What proportion of transactions have involved a financial sponsor as a buyer or seller in the jurisdiction over the last 24 months?
There are no official statistics issued by any Maltese authority in respect of merger and acquisition transaction or private equity transactions taking place in Malta or involving Maltese companies. However, much of the merger and acquisition activity that we deal with tend to be strategic transactions intended to increase market share or expand into a new service/ product offering. Transactions involving a financial sponsor are less frequent in Malta. We attribute this primarily to the fact that the Maltese market is a very small market composed of a population of less than half a million.
What are the main differences in M&A transaction terms between acquiring a business from a trade seller and financial sponsor backed company in your jurisdiction?
In our experience, the most notable difference between an M&A transaction involving a trade seller on the one hand, and a transaction involving a financial sponsor-backed company on the other hand, is that a financial sponsor-backed company tends to have a very clear and structured methodology in its approach towards a sale, having clear parameters and objectives that are in-keeping with the financial sponsor’s financial, commercial and/or strategic objectives which have a tendency to be clearly defined and set. Thus, for instance, the initiation of the sales process through the preparation of a Vendor Due Diligence report enables the financial sponsor to kick-start the sales process quickly and effectively, shortlisting potential purchasers possessing the right qualities in a more structured and objective manner. This highly methodical approach to deal-making makes the transaction more streamlined and efficient, setting private equity transactions apart from other M&A deals.
By contrast, trade sellers do not typically have any specific methodologies in their approach to the sale of the business, even in the case of serial entrepreneurs who may have sold various businesses in the past. Trade sellers tend to brings a host of other elements into play in the transaction, which could include personal, emotional and philosophical underpinnings that invariably have the tendency to complicate the management of the transaction. These issues are typically exacerbated somewhat when the sale is not an outright sale but the dilution of the trade seller’s interest in the business, creating various considerations relating to management and control. In such circumstances it is critical that advisors of a trade seller take a leading role in managing the transaction to ensure that objectives are identified and clearly established from the outset, reducing the risk of having external factors having a significant bearing on the course of the transaction.
On an acquisition of shares, what is the process for effecting the transfer of the shares and are transfer taxes payable?
The transfer of shares in a Maltese company becomes legally effective from the moment when it is validly entered into the Register of Members of the company in question. The Board of Directors of the company is ultimately responsible for the registration of share transfers in the company’s register of members. This register is generally maintained and administered by the Company Secretary.
In the course of registering a share transfer with a Maltese company, the Directors would undertake the process by examining whether or not the transfer of shares is impaired in any manner. Such impairments would typically include one or more of the following considerations:
– pre-emption rights restricting the transfer of shares. Such rights can be duly waived by the holders of that right either by way of a declaration or letter, or in the form of a members’ resolution;
– contractual restriction/s that may affect the transferability of the shares, such as lock-in provisions in a shareholders’ or investment agreement. Whether or not these restrictions can be managed or waived will very much depend on the circumstances;
– Any third-party approval/s or authorisations to which the valid transfer of shares may be subject. Practical examples of such approvals or authorisations could include:
- ex ante regulatory approvals (applicable in the case where the company in which a shareholding interest is to be transferred operates in a regulated sector and holds a formal licence, authorization or approval),
- governmental authorizations in respect of companies that own, manage or operate nationally strategic assets, or
- the approval of the holder of a security right (e.g. pledgee) registered over some or all of the shares that form the object of the proposed share transfer;
– Class rights that could be adversely affected by the share transfer and which may require specific management.
In the case of Maltese private limited liability companies, it is typical that the Articles of Association contain language to the effect that the Directors of the company may effectively refuse to register the share transfer if they do not approve of the acquiring shareholder. For this reason, it is advisable to have a Directors’ resolution as a condition precedent to the share transfer in terms of which the Board of Directors acknowledges the proposed share transfer and irrevocably undertakes to register the purchaser in the register of members once the sale is duly perfected by the parties and the shares legally pass from the seller to the purchaser. It is clearly in the purchaser’s interest to seek this resolution to eliminate any obstacle to the registration of the share transfer by the company in an orderly and timely manner.
