essential because failure to comply with environmental regulation (or to respond adequately to environmental risks) can have significant financial implications. Clean-up works, such as soil and groundwater remediation, may run to 10s of millions of Euros. There is also the prospect of criminal or administrative fines for non-compliance and, in certain circumstances, personal liability for company directors or officers. Proper management of environmental issues, as an aspect of good corporate governance, is also important for reputational issues. With increasing pressure for companies to ramp up their level of reporting on environmental matters, brand damage to a target business because of its approach to environmental issues must be factored into an investor’s due diligence analysis. What Due Diligence is Required? The level of due diligence required for a proper analysis of environmental risks will vary from deal to deal. With business disposals, it is increasingly common for vendors to prepare a suite of divestiture environmental due diligence documentation on which the investor may rely. If properly prepared (and the terms of reliance are not overly restrictive), these documents may reduce the amount of independent due diligence required by the investor’s specialist advisors (lawyers, environmental consultants, accountants and insurers). Where vendor divestiture due diligence documentation is not provided, the investor will need to choose an appropriate scope of work for its advisors. Not every environmental issue identified will be material, nor should every environmental risk be reviewed or analysed. This will partly depend on timing: if the investor is part of a competitive auction process, the Inside This Issue Steven Vaughan Associate Environmental Regulatory Practice
Transcript
No. 10, First Quarter 2007
SmartCapital
Not So Green and Pleasant Land – The Importance of Environmental Due Diligence for Private Equity Investors in Europe . . . . . . . . 1New Latham Offices in Madrid and Barcelona . . 3
European Edition—Current Legal Issues for Investors in European Businesses
Not So Green and Pleasant Land – The Importance of Environmental Due Diligence for Private Equity Investors in EuropeBy Steven Vaughan
A proactive approach to environmental risk management is
essential because failure to comply with environmental regulation
(or to respond adequately to environmental risks) can have
significant financial implications. Clean-up works, such as soil
and groundwater remediation, may run to 10s of millions of Euros.
There is also the prospect of criminal or administrative fines for
non-compliance and, in certain circumstances, personal liability
for company directors or officers.
Proper management of environmental issues, as an aspect of good corporate governance, is also important for reputational issues. With increasing pressure for companies to ramp up their level of reporting on environmental matters, brand damage to a target business because of its approach to environmental issues must be factored into an investor’s due diligence analysis.
What Due Diligence is Required?The level of due diligence required for a proper analysis of environmental risks will vary from deal to deal. With business disposals, it is increasingly common for vendors to prepare a suite of divestiture environmental due diligence documentation on which
the investor may rely. If properly prepared (and the terms of reliance are not overly restrictive), these documents may reduce the amount of independent due diligence required by the investor’s specialist advisors (lawyers, environmental consultants, accountants and insurers).
Where vendor divestiture due diligence documentation is not provided, the investor will need to choose an appropriate scope of work for its advisors. Not every environmental issue identified will be material, nor should every environmental risk be reviewed or analysed. This will partly depend on timing: if the investor is part of a competitive auction process, the
Inside This Issue
Steven VaughanAssociateEnvironmental Regulatory Practice
ability to undertake a complete environmental review may be limited. There is a middle ground between sufficient due diligence to understand properly the environmental risks faced by the target business and excessive due diligence which is not commercial or practical in the context of the transaction.
While there are no hard and fast rules on what environmental due diligence is or is not appropriate, the target business should be analysed from an environmental point of view for:
regulatory compliance; soil and groundwater issues; andlegal/contractual concerns.
Regulatory Compliance Certain non-compliance matters may only require management time or minimal cost to be remedied (and thus have no significant impact for the investor). Others may require the outlay of significant CAPEX (either on an on-going basis or when a site is decommissioned or closed). As part of the due diligence process, the following matters should be reviewed:
Permits and LicencesA business may require a licence or permit from a regulatory authority for a number of reasons: to discharge waste, to abstract water, to store or handle hazardous materials; to emit to air, etc. The due diligence process should highlight what permits are required, whether these have been obtained and if they are complied with.
WasteThe EU is aiming for a significant cut in the amount of waste generated by the Member States, through new waste prevention initiatives, better use of resources and encouraging a shift to more sustainable consumption patterns. Of most topical interest is the EU Waste from Electrical and Electronic Equipment Directive, which places waste management obligations on certain manufacturers and importers.
