Disentanglement covenants in M&A transactions (1)

In the previous blog post, I distinguished between three types of covenants the parties could agree on in order to protect the purchaser’s purposes with the acquisition at hand. In this post, I will address the various covenants parties tend to agreee on in the context of a divestment.

Various matters related to the historic positioning of the acquired companies as part of seller’s group need to be addressed. The disentanglement is usually not completed on the closing date. For that reason, the following matters are commonly provided:

  • Financial disentanglement: all securities, suretyships and collateral granted by the acquired companies for the benefit of the seller’s group and vice versa should be terminated (and replaced). This includes financial arrangements of any kind: cash pooling arrangements with the bank, security rights under credit facilities, currency exchange swaps or foreign currency hedge arrangements, surityship undertakings and parent guarantees by the selling shareholder, credit arrangements with suppliers that service both the sold companies and the remaining subsidiaries of the seller etc.
  • Employee’s rights: although the position of employees does not change as a direct consequence of a change of control, many selling companies would like to ascertain that the employees will indeed keep their employment. Also, employee codetermination laws and regulations (or the mere existence of a works council) have had the effect that a seller and purchaser often agree on a certain (or an unchanged) level of employment after closing of the transaction. A covenant could therefore address matters such as:
    • the number of FTE during the next few years;
    • the continuous availability of certain specific facilities of the seller (e.g. an employee mobility centre);
    • the replacement of an employee share or option participation scheme by a reasonable alternative;
    • certain minimum requirements for the benefit of senior staff (who are not covered by a collective labour agreement);
  • Pensions: whilst the pension rights of employees are also well-protected under European legislation, it is sometimes recommended that a purchaser takes over certain pension arrangements of the seller or arranges for a pension scheme that is substantially similar to that of the seller (e.g. defined benefit scheme, defined contribution scheme, capital contribution policy).

In a subsequent blog post, I will address business related disentanglement covenants.

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