Private equity in Austria: market and regulatory overview

A Q&A guide to private equity law in Austria.

The Q&A gives a high level overview of the key practical issues including the level of activity and recent trends in the market; investment incentives for institutional and private investors; the mechanics involved in establishing a private equity fund; equity and debt finance issues in a private equity transaction; issues surrounding buyouts and the relationship between the portfolio company's managers and the private equity funds; management incentives; and exit routes from investments. Details on national private equity and venture capital associations are also included.

To compare answers across multiple jurisdictions visit the Private Equity Country Q&A Tool.

This Q&A is part of the global guide to private equity. For a full list of jurisdictional Q&As visit www.practicallaw.com/privateequity-guide.

Contents

Market overview

1. How do private equity funds typically obtain their funding?

According to a recent article of the Austrian Venture Capital Association (AVCO), 80% of the 2013 commitments to Austria-based funds came from government agencies and 20% from private investors. At the same time, foreign funds attracted substantial commitments from Austria-based institutional investors with insurance companies, private banks and asset managers leading the way followed by Austrian family offices (that is, private wealth management advisory firms that serve high net worth individuals or families).

 
2. What are the current major trends in the private equity market?

The current major trends in the private equity market are:

  • Equity only deals.

  • Secondary transactions.

  • Bank driven auction processes.

  • Bolt-on acquisitions and market consolidation.

  • Private equity-backed non-performing loan (NPL) transactions.

  • Private equity-backed real estate transactions.

 
3. What has been the level of private equity activity in recent years?

Fundraising

According to the Austrian Venture Capital Association (AVCO), total commitments to Austria-based funds decreased from EUR332 million in 2009 to an all-time-low of EUR19.8 million in 2013 (an 88.5% drop compared to the 2012 figure). AVCO suggests that the decline is mainly attributable the following factors:

  • Some funds still had money to invest in their current funds so there was no need to raise new funds.

  • Other funds focused on liquidating their portfolio and returning capital to their investors.

  • Some funds pulled back from the Austrian market because of the difficult fundraising environment for Austria-only funds generally and the additional administrative burden associated with the introduction of the Austrian Alternative Investment Manager Act (Alternative Investmentfonds Manager- Gesetz) (AIFMG) (see Question 4).

Investment

According to AVCO, private equity investments in 2013 amounted to EUR472 million. Austria-based funds accounted for EUR88 million (a 43% drop compared to the 2012 figure) while German, Czech, Polish and pan-European funds accounted for EUR384 million.

Transactions

Small and mid-cap buyout transactions and non-performing loan (NPL) transactions represented the largest group of completed deals in 2013, while early stage financings gained further ground. Many transactions had a distressed background and were driven by the banks' efforts to clean up balance sheets. In the non-distressed space, secondary transactions and bolt-on acquisitions (that is, acquisitions of private equity backed portfolio companies aimed to consolidate the market or to enhance the portfolio company's value (for example, by acquiring neighbouring lines of business)) represented the largest number. We have not seen any notable management buyouts.

Exits

Trade sales were the main exit channel. A dual track process (involving a parallel auction and an IPO outside of Austria) and one IPO of a private equity-backed company were in discussion. Both processes were ultimately abandoned.

 

Reform

4. What recent reforms or proposals for reform affect private equity in your jurisdiction?

Austrian Alternative Investment Manager Act (AIFMG)

The EU Directive 2011/61/EU on alternative investment fund managers (AIFM Directive) was implemented in Austria by the Austrian Alternative Investment Manager Act (Alternative Investmentfonds Manager- Gesetz) (AIFMG). The AIFMG largely follows the AIFM Directive. Any alternative investment fund manager (an AIFM) managing one or more alternative investment funds (AIF) is subject to the regulations of the AIFMG (an AIF is defined as a collective investment undertaking which raises capital from a number of investors to invest in it in accordance with a defined investment policy for the benefit of those investors and where the capital does not serve a direct operational purpose).

Austrian based AIFMs generally require a licence of the Austrian Financial Market Authority (Finanzmarktaufsichtsbehörde) (FMA).There is a de minimis exception for managers of small AIFs with assets of less than EUR100 million (where leverage is used) or less than EUR500 million (where no leverage is used). Managers of such small AIFs are only subject to a few regulations of the AIFMG. They do not require a licence and only need to register with the FMA.

Funds pursuant to the Austrian Investment Funds Act (Investmentfondsgesetz) (InvFG) and funds qualifying under the Austrian Real Estate Investment Funds Act (Immobilien-Investmentfondsgesetz) (ImmoInvFG) are not captured by the AIFMG.

