This country-specific Q&A provides an overview to M&A laws and regulations that may occur in Portugal.
This Q&A is part of the global guide to Mergers & Acquisitions. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/mergers-acquisitions-3rd-edition/
What are the key rules/laws relevant to M&A and who are the key regulatory authorities?
The main set of rules applicable to M&A transactions in Portugal are the Portuguese Civil Code, Companies Code, Securities Code and Commercial Code.
CMVM is the Portuguese securities market regulator (“CMVM”) that oversees, amongst others, public M&A. Sector specific regulators may also be relevant in M&A deals.
What is the current state of the market?
Despite the global uncertainty affecting the international markets in the second semester, the year of 2018 was very positive for M&A in Portugal, in particular in the real estate and tourism sector.
Acquisitions throughout the year were essentially backed by several international funds and other private investors from several different jurisdictions, in particular Spain, US, UK, Germany and France.
The year was also marked by the launching of the public takeover of EDP, the largest Portuguese company, by China Three Gorges and several other remarkable deals in the technology, energy and pharma sectors.
In 2019, M&A activity in Portugal may be slightly affected with the current international uncertainty resulting from the trade disputes involving the world’s power blocks, the tightening of the monetary policy by central banks, Brexit, worldwide political tensions and the European Parliament and domestic general elections.
Notwithstanding, a large number of factors will likely continue to positively impact the attraction of foreign investment and maintain the M&A deal flowing steadily in 2019, such as certain tax benefits, relatively inexpensive qualified workforce and operational costs, growing reputation as a start-up hub or historical levels of dry powder in the PE industry.
Which market sectors have been particularly active recently?
Real estate and tourism, technology, energy and pharma.
What do you believe will be the three most significant factors influencing M&A activity over the next 2 years?
Technology: will allow a swifter, more efficient and accurate analysis of the information provided about a target. This will allow contractual parties to complete their transactions in a quicker, more certain and less risk-prone manner.
Economic cycle: expected market corrections may generate good business opportunities, especially for those investors that have funds to deploy, but may also result in the delay or even cancelation of certain planned investments and create financing constraints to other investors.
Global politics: relevant changes in international trade deals, the introduction or change in tariffs, application of sanctions and embargos or limitations to the investment in certain sectors by investors in particular countries will also play a significant role in the M&A activity in the near future. These factors have already had a significant impact in the nationality of investors and type of investments in Portugal.
What are the key means of effecting the acquisition of a publicly traded company?
The acquisition of control over a publicly traded company always requires the launching of a public takeover offer (PTO) over the target company. This may occur as a result of a voluntary PTO or a mandatory PTO.
History shows us that completely voluntary, unsolicited PTOs have a low chance of success. This is especially true in Portugal. The approach that has proven to be more successful has been to establish oneself as a strategic and long-term investor of the target company and leverage that position to present a PTO that further expands the current management’s plans for the company in a way that the PTO is not viewed as hostile. Unsolicited, spontaneous PTOs are more likely to be branded hostile, putting too much pressure on the consideration offered by the bidder.
Within the “negotiated PTO” strategy, the best solution has been to get other relevant shareholders to irrevocably agree to sell on a PTO prior to the formal issue of the offering. These arrangements will trigger the obligation to launch a mandatory PTO whenever certain thresholds are crossed (see 25 below). This means that the bidder may put itself voluntarily in a position to issue a mandatory PTO but this is a scenario where it has the comfort that it will acquire the shares allowing it to control the target.
What information relating to a target company will be publicly available and to what extent is a target company obliged to disclose diligence related information to a potential acquirer?
Depending on the type of company, there may be publicly available information in respect of the identity of the company’s shareholders and UBOs, their shareholdings in the company, the company’s annual accounts, by-laws, complete legal name, registered office, taxpayer number, share capital, identity of the members of its corporate bodies and duration of their tenures.
Information about any past or ongoing structural corporate events will also be available, such as mergers, demergers, transformations, dissolution, winding-up or insolvency.
The creation, existence and cancelation of certain encumbrances over the company’s shareholdings and assets, as well as certain legal proceedings against the company may also be subject to registration and publication.
