Austria: Austrian Mergers and Acquisitions Review

Originally published by Law Business Research in their 'Getting the Deal Through' series.

Form

What form do business combinations take?

Business combinations for the most important forms of separate legal entities, ie private limited companies (Gesellschaft mit beschränkter Haftung - GmbH) and joint stock corporations (Aktiengesellschaft - AG) include:

• mergers and other reorganisations,
• acquisitions (sales) of shares and assets; and
• cooperation structures.

While the relevant special tax provisions are largely concentrated in the Reorganisation Tax Act (UmgrStG), the corporate law provisions are to be found in various laws (see 2 below):

• Mergers - the target is either merged into an already existing company (absorption) or a new company is formed to which all assets and liabilities of two or more corporate entities are transferred (consolidation);
• Demergers - AGs and GmbHs may demerge their assets by either split-up (Aufspaltung) or spin-off (Abspaltung), in both types either using pre-existing entities or newly formed companies;
• Transfer (contribution) of assets - an AG or GmbH issuing shares may accept a contribution in kind instead of cash, provided the strict company law provisions on equity protection and prohibition on share dilution are complied with; and
• Transformations - these include changes of legal form, eg conversion of an AG into a GmbH and vice versa, and transformations under which the assets of an AG or GmbH are transferred automatically without liquidation either as transformation by absorption to the majority shareholder or by consolidation to a newly formed partnership or registered special civil partnership.

The acquisition of companies through the purchase of shares or assets is not subject to special regime legislation. For both privately negotiated transactions and public tender offers, requirements and restrictions contained in various laws and, if applicable, in the targets by-laws must be observed. The legal issues vary according to whether the transaction is structured as an asset or share deal. Tender offers for listed companies are additionally subject to the 1999 Takeover Act (TA). Tax considerations (goodwill depreciation) and cherry-picking of assets may call for an asset deal. For both asset and share deals special purpose acquisition vehicles, ie local or foreign new companies, may be used to minimise tax exposure and reduce transfer costs.

Cooperation can be achieved through corporate structures (JV companies) or contractually by eg agency, franchise or JV agreements.

What are the relevant regulations and statutes governing business combinations?

Relevant regulations governing business combinations include civil, corporate, tax, employment, stock exchange and antitrust laws:

• Joint Stock Corporation Act and Limited Liability Company Act (AktG, GmbHG);
• Demerger Act (SpaltG);
• Corporate Transformation Act (UmwG);
• Takeover Act (ÜbernahmeG);
• Stock Exchange Act (BörseG);
• Cartel Act (KartellG);
• Reorganisation Tax Act (UmgrStG);
• Co-determination Act (ArbVG);
• Employment Contract Adaptation Act (AVRAG);
• Commercial (HGB) and General Civil (ABGB) Codes; and
• EC Merger Regulation.

What type of contracts or other legal documentation are entered into by parties to a business combination?

The legal documentation required depends on the specific combination structure. In the case of mergers, demergers, transfers (contribution) of assets and transformation, the respective applicable corporate laws (eg GmbHG, AktG, SpaltG, UmwG) specifically list the documents, notifications and filings required and the procedures (including time limits) to be complied with. Special form requirements may apply to the agreement (eg notarial deed) or the effectuation of the agreement (eg endorsement on share certificate in case of AG registered shares or interim certificates).

What governmental or stock exchange filings are required to be made in connection with a business combination? Are there stamp taxes or other governmental fees in connection with completing a business combination?

Mergers and other corporate reorganisations involve several step procedures aimed at protecting (minority) shareholders and creditors which, eg in case of mergers or demergers, involve the filing with the commercial registry of (draft) documentation including the (draft) (de)merger contract, reports, balance sheets at least one month prior to the shareholders meeting resolving on the (de)merger. Completion will again have to be notified. Certain filings are time critical (partly to assure tax neutrality of the reorganisation). Additionally, various notices may have to be published with official gazettes.

As to notifications on share acquisitions, since the computerised commercial registry lists shareholder information in GmbHs (not AGs), the managers of a GmbH must promptly notify any shareholder changes to the commercial registry.