European Venture Capital Fund Regulation

Regulation (EU) 345/2013 on European venture capital funds (EuVECA Regulation) was introduced to create a new pan-European designation for small AIFMs, the European Venture Capital Fund (EuVECA). Austrian based AIFMs may register an AIF as an EuVECA provided that they comply with the EuVECA Regulation and have supplied certain information with regard to themselves and the relevant AIF to the FMA. The main advantage the AIFM gains by doing so is the option to market the relevant AIF throughout the EU under the EuVECA designation to certain categories of investors defined in the EuVECA Regulation under an EU wide passporting regime. Passporting allows a firm authorised under an EU single market directive to market the designated fund to certain qualified investors in another EU member state, on the basis of its home state authorisation.

The EuVECA Regulation is not compulsory; if an AIFM does not want to use the EuVECA designation, then it does not have to comply with the EuVECA Regulation for a particular fund (or at all). If the AIFM chooses not to use the EuVECA designation, national laws and EU regulations apply, such as national private placement regimes.

 

Tax incentive schemes

5. What tax incentive or other schemes exist to encourage investment in unlisted companies? At whom are the incentives or schemes directed? What conditions must be met?

No such incentive schemes are available in Austria.

 

Fund structuring

6. What legal structure(s) are most commonly used as a vehicle for private equity funds in your jurisdiction?

Mittelstandsfinanzierungsgesellschaft (MFG)

The Corporate Income Tax Act (Körperschaftssteuergesetz) (KStG) provides for a special fund vehicle called mid-sized business financing company, (Mittelstandsfinanzierungsgesellschaft) (MFG). In order to qualify as a MFG:

  • The capital must be invested in tranches (whether wholly or partly financed through state aid) of under EUR1.5 million per target and 12-month period.

  • The investment must qualify as seed, start-up or expansion capital.

  • Investments must not be made in:

    • businesses in distress (within the meaning of the EU guidelines on state aid for rescuing and restructuring businesses in distress);

    • businesses in the shipbuilding, coal or steel industry.

  • The MFG must be a limited liability company (Gesellschaft mit beschränkter Haftung) (GmbH) or a stock corporation (Aktiengesellschaft) (AG) with a minimum share capital of EUR7.3 million.

  • Public organisations must not hold more than 50% of its share capital.

  • The MFG can only invest money and cannot carry out its own business.

  • The MFG is subject to a number of investment restrictions, including the following:

    • the MFG must invest 70% of its funds in participations (Finanzierungsbereich); the remaining 30% can be held as cash, as bank deposit or in the form of bonds (Veranlagungsbereich);

    • investments must be made in non-listed small or mid-cap businesses;

    • the MFG can only acquire minority participations of up to 49%. At least 70% of the investment must be equity;

    • each participation held by the MFG can only account for a maximum of 20% of the MFG's total equity capital.

Limited partnerships

Limited partnership structures have become rather common. Investors become limited partners in a limited partnership. The general partner is usually a GmbH (sometimes an AG) and receives a fee for assuming unlimited liability. In some structures the general partner manages the partnership, in other structures the partnership is managed by a separate management company which is usually another GmbH (sometimes an AG).

 
7. Are these structures subject to entity level taxation, tax exempt or tax transparent (flow through structures) for domestic and foreign investors?

MFG

MFGs are tax exempt for income from investments in participations (Finanzierungsbereich) made before 31 December 2012. To benefit from the tax exemption, the MFG must carry out the fund activity in accordance with section 6b of the Austrian Corporate Income Tax Act (KStG) for at least seven years. If not, the tax exemption is retroactively revoked. MFGs are also tax exempt from capital duty and stamp duty triggered in connection with their establishment. The MFG's distributions are taxed at investor level as follows:

  • Domestic investors. Domestic investors are taxed as follows:

    • dividends paid to domestic private investors are generally subject to withholding tax at a rate of 25%. To the extent dividends are attributable to equity investments in a MFG in a nominal value of up to EUR25,000 they are tax-exempt (section 27, Austrian Income Tax Act (Einkommensteuergesetz) (EStG));

    • dividends paid to domestic corporate investors are tax-exempt, irrespective of the percentage or the duration of the shareholding (section 10, KStG).