Hazardous SubstancesEnvironmental due diligence will identify what hazardous substances are stored, used or handled on site and whether such is compliant with relevant legislation and good industry practices. In December 2006, the EU adopted a Regulation on the Registration, Evaluation and Authorisation of Chemicals (REACH). REACH seeks to shift the burden of assessing chemical safety from governments to manufacturers and will oblige producers and users of chemicals to register, and potentially test, approximately 30,000 chemicals currently in commercial use within the EU.
Health and SafetyThe due diligence process should include assessment of the mechanisms in place for the
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management of occupational health and safety issues, including organisation, staffing and training as well as the presence (or otherwise) of a comprehensive health, safety and environmental management system (such as EMAS or ISO 14001).
Soil and Groundwater ContaminationBecause of long industrial usage, there are thousands of sites across Europe which are either actually contaminated or which have the potential for soil and groundwater contamination. Soil and groundwater contamination risks tend to fall into three pockets:
contamination of the target business properties at the date of investment or acquisition;contamination of properties formerly owned, occupied or otherwise used by the target business; andcontamination of third party properties at the date of investment or acquisition as a result of migration of contaminative substances from the target business’ current or former properties.
Because of the EU principle that “the polluter pays” and the operation of certain Member State contaminated land regimes, it is possible for the target business to retain liability for certain environmental matters at former properties (often referred to as “legacy issues”). It is difficult to determine with any degree of accuracy relative responsibilities for contamination where a site has had long industrial use with occupation by multiple operators.
Legal MattersThe legal due diligence exercise focuses on legislative and contractual mechanisms that will have an impact on the environmental risks associated with the target business and should seek to establish:
where environmental liabilities will, or may be, allocated as a result of operation of law;whether such liabilities have been, or may be, apportioned to any other party contractually, by way of agreements on liability or indemnities; andthe existence or possibility of third party litigation or claims or enforcement action by regulatory authorities.
On divestiture, the ability to exit a target business cleanly will depend, in part, on the sufficiency of pre-investment or pre-acquisition due diligence and the associated investment or acquisition contractual protections granted to the investor. Consequently, a holistic approach to environmental due diligence is best used to provide a private equity investor with a proper understanding of the target business and target sector to which it may commit funds.
For further information, please contact Steven Vaughan at [email protected]. n
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Continued from Page 1 — Not So Green and Pleasant Land
� Latham & Watkins | SmartCapital, European Edition—Issue 10, 2007
�Latham & Watkins | SmartCapital, European Edition—Issue 10, 2007
Latham & Watkins Continues European Expansion with Launch of Spanish OfficesLatham & Watkins is pleased to announce the opening of two offices in Spain, in a move that strengthens its practice in Europe and globally. Led by highly-respected M&A partner, José Luis Blanco, the firm’s Spanish practice’s principal office is located in Madrid and is supported by an additional office in Barcelona.
José Luis joined Latham from Cuatrecasas on 1 January 2007, as the Office Managing Partner for Spain. Latham’s practice focus in Spain will be largely on M&A and private equity transactions, complemented by acquisition finance and competition law.
Possessing a formidable transactional reputation in the Spanish market, José Luis represents strategic buyers and private equity clients. In 2006, he represented the Yell Group, the British Yellow Pages company, in its multi-billion Euro acquisition of Telefónica Publicidad e Información, the Spanish Yellow Pages provider. He also regularly represents Repsol, the largest Spanish oil and gas company. On the private equity side, he has represented The Carlyle Group in both acquisitions and dispositions in Spain, as well as consortium acquisitions involving multiple global private equity firms.
The opening of the two Spanish offices takes Latham to 10 offices in Europe, with more than 380 attorneys in the region.
José Luis was educated at the University Autónoma of Barcelona, where he received his J.D. in 1984, and Yale Law School, where he received his LL.M in 1986. He joined Garrigues in its Barcelona office in 1986, becoming a partner in 1996. In 1998 he moved to Cuatrecasas, where he was appointed global head of M&A in 2005. n
New OfficesNew OfficesMadrid and Barcelona
Recent Spanish Decision on Financial AssistanceBy José Luis Blanco, Ignacio Pallarés and Xavier Pujol
From the early days of the takeover fight for the Spanish energy group Endesa, S.A.