Malta operates a central public Companies Register and any and all changes to a Maltese company’s registered details and documents (including share transfers) must be duly recorded with the Register, in terms of law. Therefore within 14 days from the effective date of transfer of the shares in a Maltese company, a Director, Company Secretary or Manager of the company must submit the appropriate statutory form (Form T) to register the transfer of shares with the Registrar of Companies. Failure to register the share transfer does not invalidate any share transfer duly recorded in the register of Members of the company, but it does trigger a penalty for failure to submit notice of the share transfer within the 14-day statutory period, and an additional penalty for each day that the default subsists.
Transfers of shares in Maltese companies are generally subject to Capital Gains Tax (“CGT”), paid by the seller, and Duty on Documents and Transfers (“DDT”), paid by the purchaser. There are however various exceptions from both CGT and DDT that apply for the benefit of persons who are not tax resident in Malta and which could apply where the company does not hold immovable property in Malta. The procedure for calculating, reporting and settling these taxes and duties are typically undertaken by an audit firm or tax practitioner and is based on the basis of self-assessment.
How do financial sponsors provide comfort to sellers where the purchasing entity is a special purpose vehicle?
When financial sponsors adopt the use of Special Purpose vehicles (SPVs) as the purchasing entity in a transaction, the financial sponsor typically undertakes the purchasing SPV’s obligations jointly and severally in favour of the seller, thereby dispelling the seller’s discomfort that the SPV’s limited liability will create an obstacle to the enforcement of any claims by the seller against that SPV. As an alternative, the financial sponsor may provide a guarantee to the seller, acting as surety for the performance of the SPV’s obligations.
The fundamental distinction between circumstances where the financial sponsor provided comfort in the form of suretyship, and circumstances where it provided comfort in the form of undertaking “joint and several” responsibility for the SPV’s obligations, is that in the latter case the financial sponsor assumes liability as a principal co-debtor, eliminating the benefit of discussion of the principal debtor’s assets which would have otherwise applied in the case of suretyship. Thus where the financial sponsor is jointly and severally liable with the SPV, the seller may turn onto the financial sponsor directly for the recovery of any amount/s due or the assertion of any rights, without he need of exhausting the SPV’s assets before doing so, which would be the case where the financial sponsor acts as surety.
How prevalent is the use of locked box pricing mechanisms in your jurisdiction and in what circumstances are these ordinarily seen?
Whilst locked box mechanisms are sometimes applied in Malta, their use is not prevalent for M&A and private equity transactions. Whilst the use of such a mechanism may be on the rise, there is no data available to discern any particular or specific trends in this regard.
What are the typical methods and constructs of how risk is allocated between a buyer and seller?
The allocation of risk between the parties to a Maltese law governed M&A transaction will very much depend on the nature of the transactions and the negotiating leverage held by each of the parties to the deal. Regular points of contention that arise tend to revolve around issues such as the attribution of risk of the significant asset/s underlying the deal, the adjustment of the negotiated price on the basis of any variances resulting from the operation in the business until completion, or the discovery of material adverse effects by the buyer in the course of the transaction.
How prevalent is the use of W&I insurance in your transactions?
Warranty and Indemnity Insurance is not common in transactions that are exclusively Malta-based. It tends to be adopted more frequently when the purchasers are foreign and, in such cases the insurance policies are typically sought and obtained from the London insurance market.
How active have financial sponsors been in acquiring publicly listed companies and/or buying infrastructure assets?
The acquisition of publicly listed companies or infrastructure assets by financial sponsors is not an active space in Malta.
Such deals tend to be driven by strategic considerations, with the most notable examples being the acquisition of the Malta Freeport by CMA-CGM and Yildirim Group, two large shipping operators, the acquisition of a 33% in Enemalta, Malta’s Government -controlled power corporation by Chinese firm Shangai Electric Power, the acquisition of 65.4% of Go plc (one of the two large Maltese telecommunications operator) by Tunisie Telecom, and the acquisition of 6PM plc (a technology company formerly listed on the Malta Stock Exchange) by IDOX Health, and its subsequent delisting.
Outside of anti-trust and heavily regulated sectors, are there any foreign investment controls or other governmental consents which are typically required to be made by financial sponsors?