  • Foreign investors. Dividends paid to foreign individual or corporate investors are generally subject to withholding tax at a rate of 25%. If the foreign investor is a corporation resident in an EU member state and holds a minimum of 10% in the MFG for an uninterrupted period of at least one year, dividends are tax-exempt (section 94, EStG). If the foreign (individual or corporate) investor is resident in a jurisdiction that has a double tax treaty (DTT) with Austria, reduced tax rates usually apply.

Limited partnerships

Limited partnerships are fully tax transparent for Austrian income tax purposes provided that the following requirements are met:

  • The partnership's sole activity qualifies as asset management (Vermögensverwaltung) for tax purposes.

  • The partnership is not deemed to conduct a business (Gewerbebetrieb).

If these two requirements are satisfied, dividends of portfolio companies and capital gains will only be taxed at the level of the investors:

  • Domestic individual investors. Domestic individual investors are taxed as follows:

    • capital gains are subject to a preferred tax rate of 25%;

    • dividends are subject to withholding tax at a rate of 25%.

  • Domestic corporate investors. Domestic corporate investors are taxed as follows:

    • capital gains are taxed at a rate of 25% if they relate to an Austrian resident portfolio company and may be tax exempt if they relate to a foreign resident portfolio company in which a minimum shareholding of 10% is (indirectly) held for an uninterrupted period of at least one year (section 10, KStG).

    • dividends are tax exempt if they related to an Austrian resident portfolio company or an EU resident portfolio company and may be tax exempt if they relate to another foreign portfolio company (section 10, KStG).

  • Foreign individual investors. Foreign individual investors are taxed as follows:

    • capital gains are only taxable (at a rate of 25%) if the percentage of the investor's (weighted) shareholding in the Austrian portfolio company (through the partnership) is at least 1% during the last five years. Note, that DTTs usually restrict Austria's right to tax such capital gains (Article 13, paragraph 5 of the OECD Model Tax Convention on Income and on Capital(MTC));

    • dividends are subject to withholding tax at a rate of 25% (subject to reduction under applicable DTTs).

  • Foreign corporate investors. Foreign corporate investors are taxed as follows:

    • capital gains are only taxable (at a rate of 25%) if the percentage of the investor's (weighted) shareholding in the Austrian portfolio company (through the partnership) is at least 1% during the last five years. DTTs usually restrict Austria’s right to tax such capital gains (Article 13, paragraph 5, MTC);

    • dividends are subject to withholding tax at a rate of 25% in case the exemption for foreign investors which are corporations resident in an EU member state is not applicable (but will usually be subject to reduction under applicable DTTs).

 
8. What (if any) structures commonly used for private equity funds in other jurisdictions are regarded in your jurisdiction as being tax inefficient (whether by not being recognised as tax transparent or otherwise)? What alternative structures are typically used in these circumstances?

Foreign fund structures are generally taxed in the same manner as the Austrian equivalent structure (Rechtsformvergleich). Foreign limited partnerships are generally regarded as transparent under the same prerequisites as Austrian limited partnerships (see Question 7). Where a foreign fund structure is tax inefficient under Austrian tax law, parallel (tax efficient) structures are sometimes set up.

 

Investment objectives

9. What are the most common investment objectives of private equity funds?

The main objective of a private equity fund is to realise a healthy return. The average life of a private equity fund is around ten years with an investment period between five and six years. The difficult exit environment has resulted in many fund extensions. To some extent, pressure to liquidate the fund on the one hand and investment backlog on the other contributed to increasing numbers of secondary transactions on the Austrian market.

 

Fund regulation and licensing

10. Do a private equity fund's promoter, principals and manager require licences?

Managers

Most private equity funds qualify as AIFs. The management of an AIF requires an AIFMG licence. There is a de minimis exception for small AIFs. AIFMs of small AIFs do not require a licence; they only need to register with the FMA (see Question 4).

Promoters

Private equity funds are usually structured as closed-end funds. The promotion of closed-end funds requires a trade permit for professional investment advice under the Austrian Trade Code (Gewerbeordnung) (GewO). There are no restrictions with regard to the promotion of AIFs (including small AIFs) to professional investors. The promotion of small AIFs to private investors is not permitted. The promotion of certain other AIFs to private investors is permitted if the AIF is managed by a licensed manager and the AIF satisfies the requirements set out in sections 48 and following of the AIFMG (which is usually not the case for private equity funds). EuVECA funds may be promoted to a wider range of investors, as the passport permits marketing not only to professional investors, but also to investors who commit a minimum of EUR100,000 and provide a written risk acknowledgment (intended to capture, for instance, business angels) as well as to executives, directors and employees of the EuVECA manager.