(Endesa), both the target and the bidders (Gas Natural SDG, S.A., Eon AG, Acciona, S.A.)
have tried to move the battlefield from the Spanish stock exchange to the courtroom. The
bid process has been affected by several judicial disputes in relation to matters such as the
scope of the passivity rule under the Spanish takeover regulation (where the target’s board
of directors should act in the ordinary course of business when a tender offer is received),
access to information during the bid process or the existence of financial assistance in the
tender offer launched by Gas Natural SDG, S.A. (Gas Natural).
In this context a Spanish lower court (Section 28 of the Audiencia Provincial de Madrid) has recently decided on the matter of certain injunction measures related to a claim filed by Endesa against Gas Natural and Iberdrola, S.A. (Iberdrola). In our
opinion, this decision is the most important ruling in Spain to date regarding financial assistance.
Endesa sued Gas Natural and Iberdrola on the grounds that if the conditional agreement entered into between Gas Natural and Iberdrola for the
Our ambition is to build a leading and innovative practice that is very focused in the segments we want to target. It became clear to me that Latham & Watkins is the firm that will best support my vision in terms of the people, practice breadth and resources required to succeed. When you combine these qualities with an entrepreneurialism that few firms can match, you have a winning platform.
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– José Luis Blanco ”
transfer of certain assets of Endesa to Iberdrola to be effective in the event the tender offer by Gas Natural for Endesa succeeded, it would infringe the prohibition on a company providing assistance in the acquisition of its own shares set out in Article 81 of the Spanish Ley de Sociedades Anónimas (LSA). Endesa argued
that the purpose of the agreement was to facilitate Gas Natural funding its acquisition of shares in Endesa financed with Endesa´s own assets. However, the court rejected the arguments of Endesa. The decisions included several remarks that may be of general interest:
The Spanish financial assistance prohibition must be interpreted restrictively. The financial assistance prohibition requires that the financing is used specifically for the acquisition of the shares and that this is the main rationale for
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the transaction. In this respect, if the purpose of providing financial assistance does not exist or it is not the most relevant rationale of the contract and there are other prevailing rationales for the transaction, then the transaction does not fall under the financial assistance prohibition of Article 81 LSA.
There must be a clear distinction between the rationale of the contract and the intention pursued by the parties to it. The rationale of a contract must reflect the common goals of the parties that are essential for the execution of the contract.
A merger between the target company and the acquiror (a “forward merger”) does not imply per se the infringement of Article 81 LSA. Under Spanish corporate law the merger process provides mechanisms to guarantee the protection of creditors and minority shareholders.
Being a decision of a lower court and not a decision of the Spanish Supreme Court, this ruling does not create a binding precedent. However, it confirms a construction of the scope and meaning of the Article 81 LSA which reassesses the interpretation supporting the structuring and financing of leverage buy-outs and contributes in clarifying the Spanish perspective on financial assistance.
� Latham & Watkins | SmartCapital, European Edition—Issue 10, 2007
Continued from Page 3 — Recent Spanish Decision on Financial Assistance
Jose Luis BlancoPartnerCorporate Department
Ignacio PallarésOf CounselCorporate Department
Xavier PujolAssociateCorporate Department
Latham Awarded ‘Law Firm of the Decade’Latham & Watkins was recently awarded the highly coveted title ‘Law Firm of the
Decade’ at the prestigious Legal Business 2007 Awards.
The judges for the ‘Law Firm of the Decade award’ said about Latham: “After conquering New York in the first part of the 1990’s, Latham turned its attention to Europe and Asia in the second half with staggering success. Now considered one of the top 15 law firms in London, the firm is unique in being able to conquer both New York and London despite hailing from neither. Now arguably the only global firm that can honestly say it has no headquarters, the firm has followed its global financial institutional clients around the world with an aggressive expansion plan. Despite its rapid growth, the firm is considered to be one of the most collegiate and diverse firms around.”
The special award was presented in celebration of the 10th anniversary of the Legal Business Awards to the law firm that has best reacted to the immense challenges posed by the legal industry globally over the last 10 years and which has demonstrated clear evidence of financial and strategic success during the period. n
In our opinion, this decision is the most important ruling in Spain to date regarding financial assistance.”“
�Latham & Watkins | SmartCapital, European Edition—Issue 10, 2007
New Statement of Intent Further to Rumours on Takeover BidsIn cases where the market for the financial instruments of a public company issuer is subject to large price swings or unusual trading volume, the AMF may require a given person(s) to disclose publicly its intentions within a given deadline where there is reason to believe that such person is preparing a takeover bid (i.e. has entered discussions with the target public company and appointed advisors). When such person discloses that he/she intends to file a tender offer, the AMF will set a date by which such tender offer will have to be filed or a press release describing the terms of the proposed tender offer will have to be published. In cases where such person states that he/she does not intend to file an offer, the new rules (codified in the AMF General Regulation) prevent the person from making an offer for the public company during a six month period from the time of the statement, unless evidence is provided showing major changes in the environment, situation or shareholding structure of the persons concerned including the target public company itself. These provisions were enforced by the AMF in January 2007 in response to rumours of the preparation of a tender offer by an investor for the French utility company Suez.