Shareholders in GmbHs or AGs (name shares) must inform the GmbH and AG, respectively, of their ownership in the share to allow the (new) shareholder to exercise its rights against the company, including its voting right. In case of GmbH shareholdings, shareholder changes must also be registered in the commercial registry; in case of name shares of an AG, registration in the AG’s share ledger is required.

Within seven days, changes in the shareholdings of a particular shareholder in a publicly listed stock corporation, reaching, exceeding or falling below five, 10, 15, 20, 25, 30, 35, 40, 45, 50, 75 or 90 per cent, must be notified to the Vienna Stock Exchange (VSE), the Financial Markets Supervisory Authority (FMA) and the company. Additional disclosure requirements are contained in the 1999 Takeover Act.

Where a concentration has a Community dimension, the EC Merger Regulation applies and fully replaces the Austrian merger control regime.

Under the 1988 Cartel Act as amended, pre-merger notifications to the Austrian Cartel Court are required in the case of both foreign and local concentrations provided the following thresholds are met: if, in the last business year preceding the merger, the combined turnover of the enterprises concerned was at least €300 million worldwide and €15 million in Austria; and at least two of the participating enterprises (in an acquisition, the purchaser and the target), reached or exceeded turnover of €2 million worldwide each. Turnover is group turnover; direct or indirect participations of at least 25 per cent must be taken into account. Special rules apply to the calculation of turnover of banks, insurance companies and to media mergers.

The acquisition by non-EU citizens of real estate including certain long-term leases, or of ‘usually controlling’ shareholdings in companies owning Austrian real estate is subject to notification or approval. The respective real estate commissions of the provinces where the real estate is located will usually grant approval especially if the property serves business and not private purposes.

Mergers and other corporate reorganisations may usually be carried out on a tax-neutral basis, provided the requirements of the Reorganisation Tax Act are met. Stamp duty cost on required documentation is negligible.

Real estate transfer tax (3.5 per cent plus one per cent registration tax) may be an issue in reorganisations involving companies owning (considerable) real estate, although the value assessment basis for the tax is reduced. Real estate transfer tax may be avoided in a sale of real estate or shares of a company owning real estate by implementing a dual purchaser (one of which can be a trustee holding a nominal share) structure.

What information are public companies required to make available to the public in connection with a business combination?

Listed companies are required to disclose any information on new facts or occurrences that could materially influence the quoted price, including any information on planned restructuring. In general, price fluctuations of five per cent or more are considered material. The FMA may release the company from this publication requirement in cases of justified interests. Under the Takeover Act, a potential bidder must immediately inform the public and the target of its intention to launch a bid if the management and supervisory boards have passed the resolution to launch a bid, or circumstances arise which trigger the obligation to launch a bid (mandatory bid). On disclosure of shareholding, see the third point in 4 above.

What are the disclosure requirements for large shareholders in a company? Are the requirements affected if the company is a party to a business combination?

As to the disclosure rules, see 4 and 5 above.

What duties do the directors and managers of a company owe to the company’s shareholders in connection with a business combination? Do controlling shareholders have similar duties?

Both the GmbHG (Section 25) and the AktG (Sections 70 and 84) require the board of management/managers and the members of the supervisory board to manage the business with the care of diligent and prudent managers. Additionally consent requirements by the supervisory board and shareholders meeting must be observed. The AktG specifically requests the management to balance the interests of the company, the shareholders, the employees and the public (Section 70) and to assure equal treatment of shareholders (Section 47a). Breach of statutory duties may result in personal liability of the respective board member. The GmbHG and the AktG contain specific procedural and substantive rules protecting, in particular, minority shareholders in case of mergers and other corporate reorganisations (including against dilution of equity and value). Board members of listed companies will have to observe the newly amended provisions against insider dealing and market manipulation of the Capital Market Act implementing EU Directive 2003/6 EC into Austrian law.

Since 1 January 1999, public bids aimed at acquiring securities in listed companies are subject to detailed regulation by the Takeover Act (TA). The rules apply provided (i) the target company is a joint stock company (AG) based in Austria and (ii) its shares are admitted on the Austrian Stock Exchange (VSE) to official trading (amtlicher Handel) or regulated unofficial trading (geregelter Freiverkehr). In case of parallel listings on foreign exchanges, only those securities admitted on the VSE are subject to the TA. The Austrian government is currently working on a reform of the Takeover Act, which will include the implementation of the EU Takeover Directive into Austrian law. The Justice Ministry is also reviewing the complex definitions of control when a mandatory bid is triggered considering to replace them by a fixed 30 per cent threshold.