 
11. Are private equity funds regulated as investment companies or otherwise and, if so, what are the consequences? Are there any exemptions?

Private equity funds usually qualify as AIF and as such are subject to the regulations of the AIFMG (see Question 4). Small AIFs may be subject to the EuVECA Regulation if they opt to register. Occasionally, private equity funds may also qualify as investment funds or as real estate investment funds, and as such are subject to the regulations of the Austrian Investment Funds Act (Investmentfondsgesetz) (InvFG) or the Austrian Real Estate Investment Funds Act (Immobilien-Investmentfondsgesetz) (ImmoInvFG).

 
12. Are there any restrictions on investors in private equity funds?

There are no restrictions on investors in private equity funds under Austrian law.

 
13. Are there any statutory or other limits on maximum or minimum investment periods, amounts or transfers of investments in private equity funds?

There are no statutory or other limits on maximum or minimum investment periods, amounts or transfers of investments in private equity funds under Austrian law.

 

Investor protection

14. How is the relationship between the investor and the fund governed? What protections do investors in the fund typically seek?

The relationship between the private equity fund and its investor(s) is governed by the partnership agreement (if the fund is a limited partnership) or the articles (if it is a corporation) and the investment principles (Anlagebedingungen). If the fund qualifies as an AIF or EuVECA, the requirements under the AIFMG or EuVECA Regulation must be taken into account when structuring the fund.

Typical investor protections include:

  • Investment restrictions, including:

    • concentration limits;

    • geographic limitations;

    • diversification of industries;

    • limits on borrowing; and

    • related-party transaction restrictions.

  • Reporting requirements.

  • Provisions for the priority payment of distributions and clawback provisions in the event excess carried interest is paid to the general partner or investment manager.

  • Creation of an advisory board to oversee conflicts of interest and provide approval of other matters specified in the limited partnership agreement.

  • Key man clauses.

  • Investor remedies including:

    • provisions allowing for early termination of the investment period or fund term (both with cause and without cause); and

    • provisions allowing for removal of the general partner or investment manager (both with cause and without cause).

  • Preferences on co-investment opportunities.

 

Interests in portfolio companies

15. What forms of equity and debt interest are commonly taken by a private equity fund in a portfolio company? Are there any restrictions on the issue or transfer of shares by law? Do any withholding taxes or capital gains taxes apply?

Common form

Private equity funds usually take equity interests (in the form of ordinary or preferred shares or limited partnership interests) in portfolio companies. Sometimes private equity funds take a combination of equity interests and institutional debt which may raise structural issues, in particular in distressed transactions where the portfolio company may be considered to be in a "crisis" and as such the institutional debt would generally be considered equity replacing (eigenkapitalersetzend) by operation of the Equity Replacement Act (Eigenkapitalersatz-Gesetz) (EKEG) (see Question 26).

Restrictions

There are the following restrictions on the issue and transfer of shares:

  • Corporations. The subscription to and transfer of (as well as the promise to subscribe or transfer) shares in a GmbH requires a notarial deed. Share transfers in GmbHs and AGs can be restricted by adding a consent requirement (Vinkulierung) of the corporation or its shareholders in the articles. For GmbHs, the articles may also contain other restrictions with regard to the transfer of shares. For example, the articles may:

    • require a shareholder to offer its shares first to its co-shareholders before it is entitled to sell (right of first refusal);

    • require a shareholder to sell along with another shareholder provided a certain aggregate minimum shareholding is sold in a particular transaction (typically the threshold is around 50 %). Sometimes that obligation is conditioned upon a minimum price being paid in the relevant transaction (drag along right);

    • entitle a shareholder to sell along with another shareholder (tag along right).

A recent Austrian Supreme Court ruling suggests that such restrictions may also be implemented in the articles of an AG if the AG is closely held.

  • Partnerships. The issuance or transfer of partnership interests by law requires the consent of all other partners. This requirement is typically modified or waived in the partnership agreement.

Taxation

The following taxes apply to equity investments:

  • Transfer taxes. Austria levies a 1% capital transfer tax on the consideration paid in return for certain equity interests issued by a corporation (whether at the time of incorporation or in the course of a later issuance). Additionally, Austria levies stamp duty on certain transactions, including, among other things, assignment agreements (Zessionen) at a rate of 0.8% and agreements regarding sureties (Bürgschaftserklärungen) at a rate of 1%.

  • Capital gains and withholding tax. With regard to taxation of capital gains and dividends from equity investments held by a private equity fund established as an MFG or a tax transparent limited partnership, see Question 7. With regard to taxation of capital gains and dividends from equity investments directly held by an investor (for example, under a co-investment arrangement), the principles set out in Question 7 with respect to transparent limited partnerships apply with the necessary changes having been made.