In private M&A deals, the target is not under the obligation to disclose any non-public information about it and its business. Information is usually disclosed in the context of M&A processes in strict collaboration between the target and the parties.
In public M&A deals, all (other) price-sensitive information is subject to disclosure to the market through the CMVM. There are certain circumstances where such disclosure may be delayed but never waived. Accordingly, due diligence is based on publicly disclosed information.
Should the management of a publicly traded company agree to disclose inside information to a potential bidder, it needs to inform the CMVM of this fact. The CMVM may then decide to force the company to release such information to the market or order the suspension of trading of the company’s shares until it informs the market of the ongoing negotiations.
To what level of detail is due diligence customarily undertaken?
The due diligence process varies from deal to deal and generally covers financial, legal and tax matters. Operational and environmental due diligence are less common in mid-market transactions, except if the target operates in the specific sectors (e.g., real estate and tourism or industrial sectors).
The level of detail the due diligence is customarily undertaken depends on the characteristics of the deal and the appropriate balance between, amongst others, the comfort the client wants to take from such exercise, the opportunity cost to the client and the transaction costs with advisers.
What are the key decision-making organs of a target company and what approval rights do shareholders have?
In private M&A deals, the transaction documentation is usually negotiated directly between the seller(s) and the purchaser(s) and therefore the decision to sell or purchase of a company rests solely with such parties.
Any decision that may be required from the target in the context of the M&A deal will usually fall within the powers of its management or – depending of the type of company – shareholders.
In public M&A deals, the board of directors is called upon to review the prospectus the bidder files with the CMVM, and issue a report on the offer, branding it as either hostile, friendly or neutral.
Shareholders do not exercise any formal approval right and are only called to issue acceptance orders once the PTO is duly registered and running. In certain cases, shareholders may convene to resolve on matters related to the PTO but not the PTO itself – for instance, to approve the removal of voting caps or other defensive measures or a merger or share swap that may occur as a result of the PTO.
What are the duties of the directors and controlling shareholders of a target company?
In general, directors of Portuguese private limited liability companies are subject to general and specific duties.
There are two general legal duties that steer the directors’ conduct during their term in the office: the duties of care and loyalty.
The duty of care demands directors to exercise their management powers in a diligent manner and with a degree of care that may be expected from a wise and organized manager.
The duty of loyalty requires that directors exercise their management powers exclusively in accordance with the best interest of the company taking into consideration the long term interests of stakeholders.
Portuguese law also sets forth a comprehensive list of specific duties which must be complied with by directors. There are core specific duties applicable to all directors regardless of the company and activity undertaken by it. There are also certain duties that are exclusively applicable to companies of certain sectors of activity, certain type or minimum size.
Specific duties establish that the directors shall act or refrain from acting in a predefined manner in certain situations, narrowing or even restricting their discretionary powers.
In the context of PTOs, the directors of the target company have two additional sets of duties.
On the one hand, they are required to issue a report appraising the PTO. On the other hand, they are subject to a “no-frustration rule” pursuant to which the board shall refrain from taking any action, other than seeking alternative bids, which may result in the frustration of the bid. This prohibition does not apply neither to the execution / implementation of obligations assumed prior to the board becoming aware of the PTO nor to the implementation of resolutions approved by the shareholders in a meeting specifically called for such purpose.
As for shareholders, they are limited to the obligation to fully pay up the subscribed shares/quotas in the company and the obligation to share the company’s losses, which – in the case of limited liability companies and as a general rule – corresponds to each shareholder not recovering the amount of subscribed and paid-up capital at the time of liquidation of the company. The by-laws may additionally impose other obligations on the shareholders, such as the obligations to grant loans or make other contributions.
Do employees/other stakeholders have any specific approval, consultation or other rights?
In share deals, no specific approval is required from employees or other stakeholders, unless the by-laws of the target company specifically attribute any such rights, which is extremely rare or even unheard of in Portugal. In the context of PTOs, however, employees’ representatives may be called by to give their opinion on the offering when the directors are reviewing the prospectus.
Specific employment related rules apply when transferring businesses as a going concern, notably by way of an asset deal, a merger or demerger.