• Types of offers: the TA distinguishes between voluntary offers, mandatory offers and anticipated mandatory offers (Section 22/11 TA Offers). A mandatory bid is triggered in case a controlling shareholding is acquired either because the offeror acquires by whatever means a controlling shareholding (usually 30 per cent voting rights). A mandatory bid is subject to minimum consideration thresholds, may not be conditional (except for legal conditions like regulatory approvals) and requires a cash offer, but can have a paper alternative in addition. A voluntary offer has no restriction in pricing, consideration may be in cash or securities and the offer may be subject to justified conditions including maximum or minimum percentages or quantities of shares the bidder undertakes to acquire. Anticipated mandatory offers (Section 22/11 TA Offers) are subject to the rules on mandatory bids, in particular on cash offer and minimum price, with, however, one exception. This offer can be conditional, in particular on reaching or exceeding a certain threshold of shareholding (eg 75 or 90 per cent). The procedural rules of the TA apply to and are largely identical for all types of bids, regardless whether hostile or recommended.
• Duties of offeror: the TA provides detailed rules for the offeror launching a public tender offer. The offeror’s duties include duties of confidentiality and disclosure (to the company and the public) to avoid the creation of false markets. Disclosure results in a prohibition of transactions and in the notification duty to the Takeover Commission on acquisitions and sales of shares and options in the target. Foreign bidders must have a domestic representative. The strictly regulated procedures require compliance with offer document requirements, expert reviews, involvement of Takeover Commission, and offer timetable. Additionally the rules on insider dealing, stake building and creeping-in must be observed.

• Duties of target The management and supervisory board of the target are bound to comply with the strict rules of the TA. These rules include responses to the bid (Section 14), confidentiality, protecting the interests of the target, complying with (ad hoc) disclosure and observing neutrality (Section 12). The management and supervisory boards of the target may not take measures likely to deprive their shareholders of the opportunity to make a free and informed decision on the bid.

In late 2000 the Takeover Commission issued a landmark opinion regarding the merger of HypoVereinsbank and Bank Austria AG (HVB/BA). It held that the proposed transaction, a complex cross-border merger preceded by a spin-off and a share swap, was not subject to the Takeover Act and did not require a (mandatory) public offer. This is because, in the Commission’s view, a transfer of control over a business of a non-listed subsidiary of the target does not necessarily fall under the Act. The Commission applied a new controlling shareholder test, holding that the Act did not apply if the shareholders of the listed target, upon completion of the transaction, did not confront the new controlling shareholder. While the ruling has narrowed the applicability of the Takeover Act, the Commission also held that it will consider applying the Act if equal treatment of target shareholders is at issue.

As in the HVB/BA merger, negotiated transactions, ultimately leading to a delisting of the target, whether by a structure falling outside the Act or by a voluntary offer under the Act, will generally continue to be the favoured approach.

What approval rights do shareholders have over business combinations? Do shareholders have appraisal or similar rights in business combinations?

Practically all business combinations are subject to shareholder approval.

Mergers, demergers and transformations of AGs into GmbHs require shareholders’ consent by 75 per cent of the voting stock, whereby in case of non-proportionate demergers (SpaltG) and merging transformations to the main shareholder of a company (UmwG) the consent requirement is raised to 90 per cent of the stated capital. Most of these threshold requirements can be modified in the articles of association, replacing them by a different, generally higher, quorum.

There are no such rules providing comparable rights in an acquisition. However, acquisitions of, and participations, in companies are subject to supervisory board approval.

In case of mergers and non-proportionate demergers, minority shareholders holding a minimum one per cent or €70,000 of the stated capital may apply for judicial review of the exchange ratio and cash contributions.

What are the special considerations for unsolicited (hostile) transactions?

Since the 1999 Takeover Act came into force up to 31 December 2004 there have been 31 public offers in Austria including 13 mandatory offers and 18 voluntary offers, seven of which were so-called anticipatory mandatory offers. Although the number of public tender offers lodged in 2004, including the first quarter of 2005, was down to six, these included two offers with substantial transaction volumes (Siemens, VA Tech and ÖVAG/Investkredit). Hostile bids and thus takeover battles (the recent Siemens/VA Tech offer was initially perceived as ‘hostile’) have been rare.