 

Buyouts

16. Is it common for buyouts of private companies to take place by auction? If so, which legislation and rules apply?

Buyouts of private companies commonly take place by auction. There is no specific legislation for such auction processes. However, when a state-controlled seller is involved, the process should be transparent and non-discriminatory to provide for a proper defence under EU state aid regulations against any argument of other (failing) bidders that the seller effectively granted a subsidy by selling to the prevailing bidder.

 
17. Are buyouts of listed companies (public-to-private transactions) common? If so, which legislation and rules apply?

While not that many public-to-private transactions were completed in 2013, they are not uncommon on the Austrian market. The private equity fund typically launches a voluntary takeover bid aimed at control (freiwilliges Angebot zur Kontrollerlangung) under the Takeover Act (Übernahmegesetz) (ÜbG) conditional upon the acceptance of shareholders holding at least 90% of the company's shares. If successful, the private equity fund will then squeeze out the remaining minority shareholders under the Act on the Exclusion of Shareholders (Gesellschafterausschluss-Gesetz) (GesAusG). Minority shareholders cannot block the squeeze out but can request a compensation review. If the squeeze out is done following a takeover offer no later than three months following the end of the offer period there is a rebuttable presumption that the compensation is adequate if it amounts to the highest compensation paid during the offer period.

 

Principal documentation

18. What are the principal documents produced in a buyout?

The principal legal documents used in a buyout are:

  • Acquisition documents. These consist of one or more share and/or asset purchase agreement(s) or an investment agreement.

  • Equity documents. These include:

    • shareholders' agreement;

    • governance documents (articles, bye-laws for management and so on);

    • service agreements for managers and key personnel; and

    • finance agreements governing equity contributions and institutional debt.

  • Debt documents. Debt documents include the following:

    • senior facility agreement;

    • mezzanine facility agreement;

    • security documents; and

    • inter-creditor agreement (if any).

 

Buyer protection

19. What forms of contractual buyer protection do private equity funds commonly request from sellers and/or management? Are these contractual protections different for buyouts of listed companies (public-to-private transactions)?

Acquisition document

The acquisition document typically includes:

  • Representations and warranties (including on legal organisation, capitalisation, taxes and financial statements, properties and assets, intellectual property, financing, commercial agreements, employment, litigation and compliance).

  • Specific indemnities (for any risks identified in the due diligence).

  • Locked box and anti-leakage provisions (aimed to protect the purchaser in a fixed price deal, based on a historical balance sheet against leakage of value to the seller (and its associates) in the period between the balance sheet date and the date of closing), or a closing adjustment. This involves adjusting for any differences between target financial parameters (usually net debt, working capital and sometimes capex) and actuals determined based on closing accounts.

  • Conditions precedent to closing.

  • Hold-back or escrow arrangements to secure claims under the agreement.

Shareholders' agreement

Protections in the shareholders' agreement (or investment agreement) typically include:

  • Composition of management board and supervisory board (if any).

  • Rights to nominate members and/or observers to boards (if any).

  • Veto rights requiring the prior consent of the investor or the investor director(s) (or the shareholders meeting or the supervisory board with qualified majority).

  • Anti-dilution provisions (allowing the private equity fund to subscribe for nominal value in case any future round of investment is completed at a lower valuation).

  • Liquidation preference (preferential treatment of the private equity fund upon certain exits).

  • Exit rights (right of the private equity fund to request initiation of a trade sale or an IPO process).

  • A prohibition to sell for a certain minimum period of time (which may apply to all or only some of the shareholders (for example, the founders only) and may differ in length from shareholder to shareholder (log-in)) and rights of first refusal, drag-along, tag-along and similar rights.

  • Requirements for management and annual accounts, business plan and budget.

  • Rights of access to information and management upon request.

  • Covenants not to compete and not to solicit customers, suppliers and employees.

With few exceptions the contractual protections are the same in listed and non-listed transactions.

 
20. What non-contractual duties do the portfolio company managers owe and to whom?

Portfolio company managers are generally required by law to act in the best interest of the portfolio company. In the case of an AG they must also account for the interests of the shareholders and the employees. They further owe fiduciary duties (Treuepflichten) to the portfolio company, as well as non-compete and confidentiality duties.