To what degree is conditionality an accepted market feature on acquisitions?
In private M&A deals, it is usual – and sometimes legally required (e.g., regulatory approvals) – to subject the effects of a deal to the satisfaction or waiver of conditions precedent.
In public M&A deals, conditionality is the norm. PTOs are usually subject to two types of conditions: conditions on the effectiveness of the offering, which may be mandatory - such as the approval of the prospectus by the CMVM and clearance by the competition authorities - or optional, such as the removal of a voting cap of the target company; and conditions on the success of the offering, such as attaining a minimum number of shares and voting rights.
What steps can an acquirer of a target company take to secure deal exclusivity?
In private M&A deals, exclusivity is usually secured at the latest stage of an auction sale between the selected bidder and the seller or in early stages of a direct negotiation between the relevant parties.
Exclusivity is usually imposed by the selected bidder/purchaser in: (i) a non-bidding or binding offer, which can then be accepted by the seller by countersigning such document; or (ii) other pre-signing arrangements (e.g., MoU or terms sheets).
In public M&A deals, any agreements about the transfer of shares risk triggering the obligation to launch a mandatory PTO (see 25 below). Accordingly, preliminary arrangements such as exclusivity agreements are not advisable.
What other deal protection and costs coverage mechanisms are most frequently used by acquirers?
At a pre-signing stage, it is usual for the parties to accept certain bilateral or unilateral obligations, such as confidentiality, non-compete, non-solicit or exclusivity undertakings, as well as penalty clauses to cover transaction costs in case one of the parties walks away from the deal.
In PTOs the bidder assumes all the costs entailed with the offering. In case there are any contractual arrangements, such as irrevocable acceptance commitments, parties usually assume their own costs. It is not common to have deal protection mechanisms in this context.
Which forms of consideration are most commonly used?
The most commonly used form of consideration is cash, although using shares or other securities as consideration is also possible.
At what ownership levels by an acquiror is public disclosure required (whether acquiring a target company as a whole or a minority stake)?
In private M&A transactions, the situation varies depending on the target being a private limited liability company by quotas (sociedade por quotas) or by shares (sociedade anónima).
The transfer or encumbrance of quotas in sociedades por quotas are subject to registration and publication. Thus, the information about the owners of the quotas and the respective transfer or encumbrances of quotas is – upon its registration and publication – publicly available information.
The transfer or encumbrance of shares in sociedades anónimas is subject to registration with the company or another third party in their internal registrars and is not public.
A recently enacted law imposes the disclosure of the identity of the UBOs of a company, other personal information about such persons and the equity interest held – directly or indirectly – in the company. Some of this information is expected to be publicly available while sensitive information will be only available to the competent public authorities.
In public M&A deals, the situation is vastly different. Any shareholder that acquires a shareholding or is attributed with an equity interest representing at least 2%, 5%, 10%, 15%, 20%, 25%, 1/3, 50%, 2/3 or 90% of the voting rights in a publicly traded company is required to inform the target company and the CMVM.
These thresholds may be crossed by adding any voting rights held by the potential acquirer to the voting rights of another shareholder the former may be attributed with. This attribution may arise from different types of arrangements, such as a shareholders’ agreement, derivative contracts, or agreements enabling them to jointly exercise significant influence over the company.
Once it receives the notice from the acquirer, the target company is required to disclose it publicly within 3 trading days.
At what stage of negotiation is public disclosure required or customary?
In private M&A, no public disclosure is legally required to be made until the transaction is closed, except if any regulatory approvals are required to be obtained prior to the completion of the transaction and it has to be disclosed (e.g., merger control).
In public M&A, the answer depends on who the potential acquirer is negotiating with.
If the acquirer is trying to obtain inside information or discuss a potential merger with the management of the target, the negotiation needs to be made public or at least disclosed to the CMVM, which will then take the measures deemed appropriate.
If it is negotiating with a shareholder, the negotiation needs to be disclosed to the market whenever a significant shareholding threshold is crossed (see 15 above).
Is there any maximum time period for negotiations or due diligence?