It is likely that negotiated transactions will generally continue to prevail over public (hostile) bids. This is due to the limited size of Austrian listed companies and limited free float, the fact that Austrian industry is dominated by closely held companies and the ability of core shareholders to shield the company against hostile bids. The privatisation plans of the current government do, however, depart from the core-shareholder concept in listed companies where the state holds a minority participation. This may lead to unsolicited transactions relating to these companies.

The management and supervisory boards must refrain from any act likely to frustrate the bid. This restriction does not apply to measures based on prior obligations of the boards or on shareholder resolutions adopted after the intention of the offeror to make a bid has become known.

The TA does not include a particular definition of compliant/ non-compliant defence responses. Because of the limited number of hostile public offers, anti-takeover strategies have rarely been tested in Austria. In line with international practice, the defences can be categorised into measures affecting the target in its organisational structure, capital structure, asset position and other measures.

The two-tier board structure (management and supervisory board) and the limitations of Sections 75 and 87 AktG do already have an impact on takeover procedures. Staggered terms of office for boards may only delay the offeror to establish effective control, yet not hinder takeovers.

Self tenders, ie the acquisition of own shares, are possible, yet subject to strict requirements (maximum 10 per cent), the effectiveness of this measure is thus limited. Employee stock ownership plans (ESOPS) may qualify as a defence response; Austrian-listed companies have, however, only recently started to introduce ESOPS on a wider scale. Other than in Germany (Kon- TraG), maximum voting rights are admissible (Section 114 AktG); nevertheless such structures are rare in listed companies. Certain US-type ‘poison pills’, like the so-called ‘flip-over’, may not work in Austria because of the prohibition of unequal treatment of shareholders (Section 47a AktG). The use by the management board with approval by the supervisory board of pre-authorised capital for a capital increase may cause a problem under section 12 TA. Generally, capital increases are admissible, yet may not prove effective because of strict Austrian rules on exclusion of subscription rights.

The sale of strategic assets (crown-jewel option) may be an effective measure, since such sales will normally only require supervisory board and not shareholder approval. However, the sale of the main assets of a stock corporation is subject to shareholders approval under Section 237 AktG. Further, the examples stated in the travaux préparatoires for defence measures possibly violating section 12 TA include the sale of strategic assets. The target may also try to acquire a company being in direct competition with the bidder, which acquisition may cause merger control problems for the successful bidder.

Short-term defence measures available to the management board in direct response to the offer will, in practice, largely be limited to soliciting a better tender offer from a friendly third party (‘white knight’).

Management boards and supervisory boards which violate the requirement of neutrality of Section 12 TA are subject to administrative fines and its members may become liable for damages as a result of violating sections 70 and 84 AktG and Section 12 TA.

Are break-up fees allowed? Are other types of mechanisms allowed to potentially frustrate additional bidders? Describe any ‘financial assistance’ restrictions and how they can affect business combinations.

Break-up fees are not prohibited, yet not common. Break-up fees payable by the target (rather than the controlling shareholders) may potentially violate mandatory corporate rules prohibiting constructive dividends. Breaking off negotiations without cause may entitle negotiating partners to reimbursement of frustrated costs. As to admissible measures to potentially frustrate additional bidders, see 9 above.

Other than (i) through relevant competition (antitrust) regulations, or (ii) in specific industries in which business combinations are regulated, can governmental agencies influence or restrict the completion of business combinations?

Unless: (i) ‘fit and proper’ tests (eg banking, insurance sectors) are required; (ii) licences may be subject to revocation in case of unapproved shareholder changes (eg airline, telecoms sectors); (iii) certain real estate is acquired by non-EU foreigners; and (iv) except for antitrust reasons (for details see 4 and 5 above), governmental agencies cannot influence or restrict the completion of business combinations.

What conditions to a tender offer, exchange offer or other form of business combination are allowed? In a cash acquisition, can the financing be conditional?