 
21. What terms of employment are typically imposed on management by the private equity investor in an MBO?

The terms of employment imposed on management typically include:

  • Restrictive covenants, such as:

    • non-compete;

    • non-solicitation; and

    • non-disclosure and confidentiality.

  • Rights upon termination.

  • Assignment of intellectual property rights.

  • Incentives (options, restricted shares, performance based payment, deferred payments or other incentive structures aimed at retaining management (golden handcuffs)) which are usually subject to vesting as well as good and bad leaver provisions.

If management holds shares, the shareholders' agreement typically restricts transfers of their shares and requires them to sell upon leaving the portfolio company.

 
22. What measures are commonly used to give a private equity fund a level of management control over the activities of the portfolio company? Are such protections more likely to be given in the shareholders' agreement or company governance documents?

The private equity fund typically seeks some or all of the following protections in the transaction documentation:

  • Rights to nominate members and/or observers to each board.

  • Veto rights requiring the prior consent of the investor or the investor director(s) (or the shareholders meeting or the supervisory board with qualified majority).

  • Agreed form governance documents (articles, bye-laws for management and so on).

  • Agreed form service agreements for management board and key personnel.

For GmbHs or AGs, the enforcement of some of the protections above is easier if implemented in the articles. However, as the articles are publicly accessible, most private equity funds prefer them being given in the shareholders' agreement or elsewhere.

 

Debt financing

23. What percentage of finance is typically provided by debt and what form does that debt financing usually take?

Available debt mainly depends on the size and type of the business, the track record of the private equity fund, its relationships with the financing banks and the quality of the due diligence material. Currently, debt ratios for mid-cap deals range from 40% to 60%.

Form of debt

Debt financing can take the following forms:

  • Senior debt. Senior debt typically includes:

    • a term loan (to finance the acquisition and the costs of the acquisition); and

    • a working capital facility (to fund the working capital requirements of the target).

      The term loan is sometimes divided into "alphabet loans", a term loan "A" repayable in annual instalments and a term loan "B" repayable by a single bullet repayment (that is, a lump sum payment for the entire loan amount at maturity). Given the different risk profile, interest on each tranche of the alphabet loans is different.

  • Mezzanine debt. Mezzanine debt may be used to fill the gap between senior debt and equity invested. Mezzanine debt carries higher interest, ranks after senior debt but before institutional debt (if any) and has the benefit of second ranking security and usually an equity kicker (that is, shares, options or conversion rights in the debt issuer).

  • Institutional debt. The private equity fund's financing is typically split into an equity component and a debt component. The reason for that is that the funds will usually try to maximise interest deduction against the acquisition vehicle's taxable profit. There is no statutory thin cap rule or court rulings on the subject providing guidance on what that maximum is, but practice of the tax authorities suggests debt-to-equity ratios of 3:1 to 4:1.

  • High yield bonds. High yield bonds have been used in pan-European deals. We are not aware that they have been used in Austrian deals so far.

 

Lender protection

24. What forms of protection do debt providers typically use to protect their investments?

The following forms of protection are used by debt providers to protect their investments:

  • Security. Debt providers typically request security interests not only in the assets of the acquisition vehicle but also in the assets of the target and all operating subsidiaries. For the acquisition vehicle, this typically includes security interests in:

    • the target's shares;

    • the rights and claims under the acquisition documents.

    For the target and the operating subsidiaries, this typically includes security interests in:

    • receivables;

    • bank accounts;

    • intellectual property;

    • real estate;

    • shares.

  • Guarantees. In addition to security, the loan agreement or separate guarantee instruments usually provide for cross-guarantees of the secured debt of all operating group companies.

  • Contractual and structural mechanisms. The loan agreement typically provides for positive and negative covenants to ensure a certain conduct of business by the target group. In addition, the loan agreement usually provides for regular financial testing, reporting and information covenants. Exclusive lender clauses and intercreditor arrangements are entered into to address structural subordination of debt, priority and rights upon the occurrence of an enforcement event.

 

Financial assistance

25. Are there rules preventing a company from giving financial assistance for the purpose of assisting a purchase of shares in the company? If so, how does this affect the ability of a target company in a buyout to give security to lenders? Are there exemptions and, if so, which are most commonly used in the context of private equity transactions?

Sections 82 of the GmbHG and 52 of the AktG generally prohibit the return of equity (Verbot der Einlagenrückgewähr) to shareholders. Based on this principle Austrian courts have established that a company may not make any payments to its shareholders, except for:

  • The distributable balance sheet profit.

  • In a formal reduction of the stated share capital (Kapitalherabsetzung).

  • The surplus following liquidation.