Extension of the Scope of Application of the Fairness OpinionThe filing of a fairness opinion issued by an independent appraiser appointed by the target is now mandatory not only for the squeeze-out of unaccepting shareholders to a takeover offer but also in cases of (i) conflicts of interest within the board of directors or governing body of the target, (ii) breaches of equal treatment between shareholders, (iii) if the offeror controls the target prior to the launching of the offer or (iv) if the price offered is paid in any securities other than shares. The issuance of a fairness opinion is now regulated by the AMF General Regulation and which also governs the independence criteria applicable to the expert giving the opinion, the methods required for delivering the fairness opinion and its content.
If a fairness opinion is required, the offer document may not be jointly prepared by the offeror and the target company. Rather, the offeror and the target company must each prepare its own reply document.
Simplified Rules for the Filing and Supervision of a Tender OfferTo ensure more transparency in the market, the draft of offer document must be made available to the public from the date when the proposed offer is filed with the AMF.
The issues of approval of the terms and conditions of the offer and approval of the offer document are now considered together and are the subject of a single, comprehensive decision issued by the AMF within 10 trading days. The AMF supervision mainly focuses on whether the information necessary to assess the price or the exchange ratio is consistent and complete, except where specific provisions regarding the offer price apply (e.g. mandatory tender offer, standing market offer, competitive offer).
Furthermore, if the target holds one-third or more of the share capital in a company listed on a European regulated market or a foreign stock exchange, where such shareholding represents an essential asset of the target, then the filing of the offer must include any document providing evidence that a tender offer for the securities of such foreign listed company has been filed with the relevant authorities (and such an offer for the foreign subsidiary is required by French law).
Mandatory Tender Offer – Minimum Offer PriceIn accordance with the EU Takeover Directive, the price offered in a mandatory tender offer must be at least equal to the highest price paid by the offeror for the target’s shares within the last 12 months. The AMF may request or authorise a price modification in the case of a manifest change in the characteristics of the target, in the market for its securities, in cases where events materially alter the value of the securities concerned in the 12-month period, or if the target company is in a compromised financial position. In those cases or in the absence
Modifications to the French Rules on Takeover BidsBy Marie-Crystel Dang Tran
The French rules governing takeover bids provided for in the
General Regulation issued by the Financial Market Authority
(Autorité des marchés financiers “AMF”) were modified in
September 2006 to implement a new law dated 31 March 2006
applicable to such bids (and covered in Smart Capital,
Issue 6, 2006). This article provides an outline of some of
the major changes resulting from these modifications.
Marie-Chrystel Dang Tran AssociateCorporate Department
� Latham & Watkins | SmartCapital, European Edition—Issue 10, 2007
It is estimated that €25 billion in 2005 and €50 billion in 2006 was spent on the acquisition of German real estate, and in 2007, that number is expected to rise to €75 billion. Germany provides Europe’s highest volume of real estate transactions, however, only 11 percent is estimated to be accessible in equity capital markets. G-REITs are expected to fulfill investors’ needs, with the German government intending to professionalise the real estate capital market and to close the gap with the rest of the world’s, especially Europe’s, real estate capital markets.
G-REIT CriteriaThe G-REIT is exempt from trade and corporate tax, with taxation only applying at the shareholder level. There are a number of prerequisite criteria to obtaining G-REIT status:
The G-REIT is registered in Germany and has a listed share capital of at least €15 million. Its business purpose is for the direct or indirect owning and managing of real estate assets. Loan capital represents less than 60 percent of the company’s assets. 75 percent of its income derives from real estate which includes rental and sales income. During the stock market listing procedure, at least 25 percent, and later at least 15 percent of its shares are widely held by a large number of shareholders, none of whom own more than 3 percent of the voting rights in the G-REIT shares. No shareholder owns or represents 10 percent of the shares or more directly (i.e. where a fund holds as nominee they may hold more than 3 percent), whereas a group of investors may hold more than
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REITs in GermanyBy Martin Meissner
The new German REIT law is expected to be implemented in the
near future, retroactively coming into force on 1 January 2007. After
almost three years of political discussion, there is finally a German
REIT (G-REIT) and different views exist on whether the G-REIT
serves as a tax model, asset class or simply as an exit opportunity
for real estate investors. At present, market participants are waiting
for the first G-REIT to be brought to market.