Under the 1999 TA, conditions or rights of withdrawal to a bid for shares in a listed company must be objectively justified, must in particular result from legal obligations of the offeror (eg regulatory consents like merger control) and must not depend entirely on the offeror’s discretion. Admissible withdrawal conditions include non-acceptance of a voluntary bid by a sufficient percentage of shareholders and substantial changes in the target’s asset or financial position during the bid term (possibly because of defence measures). Mandatory bids may not be conditional (except for legally required conditions, eg merger control) and not provide for a right of withdrawal. The public offer on the 2003 GE/Jenbacher takeover is the lead case on offer conditions, including on material adverse change conditions. In the 2004 Dicom/Topcall and Siemens/VA Tech offers, the TC allowed for the possibility of an unilateral waiver of certain conditions by the bidder during the offer term, deeming such waiver as an improvement of the offer under the TA.

Can minority stockholders be squeezed out? If so, what steps must be taken to do so and what is the timing of the process?

A majority shareholder with 90 per cent of the nominal capital can exclude minority shareholders from their shareholding by conversion under Sections 2 and 5 of the Transformation Act. Alternatively, a 90 per cent shareholder may squeeze out minority shareholders by a non-proportionate spin-off (cash-box demerger). The company conversion route involving a transfer of the company’s entire enterprise to its 90 per cent majority shareholder will result in minority shareholders, who own 10 per cent of the company or less, losing their shares in exchange for cash compensation. In the squeeze-out by spin-off, the minority shareholders will, upon completion of the demerger, merely hold shares in the cash box company. The shares in the operating company will be entirely held by the former majority shareholder(s). Rules on shareholder protection and information essentially correspond to the rules applying to mergers. A transformation balance sheet (in case of a spin-off, demerger balance sheets) must be made available to minority shareholders. As in mergers, the court may be asked to review and fix the appropriate amount of cash compensation to be paid to minority shareholders. The right of a minority shareholder to file for such review of the cash competition by the courts requires a minimum shareholding of one per cent. The Austrian Constitutional Court currently reviews the constitutionality of the minimum shareholding requirement in squeeze outs.

What additional legal and regulatory framework, if any, governs cross-border transactions?

The Tenth EC Directive on Transnational Mergers has not yet been incorporated into Austrian law. Thus, no special corporate law rules govern cross-border mergers and reorganisations. Tax regulations do, however, have a significant impact.

Under a March 2000 decision, the Austrian Supreme Court confirmed the admissibility of a transformation of an Austrian GmbH to its foreign sole shareholder (a German GmbH) under the UmwG.

Can the legal form of the entity involved in a business combination have an impact on the manner in which it is structured? Do such factors have an impact on cross-border transactions involving entities organised in your jurisdiction?

The legal form may clearly have an impact on both admissibility of reorganisation and transfer structures (eg it is possible to merge a GmbH into an AG, not vice versa) or tax efficiency (eg not all legal forms may be used for tax-neutral reorganisations). Moreover, the strict rules of the TA governing public takeovers will only relate to joint stock corporations admitted to trading at the VSE. In general, choice of legal form is usually strongly influenced by tax (planning) considerations.

Other than competition laws, what are the relevant waiting or notification periods for completing business combinations? Are companies in specific industries subject to additional regulations and statutes?

The respective laws governing mergers, demergers and squeezeouts provide for a (usually one month) minimum waiting or notification period before adoption of the corporate measure. This allows the co-shareholders and creditors to examine the proposed transaction. Required audits may add to the timeline. Balance sheets used in mergers and demergers may not date back more than six months, otherwise new interim balance sheets are required. Completion may also require actual registration in the commercial registry which may delay effectiveness.

Tax neutrality of a reorganisation will usually require filing of a reorganisation within a certain deadline (eg not more than nine months after regular balance sheet date). Specific detailed timelines are prescribed by the TA for public takeovers of listed companies.

What are the basic tax issues involved in business combinations?

Reorganisations are usually structured to comply with the Reorganisation Tax Act to ensure tax neutrality. The Act covers the tax effects, if any, of various reorganisations including mergers, transformations, in-kind contributions, transfer of businesses, splits and demergers. Structures minimising taxable income by utilising loss carry-forward are available.

According to the Austrian Tax Reform Act 2005, new and improved opportunities to structure acquisitions tax efficiently are effective as of 2005. The corporate income tax rate was reduced from 34 per cent to 25 per cent with an effective income tax burden of 22 per cent.