There is no maximum time period for negotiations or due diligence in private M&A deals.
The same occurs in public M&A deals although certain legal terms do apply to PTOs. For instance, the actual offering shall last between 2 and 10 weeks.
Are there any circumstances where a minimum price may be set for the shares in a target company?
In voluntary private M&A deals, the parties are not subject to any minimum or maximum price limitation, except in case of a squeeze-out (see 27 below).
In public M&A, a minimum consideration applies in two scenarios.
In a mandatory PTO (see 25 below) the consideration may not be lower than the higher of (a) the highest price paid by the bidder or any entity in a control or group relationship therewith for shares of the same category in the six months prior to the PTO’s preliminary announcement or (b) the volume-weighted average price of the share in the regulated market for the same period. If the consideration may not be calculated using any of these criteria or the CMVM understands that the consideration is not sufficiently justified or is not equitable, it may appoint an independent auditor to calculate such minimum consideration.
Additionally, the exercise of sell-out or squeeze-out rights is also subject to a minimum price, as detailed in 26 and 27 below.
Is it possible for target companies to provide financial assistance?
No, under Portuguese law a target may not grant loans or in any other way provide funds or give guarantees to a third party for it to subscribe and/or acquire shares in the target’s share capital.
This rule is not applicable to ordinary course transactions carried out by financial institutions or transactions which intention is to acquire shares by or for the employees of the target company or of a company related to the target. These exceptions also require passing a “financial test” according to which, as a result of these transactions, the company’s net assets shall remain above the sum of the company’s share capital and legal and any contractual non-distributable reserves.
Any contract or act in breach of the rules set out in the previous paragraphs is null and void.
These rules are also applicable to subsidiaries of the parent company considered to be in a group or control relationship even if the registered office of the former is outside Portugal, provided that the parent company is subject to Portuguese law.
Which governing law is customarily used on acquisitions?
Portuguese law usually governs the transaction documents in respect of the acquisition of Portuguese companies.
In case of a PTO, the prospectus and the offering process will necessarily be governed by Portuguese law.
What public-facing documentation must a buyer produce in connection with the acquisition of a listed company?
Once it decides to issue a PTO, the bidder is required to produce:
(a) The preliminary announcement, including the basic information on the offering;
(b) The launching announcement, which shall further detail the information provided earlier in the process; and
(c) The prospectus, setting out the terms of the offering and the strategic plan for the target company. The prospectus and the launching announcement need to be disclosed to the public simultaneously further to their approval by the CMVM.
It is also common, but not compulsory, for the bidder to prepare marketing materials that need to be approved by the CMVM.
What formalities are required in order to document a transfer of shares, including any local transfer taxes or duties?
The transfer of quotas in sociedades por quotas need to be documented in writing and the prior consent to the transfer from the company is required, unless (i) the transferee is another shareholder or a related person or (ii) the by-laws provide otherwise. The transfer of quotas is subject to registration with the Commercial Registry Office. No transfer tax is due, but property transfer tax may be levied in certain cases.
The transfer of shares in sociedades anónimas is not legally subject to any limitations, but it is possible for the by-laws of companies that do not have their shares listed in a regulated market to impose certain restrictions.
The transfer formalities depend on how the shares are represented: titles or in book-entry form.
If the shares are represented by titles, the transferor shall make and sign a transfer statement in the title and notify the target to update its internal share registrar.
If the shares are in book-entry form, the transfer shall be registered in the individual registration account of the transferee. These accounts may be held with a financial intermediary integrated in a central securities depository, a single financial intermediary, or the issuer or a financial intermediary representing the issuer.
No transfer tax is due, but the transfer of shares has to be notified to the Portuguese tax authorities within 30 days from exchange.
Are hostile acquisitions a common feature?
As mentioned in 5 above, hostile acquisitions are a feature in public M&A but not a very common feature, especially considering the recent PTO landscape in Portugal. Most of the PTOs are deemed neutral or friendly by the target, even when the board concludes that the price undervalues the company.
What protections do directors of a target company have against a hostile approach?