No. There is little bureaucracy outside of the regulated economic sectors for financial sponsors to acquire or sell Maltese companies, regardless whether such financial sponsors are based within the EU or outside it.
How is the risk of merger clearance normally dealt with where a financial sponsor is the acquirer?
Merger clearance is managed as part of the transaction, with the necessary threshold calculations being established from the outset to determine whether or not any notifications or approvals are required.
Have you seen an increase in the number of minority investments undertaken by financial sponsors and are they typically structured as equity investments with certain minority protections or as debt-like investments with rights to participate in the equity upside?
No we have not. Most of the transactions that we deal with where financial sponsors are involved would typically relate to the acquisition of control in the target company of the equity share capital.
How are management incentive schemes typically structured?
The structuring of the management incentive schemes will very much depend on the financial sponsor and its preferred approach to such schemes. Maltese company law and employment law allow a significant degree of flexibility for the correct structuring of such schemes. In our experience over the years we have rarely encountered any material difficulties in implementing management incentive schemes and structures in the context of a Maltese target company.
Are there any specific tax rules which commonly feature in the structuring of management’s incentive schemes?
Employee Share Option Programmes should be carefully structured under the relevant Maltese tax rules and the fringe benefit rules. However, the applicability of Maltese tax rules will very much depend on whether or not the individuals involved in the management of the target company effectively establish their ordinary residence in Malta.
Are senior managers subject to non-competes and if so what is the general duration?
The inclusion of non-compete clauses in senior management contracts has become more commonplace, and the duration for such clauses is usually between 6 and 18 months. It is important, however, that if such clauses are to be upheld as valid and enforceable by the Maltese courts, there must be fair compensation to the employee during the non-compete period, thereby compensating the employee to refrain from undertaking any role in the industry that can be construed as competition to his/her previous employer’s business.
How does a financial sponsor typically ensure it has control over material business decisions made by the portfolio company and what are the typical documents used to regulate the governance of the portfolio company?
Governance mechanisms are usually included in the Memorandum and Articles of Association, including the creation of equity share classes having clearly defined rights (e.g. A Shares, B Shares etc.), and the establishment of reserved matters requiring a qualified majority of the directors or shareholders of the company. Shareholders’ Agreements are also widely used to regulate more detailed mechanisms which the shareholders wish to keep private and outside of the public domain. The shareholder agreement may be subject to a governing law other than Malta and can be made to supersede the company’s Articles of Association in case of conflict.
Is it common to use management pooling vehicles where there are a large number of employee shareholders?
Whilst we have implemented such management pooling vehicles in the contest of private equity transactions in Malta, the use of such vehicles is not common.
What are the most commonly used debt finance capital structures across small, medium and large financings?
In the recent deals we have handled, debt financing usually takes the form of a combination of debentures, preference shares and secured lending granted by a banking syndicate.
Is financial assistance legislation applicable to debt financing arrangements? If so, how is that normally dealt with?
Yes, Maltese rules on financial assistance prohibit public limited liability company from providing any financial assistance in the context of debt financing arrangements. However, in the case of private limited liability companies these rules are subject to a whitewash procedure which is subject to specific formalities including directors’ and shareholders’ approval. These formalities are typically managed by Maltese legal counsel at the early stages of the transaction once the financing arrangements are clearly defined.
For a typical financing, is there a standard form of credit agreement used which is then negotiated and typically how material is the level of negotiation?
Credit Agreements adopted in the context of the acquisition of a Maltese company are typically regulated by a governing law other than Malta, providing the banking syndicate the comfort of dealing with legal principles and mechanisms that they are more comfortable with. Standard form documentation is typically based on the Loan Market Association templates but are subject to some amendment to reflect the risks and dynamics of the specific transaction.
What have been the key areas of negotiation between borrowers and lenders in the last two years?
The most contentious points of negotiation in credit agreements over the past two years include the controlling of floating interest rates and the margin charged over the base rate, the definition of material adverse effects triggering events of default, the degree of clearances and approvals imposed by the syndicate on the borrower, and the management of dividend distributions subject to the accomplishment of pre-agreed financial targets.
Have you seen an increase or use of private equity credit funds as sources of debt capital?
The presence of private equity credit funds has been consistently present in the deals that we have handled, so their presence has been quite consistent.