In acquisitions, assuring the deductibility of financing costs is crucial. Generally, financing costs related to the acquisition of stock are not tax-deductible, unless specific post-acquisition steps are undertaken (mergers, transformations or creation of tax units). According to the Austrian Tax Reform Act 2005,financing costs and thus interests on loans taken out to acquire domestic or foreign participations are generally tax deductible from 2005 onwards.

An important element in planning the tax consequences of an acquisition is achieving a goodwill depreciation. According to the Austrian Tax Reform Act 2005, as of 2005 goodwill can be depreciated not only in asset deals but also in share deals provided certain requirements are met.

As of 2005 the previously existing regulation for the creation of a fiscal unity has been substantially broadened by a modern and attractive system of group taxation. If two or more companies form a tax group, the taxable results (profits and losses) of group members will be attributed to their respective domestic parent company and will be taxed on a group level of such group parent. Profits and losses are only attributed for tax purposes without a requirement for a statutory profit/loss takeover agreement. The new group taxation regime even provides for the cross border use of losses within the fiscal unit by allowing the consolidation of losses of directly held foreign subsidiaries with profits generated in Austria.

What is the basic regulatory framework governing labour and employee benefits matters in a business combination?

In accordance with the EC Acquired Rights Directive, AVRAG Section 3 provides for a mandatory transfer of all existing employment contracts (with benefits)pertaining to the entire business or operational unit sold (eg asset deal), leased or transferred (eg by a merger) to another company.

If benefits are based on a shop agreement or collective bargaining agreement and the acquirer entity has less favourable terms, the seller’s terms will continue to apply to the respective employees or transferred unit. In a share deal, the benefit plans (based on shop or collective bargaining agreements) of the legal entity whose shareholder (partly) changes, will continue to apply.

Finally, foreign acquirers in particular should be aware of the possibility of a works council. The works council exercises employees’ co-determination and participation rights and negotiates the respective shop agreements with the management. If a corporation has a works council and a supervisory board, the works council may delegate employee representatives in a ratio of two (shareholder representatives) to one (employee representative) to the supervisory board.

What are the special considerations for business combinations involving a target company that is in bankruptcy or receivership or engaged in a similar restructuring?

Bankruptcy and reorganisation procedures are governed by the Bankruptcy Act (Konkursordnung - KO), the Settlement and Recomposition Act (Ausgleichsordnung - AO) and the Business Reorganisation Act (URG, not discussed here). In the case of asset deals purchasers may incur liability for debts of the seller of the business of a company. Tax, civil, corporate and labour regulations oblige the buyer to meet certain, partly subsidiary, liabilities or contractual obligations of the seller to protect the company’s creditors and employees. However, these statutory requirements and purchaser liabilities do not apply in case of acquisitions of companies which are already subject to pending bankruptcy and reorganisation procedures.

Are there current proposals to change the regulatory or statutory framework governing business combinations?

Under the proposed draft Corporate Law Reform Act 2005, features relating to the supervisory board and the regime on the appointment and liability of auditors shall be amended in accordance with the Austrian Corporate Governance Code. The 2005 Cartel Reform Act will amend the Austrian Cartel Act and will bring Austrian cartel law in line with Articles 81 and 82 EC Treaty as of 1 January 2006. Legislative changes currently under discussion also include the reform of the Takeover Act and of the Commercial Code by a draft Enterprise Act.

Update and Trends Headline transactions in 2004/first quarter 2005 included the large scale privatisation sale of Austrian real estate, some large capital markets transactions (IPO of Raiffeisen International, ÖIAG block trade in Telekom Austria shares, OMV combined share capital increase/convertible bond issue) ([…………]) and large takeovers, including Siemens/VA Tech and ÖVAG/Investkredit. Private M&A activity was concentrated on industry consolidation, including in the Telekom´s sector (UTA/Tele 2). Cross-border investments from Austria into the Central European markets continued. The 1 May 2004 enlargement of the EU intensified, as expected, inward investment into the CEE countries.

The 2005 tax reform (see above for details) and the planned Corporate Reform Act 2005 are likely to increase transactional activity since Austrian companies may become even more attractive takeover targets.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.