Martin MeissnerPartnerFinance Department
of transactions by the offeror, the offer price is determined following the AMF’s ‘usual and general’ multi-criteria valuation method.
Tender Exchange Offers Any tender offer for a target’s securities in exchange for offeror securities must include an option in cash in the case where the securities offered in exchange are not listed on a European Regulated Market or the offeror has purchased in cash more than 5 percent of the target company’s share capital, within the 12 months prior to the offer.
Extension of the Squeeze-OutSqueeze-out provisions have been extended to securities giving access to the share capital of a target company provided that these securities and the existing equity securities held by the minority shareholders do not exceed more than 5 percent of the sum of the target’s existing and outstanding equity securities. The squeeze-out may be implemented directly following any tender offer and within three months thereafter, provided that
the offeror holds at least 95 percent of the share capital and voting rights of the target. If the initial tender offer has been paid in whole or in part through the exchange of securities, the minority shareholders may receive such securities provided that an option in cash be offered.
For further information, please contact Marie-Chrystel Dang Tran at [email protected]. n
Continued from Page 5 — Modifications to the French Rules on Takeover Bids
To ensure more transparency
in the market, the draft of offer
prospectus must be made available
to the public from the date when
the proposed offer is filed with
the AMF.
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�Latham & Watkins | SmartCapital, European Edition—Issue 10, 2007
10 percent provided none individually exceeds the 10 percent threshold. At least 90 percent of the G-REITS revenues shall be distributed to its shareholders. Pre-REIT status can be registered at the Central Tax Agency. Once an application for registration as a ‘pre-REIT’ is made, they obtain the same tax exemptions as the G-REIT. The pre-REIT must apply for admission to a stock exchange within three years to obtain G-REIT status (there is a further grace period of one year on request).
G-REIT operations are limited to the acquisition, holding, management and sale of domestic and foreign real estate. G-REITs are excluded from purely professional property trading. Within a period of five years, a G-REIT may not generate revenues from sale of real estate that exceeds 50 pecent of the average market value of its portfolio. Residential properties built before 1 January 2007 can be acquired by a G-REIT only if these are mixed-used buildings where residential housing is of minor importance. Due to the fact that those mixed-use properties are not estimated to create marketable portfolios, residential housing is likely to be excluded from the German REIT market. G-REITs may hold foreign property companies as wholly owned subsidiaries provided that the assets of the foreign company consist exclusively of foreign real estate. A G-REIT may hold or participate in service companies – e.g. property facility-management – rendering property related services to third parties provided that revenues from such participation do not exceed 20 percent of the G-REITS’s total revenues.
Violations of G-REIT CriteriaViolation of the G-REIT prerequisite criteria may trigger penalty payments or suspend tax exemptions. For example:
If less than 15 percent of the shares in a G-REIT are widely held for three consecutive business years, the G-REIT loses its tax-exempt status at the end of the third business year. In this case, the articles of the G-REIT shall provide for the compensation of all shareholders that hold less then 3 percent of the voting rights in the G-REIT’s shares. If less than 75 percent of the G-REIT’s assets derive from real estate or if less than 90 percent of the revenues are distributed to the shareholders, a fine may be applied to the G-REIT.If loan capital exceeds 60 percent of the G-REIT’s assets within three consecutive years, at the end
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of the third business year the G-REIT shall lose its trade and corporate tax-exempt status. Where the G-REIT engages in professional real estate trading, the G-REIT shall lose its REIT status for that respective year. If shareholders own or control 10 percent or more of the G-REIT shares, the G-REIT does not lose its tax-exempt status and the shareholder does not lose his dividend and voting rights, but he/she may only claim for rights that would be applicable from a shareholding of less than 10 percent.
ConclusionLarger investment funds are, in the future, expected to create G-REITs for refinancing purposes. Companies with real estate assets might raise liquidity selling their property into a G-REIT. Investment banks already plan to use G-REITs as an investment vehicle. However, the exclusion of private G-REITs and marketable residential housing portfolios has set essential restraints on G-REITs within the German market. At present, we face the calm before the storm of G-REITs coming to market.
