by Ignacio Lacasa Managing Partner Across Legal &
Sarah Schwartz Partner Across Legal VC/M&A
M&A and Venture Capital lawyers love the adrenaline associated with deal making. After all business issues have been finally agreed, all eyes look at the legal team to immediately “finish up the legal stuff” so that the clients can uncork the champagne. Unfortunately, there is no “finish up the legal stuff” button on our computer, so the pressure to close swiftly and without any crisis becomes quite intense. Although we all understand how to run a smooth closing subject to a state law, if a client hires you as a trusted advisor for a continental European investment, then you should highlight the differences in the closing process. Otherwise, if their expectations were not met, perhaps the client blames you instead of local counsel.
This paper reviews complexities related to M&A closing processes, focusing on the differences between US style closings and continental European style closings, so that attorneys can properly set clients’ expectations for the final day of an international deal. This paper compares a typical US style closing against a Spanish style closing and highlights the primary characteristics and pitfalls. As a disclaimer, we advise on Spanish law, yet we have witnessed many of the practices below in other continental European deals. The critical questions that this paper attempts to answer are (i) how can I prepare my American client for a continental European closing and (ii) what are the common pitfalls that make EU closings more complex (and thus upset American clients). The authors’ goal is to explain the primary pitfalls and give attorneys the tools necessary to prepare and advise clients so that the closing process is as smooth as possible.
- The Public Notary’s Role
Unlike the US system, continental European legal systems, such as Spain, do not have a premise that parties act in good faith. As a result, Public Notaries safeguard the legal system and ensure that the parties act in good faith. Spanish closings are formalistic and are typically performed in-person before a public authority, together with all other parties and their advisors. The parties must also draft additional documentation, such as public deeds. The public notary will then, in front of all participants, confirm all signatories’ identities and authority to act, and then proceed to read all documents to be signed that day.
This process will immediately shock your American clients because (i) there are additional documents to negotiate (such as public deeds, powers of attorneys, or certifications), (ii) the Public Notary will confirm if the documents meet legal standards, and if he has any comments, the Public Notary can modify the documents, including underlying conditions to closing, (iii) because the closing is typically completed in-person, and the documents must be read, the client is exposed to and participates in the full closing process, and (iv) the additional documents and the notary appointment increase costs to do the transaction.
You need to prepare your American client for this event, the length of time, and any additional costs. In our experience, this advice helps to set expectations, making the client look competent and in control.
- Virtual versus In-Person Closings
As mentioned above, if your American client invests in Spain, the European counterparts will expect an in-person closing before a Public Notary. Until the closing date, the American and European closing processes are similar in that typically the external counsel representing the parties will work together, and together with the Public Notary, to finalize and agree on execution versions of all documents. Counsel may also complete a dry run the night before the closing date so to ensure that everything will run smoothly. But, the closing day is different.
On the closing date, the lawyers from both sides will typically go to the Public Notary’s office earlier to prepare everything and finalize last-minute changes. Once the clients appear, everyone needs to put on their game face, in particular when additional changes need to be made (for example, a last-minute negotiation of a clause or a change in signatory), as those changes will need to be handled smoothly because your client will be watching you. Then, the notary will read the documents to the clients and request that they confirm that they understand what they are signing. Please bear in mind that if your client invests into a non-English speaking country, to prove the signatory’s competence, either the parties and Public Notary agree to notarize the documents in English or otherwise your client must locate a signatory that understands the local language. If your client does not have such expertise, then a specific power of attorney can be granted to local counsel. Typically, in such situations, the deal documents will be drafted in bilingual, double columns, with the local language governing in case of conflicts.
Notwithstanding, Covid-19 and the pandemic has pushed our profession to modernize. In this regard, if your client cannot be physically present at the Public Notary, you could try to insist on a virtual closing by availing your client to a qualified, electronic signature process in accordance with Regulation 910/2014 of the European Parliament and of the Council of 23 July 2014 on electronic identification and trust services for electronic transactions in the internal market. Although more cumbersome than just the advanced electronic signature, qualified, electronic signatures are granted full legal authority and considered equivalent to a wet signature. After travel restrictions were imposed, Public Notaries increasingly have accepted qualified electronic signatures for those signatories who are unable to travel to an in-person closing, and in certain European jurisdictions, notaries can now grant public deeds using the qualified electronic signatures. Unfortunately, Spain still requires physical attendance to grant a public deed (which is required for M&A activities), although perhaps this could evolve to permit videoconference and electronic signature in the future. In the meantime, if your client cannot travel to the notary appointment, then it should grant a power of attorney to someone located locally to close the deal.
- Powers of Attorney
Unlike the American style where an Officer’s Closing Certificate proves authority, continental European style requires notarized powers of attorney or certified corporate resolutions expressly authorizing the signatory to sign the deal documentation. Unless the power of attorney or certificate is notarized by a local public notary, the client must notarize and apostille the document. In addition, unless the Public Notary can speak English, your client might also have to prepare an official translation of the document into the local language. These formalities increase costs and complexity and can be time consuming. As such, you should understand the estimated timetable and communicate it to your client so that a procedural issue does not derail the closing.
- Paying the Purchase Price and Changing Bank Signatories
If closing occurs simultaneously with payment, then you better bring a bank check or otherwise be prepared to sit in the Public Notary’s office waiting for the bank to formally confirm via a certificate that the funds have been received. This seems a bit antiquated, but the Public Notary includes in the public deed a copy of the bank check or bank certificate to confirm that the closing has occurred. Obviously, a bank check significantly simplifies this process.
Although not typically considered “legal,” your client could be concerned about changing bank signatories immediately post-closing so to take control of the newly acquired entity. In the United States, in our experience, this change can be done quickly and most likely on the closing date, provided that the client has completed the necessary paperwork. In Spain, on the other hand, this change can be bureaucratic, and without an existing banking relationship with a Spanish bank, this process can take one or two weeks, during which your client will not control the bank accounts. As advisors, you should understand these complications and work together with your client, its bank, and local counsel to quickly produce all documents the bank will require (including notarized documents from the Public Notary). Resolving this issue can be bureaucratic and complex for a non-native, so your ability to anticipate the issue and assist your client will most definitely add value.
- Restrictions on Foreign Investment into Spain
During 2020, the Spanish legislature implemented the European regulation 2019/42 related to foreign investment into Europe. Similar to CFIUS, this law requires certain foreign buyers to obtain authorization before investing. If your client will own more than 10%, exercise control, is related to a foreign government, or otherwise invests into an industry related to law and order, security, or the public health system, then you should contact local regulatory counsel to determine if your client must obtain approval. Impacted industries include, among others, defense, transportation, artificial intelligence, cloud, cybersecurity, data, media, and telecommunications.
Closings are exciting because of their unique challenges. When advising a client on a continental European deal, you should expect differences, discuss the same with local counsel, and then set your client’s expectations. These details will smooth the closing process, which, of course, will just serve to confirm how great of a lawyer you really are. Best of luck!