The prohibition on return of equity covers payments and other transactions benefitting a shareholder where no adequate arms' length consideration is received in return. To the extent a transaction qualifies as a prohibited return on equity, it is null and void between the shareholder and the subsidiary (and any involved third party if it knew or should have known of the violation). It may result in liability for damages. Most of the above principles are also applied by the Austrian courts by analogy to limited partnerships having a GmbH or AG as unlimited partner (that is, GmbH & Co KG and AG & Co KG).

In addition, section 66a of the AktG prohibits a target company from financing, or providing assistance in the financing of, the acquisition of its own shares or the shares of its parent company (irrespective of whether or not the transaction constitutes a return of capital). It is debated if section 66a of the AktG should be applied by analogy to GmbHs. Transactions violating section 66a of the AktG are valid but may result in liability for damages.

Exceptions

With regard to the prohibition on return of equity (Verbot der Einlagenrückgewähr) Austrian courts have developed case law suggesting that a subsidiary may lend to a shareholder, or guarantee, or provide a security interest for a shareholder's loan if:

  • It receives adequate consideration in return.

  • It has determined (with due care) that the shareholder is unlikely to default with its payment obligations and that even if the shareholder defaults with its payment obligations, such default would not put the subsidiary at risk.

There are no exceptions to section 66a of the AktG. Given that a violation does not render the transaction void, section 66a of the AktG is usually of lesser concern.

 

Insolvent liquidation

26. What is the order of priority on insolvent liquidation?

Statutory priority

In the case of an insolvency, the following applies:

  • Secured creditors have prior access (Absonderungsrecht) to the proceeds of enforcement against the assets subject to their security interest.

  • Any surplus of enforcement belongs to the general insolvency estate (Gemeinschaftliche Insolvenzmasse).

  • Creditors of claims (Masseforderungen) (these are in broad terms, claims that have arisen after the opening of the insolvency proceedings) under section 46 of the Austrian Insolvency Act (Insolvenzordnung) (IO) rank prior to other (unsecured) creditors and share pro rata amongst themselves.

  • The remainder of the insolvency estate is shared among all creditors on a pro rata basis.

Loans given by qualified shareholders in a crisis are considered equity replacing (eigenkapitalersetztend) and as such are subordinated by operation of the Equity Replacement Act (Eigenkapitalersatz-Gesetz) (EKEG). As long as the crisis continues, repayments are not permitted and any amounts repaid in violation of the repayment ban can be reclaimed. For that purpose a crisis is deemed to exist, if the:

  • Company is illiquid (zahlungsunfähig) within the meaning of section 66 IO.

  • Company is over-indebted (überschuldet) within the meaning of section 67 IO

  • Company's equity ratio within the meaning of section 23 of the Reorganisation Act (Unternehmensreorganisationsgesetz) (URG) is less than 8% and its fictitious debt redemption period (fiktive Schuldentilgungsdauer) is more than 15 years.

In the last case, a loan will, however, only be considered equity replacing and therefore subordinated, if the latest balance sheet actually showed, or, if a a timely set up balance sheet would have showed, or if the (lending) qualified shareholder actually knew, or it should have been obvious to him, that a balance sheet would have shown an equity ratio of less than 8% and a fictitious debt redemption period of more than 15 years.

By way of exception to that rule, loans of qualified shareholders are not deemed equity replacing in the following circumstances:

  • If the repayment term for a loan made pre-crisis is extended during a crisis, this does not result in the loan becoming equity replacing.

  • Loans given as part of a turn-around plan (Sanierungskonzept) in connection with an acquisition of a company in crisis are not captured.

If a qualified shareholder has guaranteed or granted a security interest for the benefit of a subsidiary in crisis, creditors of the subsidiary can enforce against the controlling shareholder without claiming against the subsidiary first. If the creditor has recovered from the controlling shareholder, the controlling shareholder cannot claim payment from the subsidiary under rights of subrogation for as long as the subsidiary is in crisis. If a creditor claims against the subsidiary, the subsidiary can require the creditor to claim against the controlling shareholder first. If the subsidiary repays the loan, it can claim the amount paid to its creditor from the controlling shareholder.

Contractual priority

Within the framework of a restructuring, creditors often subordinate their repayment claims to other third party claims by way of a qualified subordination agreement (qualifizierter Rangrücktritt) to avoid the need to file for insolvency proceedings.