For further information, please contact Martin Meissner at [email protected]. n
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The exclusion of private G-REITs and marketable residential housing portfolios has set essential restraints on G-REITs within the German marketplace.
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Upcoming SeminarOn Tuesday, 24 April 2007, Latham & Watkins, along with management firm Starnberg, will organise a seminar on G-REITs in Frankfurt. Speakers include Oliver Everling (Everling Advisory Services), Michael Janetschek (Partner, Ernst & Young Real Estate GmbH), Wolfgang Schaefers (Director, Sal. Oppenheim jr. & Cie. KGaA), Andreas Steyer (Manager, Deka Immobilien Invest) and Thilo Wagner (Head of Property Investment, Henderson Global Investors Ltd.). Latham & Watkins partners Marcus Herrmann, Martha B. Jordan, Roland Maass, Martin Meissner and Stefan Süss are participating as either speakers or discussion moderators. For further information about this event: please contact Astrid Kochs in our Frankfurt office at [email protected].
� Latham & Watkins | SmartCapital, European Edition—Issue 10, 2007
Over the last few years, trade receivables securitisations have become an increasingly popular source of finance for private equity investors. The driving force behind the evolution of securitisations – achieving lower cost of funds through the capital markets by separating the more reliable income revenue of a target company from the credit risk of the borrower group itself – lends itself to leveraged buy-outs where the target’s credit rating is affected by the high levels of debt with which it is leveraged. In 2006, several high profile private equity transactions (e.g. Europcar) used securitisation to access the capital markets to an unprecedented level and achieve lower costs of funds
in highly-leveraged deals. When used to refinance existing debt of the target company, trade receivables securitisations also have the potential to reduce the pressure of the target’s ongoing debt amortisation profile and free up working capital. This may, in turn, enable the private equity investor to realise its investment more quickly, as the released capital is reinvested in the profitability strategy for the target company.
As well as the potential for lowering the cost of funds, improving amortisation profiles, releasing working capital and providing a diversified investor base, trade receivables securitisations can offer ancillary benefits by improving the operating efficiency of target companies whilst allowing greater flexibility through the use of less onerous financial covenants. Trade receivables securitisations are dependant upon the operating systems of the company originating the receivables; in order to achieve the necessary ratings for commercial paper funding, the company will need to demonstrate that it has the systems in place to track the receivables which it has sold into the transaction, to track the collections which have been paid in respect of those receivables and notify its customers of the
sale if required by local transfer law requirements. Whilst these kinds of requirements may offer an additional challenge during the implementation stage, once in place a more efficient and accurate operating and invoicing system is likely to benefit both the company and its investors; for example, the company will be better placed to be able to monitor customer performance in terms of payment speed and the number of post-sale adjustments required. The transfer of the receivables to a bankruptcy-remote vehicle outside of the target group will also allow the funding to be less reliant on restrictive operating covenants given by the target, relying instead on the quality of the eligibility criteria of the receivables portfolio itself.
The comparable benefits to a bank lender sponsoring a trade receivables securitisation may also offer incentives for a higher borrowing base. For example, the lenders under a properly structured securitisation will have direct recourse to the operating company’s cash-flows, through the receivables collection accounts. This compares favourably to an acquisition finance loan to the holding company, which may have access to the cash-flows of the operating subsidiary restricted by regulation relating to the granting of up-stream guarantees and/or be subordinated to other liabilities of the operating company. The structural benefits of securitisation to a lender may therefore encourage the lender to increase the size of the securitisation (in sensible ways) as a proportion of the overall acquisition financing and thereby increase the amount lent against the asset pool.
Moreover, the short-term nature of the commercial paper funding a trade receivables securitisation may allow for a more dynamic borrowing base, which is therefore able to extract more value from the pool of receivables than may have been acceptable to the lender in a more traditional acquisition financing. As well as offering a more competitive overall advance rate, the borrowing base calculation may allow for funding against particular receivables which would not otherwise have been funded against. For example, larger concentrations of receivables owing by a particular customer, in a particular currency or originated in a particular country may be funded against. As long as the portfolio of receivables is performing well enough, collections from the receivables will be available to be applied for the purchase of new receivables into the transaction.
