M&A Blog
Disclosure Letter: Warranties Provide Only Partial Assurance
In every transaction, the seller provides the buyer with a series of warranties concerning the condition of the company. However, these warranties alone are not sufficient. The disclosure letter introduces exceptions and clarifications, enabling the buyer to understand precisely what they are acquiring, while simultaneously protecting the seller from potential claims of breach of warranty. When properly prepared, it acts as a safeguard against disputes.
Cross-border acquisitions are often significantly more complex than investors initially expect. It is not merely about purchasing a company or assets, but also about assuming local legal, tax, and regulatory risks.
While domestic transactions occur in an environment that the parties typically know well, cross-border acquisitions involve different legal systems, distinct business practices, language barriers, and more complicated tax issues.
Share Deal vs. Asset Deal
The fundamental difference lies in what the investor is acquiring. In an asset deal, specific assets are acquired, typically real estate or part of a business. In a share deal, on the other hand, the investor acquires a stake in the company as a whole, including its history, contracts, liabilities, and potential risks. This makes a share deal considerably riskier, especially considering that local legal regulations may differ significantly from the investor's domestic environment.
Specifics of Cross-Border Mergers
Cross-border mergers follow a somewhat formalized process within the European Union. They require coordination across multiple jurisdictions, multilingual documentation, and legal compliance checks for each step. In practice, they tend to be more time-consuming and administratively burdensome than standard domestic transformations.
In addition to procedural issues, tax aspects play a crucial role in cross-border acquisitions. Foreign investors often assume that acquiring a stake in a company (share deal) will be simpler from a tax perspective than a direct purchase of assets. However, Czech regulations indicate that the situation can be more complicated, especially if the company's value is primarily derived from real estate or if the company has a longer history. This can be illustrated by a situation where more than 50% of the company's value is represented by real estate located in the Czech Republic. In such cases, Czech tax authorities have the right to tax this income.
Legal Risks of Cross-Border Share Deals
Unlike an asset deal, where only specific assets are acquired, a share deal involves taking over the company as a whole, along with all its rights and obligations. This brings greater legal risks. The buyer does not only acquire the company's assets but also its legal history. This may include older contractual obligations, lawsuits, environmental liabilities, labor claims, or regulatory deficiencies. Therefore, representations and warranties from the seller in the Share Purchase Agreement (SPA) play a key role in protecting the buyer from hidden defects or debts of the company.
For this reason, quality due diligence is absolutely essential in cross-border transactions. The investor often enters an environment they do not know well, and public registries or financial statements typically do not provide a complete picture of the company's actual condition. The due diligence process should cover not only legal and tax risks but also regulatory obligations, labor relations, and ownership of assets and real estate.
Practical Complications in Cross-Border Transactions
Cross-border acquisitions can also be challenging from a practical standpoint. Complications often arise from multilingual documentation, official translations, apostilles, differing requirements from various registries, or the identification of foreign individuals. For companies owning real estate, the timeline can also be significantly affected by the land registry and the duration of subsequent proceedings.
In Conclusion: What to Watch Out for Before a Cross-Border Acquisition
Before entering into a cross-border acquisition, it is crucial to understand what is being purchased. In the case of a stake, this includes the company's history, its liabilities, and how it operates. Careful preparation, quality due diligence, realistic contractual protections, and an understanding of local customs significantly reduce the risk of unpleasant surprises.
While domestic transactions occur in an environment that the parties typically know well, cross-border acquisitions involve different legal systems, distinct business practices, language barriers, and more complicated tax issues.
Share Deal vs. Asset Deal
The fundamental difference lies in what the investor is acquiring. In an asset deal, specific assets are acquired, typically real estate or part of a business. In a share deal, on the other hand, the investor acquires a stake in the company as a whole, including its history, contracts, liabilities, and potential risks. This makes a share deal considerably riskier, especially considering that local legal regulations may differ significantly from the investor's domestic environment.
Specifics of Cross-Border Mergers
Cross-border mergers follow a somewhat formalized process within the European Union. They require coordination across multiple jurisdictions, multilingual documentation, and legal compliance checks for each step. In practice, they tend to be more time-consuming and administratively burdensome than standard domestic transformations.
In addition to procedural issues, tax aspects play a crucial role in cross-border acquisitions. Foreign investors often assume that acquiring a stake in a company (share deal) will be simpler from a tax perspective than a direct purchase of assets. However, Czech regulations indicate that the situation can be more complicated, especially if the company's value is primarily derived from real estate or if the company has a longer history. This can be illustrated by a situation where more than 50% of the company's value is represented by real estate located in the Czech Republic. In such cases, Czech tax authorities have the right to tax this income.
Legal Risks of Cross-Border Share Deals
Unlike an asset deal, where only specific assets are acquired, a share deal involves taking over the company as a whole, along with all its rights and obligations. This brings greater legal risks. The buyer does not only acquire the company's assets but also its legal history. This may include older contractual obligations, lawsuits, environmental liabilities, labor claims, or regulatory deficiencies. Therefore, representations and warranties from the seller in the Share Purchase Agreement (SPA) play a key role in protecting the buyer from hidden defects or debts of the company.
For this reason, quality due diligence is absolutely essential in cross-border transactions. The investor often enters an environment they do not know well, and public registries or financial statements typically do not provide a complete picture of the company's actual condition. The due diligence process should cover not only legal and tax risks but also regulatory obligations, labor relations, and ownership of assets and real estate.
Practical Complications in Cross-Border Transactions
Cross-border acquisitions can also be challenging from a practical standpoint. Complications often arise from multilingual documentation, official translations, apostilles, differing requirements from various registries, or the identification of foreign individuals. For companies owning real estate, the timeline can also be significantly affected by the land registry and the duration of subsequent proceedings.
In Conclusion: What to Watch Out for Before a Cross-Border Acquisition
Before entering into a cross-border acquisition, it is crucial to understand what is being purchased. In the case of a stake, this includes the company's history, its liabilities, and how it operates. Careful preparation, quality due diligence, realistic contractual protections, and an understanding of local customs significantly reduce the risk of unpleasant surprises.