 

Equity appreciation

27. Can a debt holder achieve equity appreciation through conversion features such as rights, warrants or options?

Most mezzanine transactions involve an equity kicker which can take the form of actual shares, options or conversion rights. For AGs, a specific part of the share capital can be reserved for conversion rights. Generally, a waived loan may be used as consideration for new shares.

 

Portfolio company management

28. What management incentives are most commonly used to encourage portfolio company management to produce healthy income returns and facilitate a successful exit from a private equity transaction?

Management incentives are outlined in Question 21.

 
29. Are any tax reliefs or incentives available to portfolio company managers investing in their company?

Performance-based payments are taxable as employment income at a rate of up to 50%. Options, restricted shares and other participation models can in certain circumstances be structured so as to qualify as investment income (taxed at a preferred tax rate of 25%).

 
30. Are there any restrictions on dividends, interest payments and other payments by a portfolio company to its investors?

Restrictions on payments by a portfolio company to its investors can broadly be divided into two groups:

  • Corporate law restrictions. Dividends can generally only be paid when there is sufficient balance sheet profit. Interest payments and other payments to shareholders are only allowed where adequate arms' length consideration is received in return (see Question 25).

  • Tax law restrictions. All payments to a shareholder (other than profit distributions) must be made at arm's length. If they are not, they are classified as constructive dividends and are subject to 25% withholding tax. In addition, the portfolio company cannot deduct these payments as business expense (Betriebsausgabe).

 
31. What anti-corruption/anti-bribery protections are typically included in investment documents? What local law penalties apply to fund executives who are directors if the portfolio company or its agents are found guilty under applicable anti-corruption or anti-bribery laws?

Contractual protection

Anti-corruption provisions are usually included in the representations and warranties of the acquisition agreement. In addition, anti-corruption provisions are typically included in the governance documents and internal guidelines of the portfolio companies.

Criminal law penalties

The bribing of an official is a criminal offence subject to criminal penalties or imprisonment. The portfolio company may also be subject to criminal penalties (which are determined based on profits) if it benefited from the bribe.

 

Exit strategies

32. What forms of exit are typically used to realise a private equity fund's investment in a successful company? What are the relative advantages and disadvantages of each?

Forms of exit

The following forms of exit are typically used to realise an investment in a successful company:

  • Trade sales.

  • Secondary transactions.

  • IPOs. These are the exception rather than the rule.

  • Dual track processes. These are rather uncommon in Austria.

Advantages and disadvantages

The gains realised in a trade sale or a secondary transaction tend to be lower than in an IPO. However, IPOs usually take substantially longer and are more expensive.

 
33. What forms of exit are typically used to end the private equity fund's investment in an unsuccessful/distressed company? What are the relative advantages and disadvantages of each?

Forms of exit

The most common forms of exit are:

  • Secondary transactions to specialist funds.

  • Management buyouts.

  • Liquidation or insolvency.

Advantages and disadvantages

Selling to a specialist fund or management will usually allow the private equity fund to recover at least some of its investment and may also be beneficial from a reputational perspective. However, where the prospective return does not justify the cost and management time involved, private equity funds sometimes also opt for liquidation or insolvency.

 

Private equity/venture capital associations

Austrian Private Equity and Venture Capital Organisation (AVCO)

Status. AVCO is a non-governmental organisation.

Membership. AVCO currently has around 70 members.

Principal activities. AVCO is the National Association of Austria's Private Equity and Venture Capital industry (founded in 2001), which covers more than 80% of the private Austrian private equity market with its members. In particular, AVCO is: 

  • A knowledgeable partner and independent information point.
  • The official representative of the industry.
  • A networking institution.
  • An interface to international organisations.

Information sources. www.avco.at



Online resources

The Legal Information System of the Republic of Austria (Rechtsinformationssystem des Bundes) (RIS)

W www.ris.bka.gv.at/Englische-Rv

Description. This website is part of the official Austrian legal information system and contains a selection of Austrian laws translated into English. All translations are unofficial and only occasionally updated.



Contributor profiles

Florian Philipp Cvak, Partner

Schindler Attorneys

T +43 1512 2613
E florian.cvak@schindlerattorneys.com
W www.schindlerattorneys.com

Professional qualifications. Admitted to the Austrian, New York and Polish bar.

Areas of practice. Corporate; M&A; finance.

Clemens Philipp Schindler, Partner

Schindler Attorneys

T +43 1512 2613
E clemens.schindler@schindlerattorneys.com
W www.schindlerattorneys.com

Professional qualifications. Admitted to the Austrian bar. Austrian certified public tax advisor.

Areas of practice. Corporate; M&A; tax.


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