The Benefits of Trade Receivables Securitisations
By Mark Nicolaides, John-Patrick Sweny and Gero Schreiber
As an established financing tool for private equity investors,
trade receivables securitisations offer a low-cost funding alternative
for highly-leveraged LBO targets. In this article, we will be looking
at the benefits of such transactions over more traditional financings,
as well as the ways in which these transaction structures can
themselves be refined.
Mark NicolaidesPartnerFinance Department
Gero SchreiberAssociateFinance Department
John-Patrick SwenyAssociateFinance Department
�Latham & Watkins | SmartCapital, European Edition—Issue 10, 2007
In conclusion, a trade receivables securitisation may help a private equity investor to improve the efficiency of the operating systems of a target company whilst providing both a lower cost of funds and release of working capital to enable the company to take advantage of enhanced operating systems and grow the business in a less restricted manner to help achieve the exit strategy of the investor. Despite the extra complexity imposed by the specialist structuring and execution requirements of
a trade receivables securitisation, the benefits of using this deal technology are now established features of the leveraged buy-out landscape.
SmartCapital Picks up an AwardSmartCapital was named the ‘Best Client Newsletter’ in the Legal PR News awards, a US awards programme which recognises the year’s most outstanding communications initiatives within the legal community. SmartCapital was launched three year’s ago, aimed at providing current legal issues to investors in European businesses. As a result of its success, a US edition was launched a year later.
Accomplished Competition Partners Join Latham in Brussels: Latham Grows its European Cartel Defense and Merger Control Practice Capability Howard Rosenblatt and Bruno Lebrun, two highly regarded competition partners, have joined Latham’s Brussels office from Howrey LLP. Both partners bring strong expertise in advising EU and US corporations on cartel defense and merger investigations, in addition to further enhancing the firm’s EU law and broader litigation capabilities.
Howard has expertise in both US and EU competition law. He practices regularly before the European Commission, the US Federal Trade Commission and the US Department of Justice in cartel and merger investigations. He also represents parties in proposed transatlantic joint ventures and all other business practices implicating the competition rules.
Bruno has extensive experience in the cartel and merger arenas, where he represents European and US clients before the European Commission and national competition agencies. His practice also includes competition-related issues faced by technology industries and intellectual property owners.
The arrival of Howard and Bruno takes Latham’s Antitrust and Competition Practice Group in Brussels to 17 lawyers, including seven partners, who advise major national and multinational companies on issues arising from merger control, antitrust enforcement and state aid control. n
Latham Named Most Admired Firm by The American LawyerIn the December 2006 issue of The American Lawyer, Latham & Watkins is identified as The Am Law 200’s most admired firm. The article resulted from the magazine’s Firm Leaders Survey, in which Latham & Watkins is named more than three times as often as any other firm for its management style. The article charts the rise of Latham from its Los Angeles roots to one of the leading global firms today, and it discusses Latham’s approach to management, successful practice growth and expansion, and collegial culture.
Upcoming SeminarWhat Every Company Needs to Know About Doing Business in the US or With US Companies A Practical Guide to the Lessons Learned from Enron, WorldCom and Other Corporate ScandalsLatham & Watkins’ Securities Litigation Practice is hosting a three-city seminar series in London, Paris and Frankfurt on 24, 25 and 26 April respectively, featuring two of the leading former white collar crime and corporate fraud prosecutors in the US, Sean Berkowitz and Richard Owens.
These seminars will draw upon their experience and expertise gained in prosecuting many high profile cases, such as Enron, Worldcom and ImClone Systems (the Martha Stewart case). The speakers will give first-hand insight into regulatory and criminal issues to be considered when doing business in the US or with US companies. For further information: please contact Anine Leakey on +44 (0)20 7710 1865 or [email protected].
10 Latham & Watkins | SmartCapital, European Edition—Issue 9, 2006
RecentEuropean DealsRecent
Delsey Group
Representation of Argan Capital on the acquisition of Delsey Group, the second largest travel luggage brand worldwide.
Undisclosed
Interhotel Portfolio
Representation of Deutsche Bank and Aareal Bank in Sale of Interhotel Portfolio.
Undisclosed
KAMPA
Representation of Kampa AG as target company in a public takeover bid by Triton Fund II L.P.
€70,000,000
Mill Digital Media Limited
Representation of The Carlyle Group in its acquisition of Mill Digital Media Limited, a leading London visual special effects group, from 3i and Mill Digital Media Limited Management.
Undisclosed
NLB Corp
Representation of Italy-based Interpump Group S.p.A. on its acquisition of Michigan-based NLB Corp, manufacturers and worldwide commercialisation of high pressure water jet cleaning equipment.