Protections set out in the law are aimed at benefiting shareholders, not the directors. Regardless, in practical terms, when facing a PTO, directors resort to preexisting defensive measures or benefit from new defensive measures enacted after the PTO is issued.
Preexisting defensive measures include voting caps and other limitations in the by-laws, contractual arrangements preventing the transfer of shares and others. However, under the legal “breakthrough rule” all of these may be discarded (“broken through”) if there is a specific provision for that purpose in the target’s by-laws and if, as a result of the PTO, the bidder acquires shares representing at least 75% of the company’s voting rights. This provision will not apply if there is no reciprocity, i.e., if the bidder (or the entity controlling the bidder) is not subject to the same rules.
As for protection post-launching of the PTO, while the board is subject to a “no frustration rule” (see 9 above), shareholders may approve any defensive measures which the board will then have to respect. The board, by itself, may only take initiative to seek competing bidders.
Finally, even if frowned upon under good governance standards, “golden parachutes” are not in general forbidden and may also serve as an indirect means of protection of the directors.
Are there circumstances where a buyer may have to make a mandatory or compulsory offer for a target company?
A bidder will be required to issue a mandatory PTO whenever it is attributed with more than 1/3 or 50% of the voting rights over the target company.
As further detailed in our answer to 15 above, for this purpose the sum of voting rights includes those arising from shares held in the company and those arising from the attribution of voting rights of another shareholder.
When the voting rights attributed to an acquirer exceed 1/3 but not 1/2 of the total voting rights over the target, the CMVM may waive the mandatory PTO should the acquirer evidence that its stake does not allow it to exert control over the company.
If an acquirer does not obtain full control of a target company, what rights do minority shareholders enjoy?
All shareholders of sociedades por quotas have – in general terms – the same rights regardless of their shareholding. All shareholders are entitled, amongst others, to attend, participate and vote on shareholders’ meetings (if no limitation exists in the by-laws), request written information regarding the company, consult corporate documentation or request the convening of a shareholders’ meeting. There are exceptions, such as voting rights, rights to dividends or to share the proceeds of a liquidation, which are based on their shareholding.
As for sociedades anónimas, minority shareholders may in certain cases be entitled to sell-out. This right applies both in private companies – following an acquisition of 90% of the share capital of the target (see 27) – and in public companies – following a PTO or the approval of the target’s delisting.
For this purpose, PTOs must have resulted in the acquisition of shares representing at least 90% of the voting rights in the target company and the bidder must have acquired shares representing at least 90% of the voting rights that were the object of the offering. Minority shareholders will then be able to sell-out for a “fair consideration”, calculated pursuant to the same rules detailed in in 18 above.
These rules will also apply whenever the majority shareholder approves the delisting of a publicly traded company.
Other minority rights will vary based on the shareholding held by the relevant shareholder, although minority shareholders may group with each other to reach a minimum shareholding threshold and jointly exercise their rights.
Accordingly, while rights to dividends and the proceeds of a liquidation and the a pre-emption right in the subscription of new shares and convertible bonds are granted regardless of the shareholding, rights to special information, convene shareholders’ meetings, appoint members of the board of directors and others depend on the stake held in the company.
Is a mechanism available to compulsorily acquire minority stakes?
A squeeze-out mechanism is triggered if a company – directly or indirectly – holds 90% or more of the share capital of the target.
In such case, such company has to notify the target within 30 days from the date it reached such threshold and exercise the squeeze-out right within 6 months from such notification.
The offer to the other shareholders shall be in cash, bonds or quotas/shares in the acquirer’s share capital and based on an independent valuation. The consideration – in the amount equivalent to the higher range of the independent valuation – shall have to be deposited for the benefit of the minority shareholders.
If the majority shareholder does not acquire the minority shareholders’ shares, the latter are entitled to sell-out their shares.
In the particular case of public companies, the acquirer also benefits of a squeeze-out right. The squeeze-out operates under the same rules as the sell-out detailed in our answer to the preceding question: the acquirer will only be able to trigger it if its shareholding crosses the thresholds set out above and in any case only within 3 months after the PTO.
The acquirer controlling 90% of the voting rights of the target may also approve a delisting of the shares, in which case a specific public offering process will apply.