$62,400,000
PPM Capital
Representation of the private equity investor on the acquisition of orizon AG, one of the leading German provider of temporary staffing services, from its main shareholder, GL Aktiengesellschaft, Hamburg, and other private investors.
Approx. €200,000,000
Svyazinvest
Representation of Comstar-United TeleSystems, the leading provider of integrated communications services in Moscow, on the acquisition of a 25 percent plus one share blocking stake in Russian company OAO Svyazinvest, one of the largest telecoms holding companies in the world, from Mustcom Ltd.
$1,300,000,000
Techem AG
Representation of BC Partners in the public takeover bid for Techem AG, one of the leading global providers of energy services for real estate businesses.
€1,450,000,000
Telediffusion de France
Representation of Axa Private Equity on its Joint Acquisition with Texas Pacific Group of Telediffusion de France, Europe’s biggest owner of broadcast and telecoms masts and transmitters, from Caisse des Dépôts et Consignations (CDC) and Charterhouse Capital Partners LLP.
€4,900,000,000
Classic Media Holdings
Representation of Spectrum Equity Investors on the sale of Classic Media Holdings to Entertainment Rights plc, a UK children’s television character rights group.
$210,000,000
Dangaard Telecom and Nordic Capital Fund Representation of Dangaard Telecom and Nordic Capital Fund in their merger with Brightpoint, Inc., a global leader in the distribution of wireless devices.
Undisclosed
10 Latham & Watkins | SmartCapital, European Edition—Issue 10, 2007
Our comprehensive experience in all aspects of private equity investment enables us to service the full array of legal needs of fund sponsors and investors alike, from fund formation to investment acquisition, structuring, financing and disposition.
The following is a selection of recent European deals.
11Latham & Watkins | SmartCapital, European Edition—Issue 9, 2006
CountryCountryUpdates
FranceAmends to French Law Introduces a “Record Date”On 11 December 2006, a new decree was published in France in order to amend certain rules applicable to French limited liability companies. Of particular note, this decree has changed the rules applicable to the exercise of voting rights in shareholders’ meetings of French sociétés anonymes. The decree introduces into French corporate law the concept of a “record date” which did not exist previously.
The record date is set three days before the shareholders’ meeting and any person being a shareholder of the company on this date shall have the right to vote at the shareholders’ meeting. Any transfer of shares registered prior to such record date will be taken into account and the transferor will be denied any rights to participate to the meeting where the transferee will instead be authorised to vote. Any transfer of shares completed after the record date will have no effect on the ability of the transferor to participate at the shareholders’ meeting.
This new rule is mandatory for public companies and optional for private companies. Before this decree, any French société anonyme could, within certain limits, determine in their own by-laws the rules applicable to the right to vote at their shareholders’ meeting (usually, companies would require the participant to be shareholder on a certain date before the meeting (which could not exceed five days before) and to undertake not to proceed with a transfer of shares before the meeting). This amendment to French company law is in line with the recommendation contained in the Proposal for a Directive (presented by the European Commission on 10 January 2006) on the exercise of voting rights by shareholders of a company having their registered office in a Member State and whose shares are admitted to trading on a regulated market. This “record date” concept is already applied in other European countries including the UK, Germany, Sweden and Finland.
GermanyChanges in German Law Impacting Public TakeoversStarting on 20 January 2007, the notification obligations for shareholdings in publicly listed German companies changed. These changes may have an impact on the strategy used to purchase shares in the market prior to launching a public offer for a German company. In addition to the previous thresholds which started at 5 percent, new thresholds of 3 percent, 15 percent, 20 percent and 25 percent have been introduced. Furthermore, certain financial instruments granting an option to purchase shares will trigger a notification obligation.
Whether conditional off-market agreements, which are effective after their signing, will fall under this new provision is currently under review with the German Financial Supervisory Authority. The changes may have the effect that a notification obligation arises earlier; this needs to be taken into account when determining any offer strategy.
Finally, the changes made to German law (Section 30 (1) No. 1 WpÜG) in July 2006 and which led to an attribution of voting rights to sister companies (e.g. in cases where a private equity fund held a public company, the voting rights in such public company were attributed to each newly acquired portfolio company of the private equity owner) with the consequence of a flood of exemption applications for launching a mandatory tender offer – has been reversed. n
11Latham & Watkins | SmartCapital, European Edition—Issue 10, 2007
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