The contracting of representations and warranties insurance is an option that has been increasing during the last years in the framework of M&A operations. This is due to the great advantages it offers for both parties, although there are also some drawbacks that need to be kept in mind.
Mergers and acquisitions of companies, known by the acronym M&A., is a corporate economic strategy. Mergers between business entities assuming the termination of investee companies and the transmission of their assets to a new entity – merger for a new creation – or for an existing one– merger through absorption.
The use of representation and warranties insurance (R&W) is becoming more and more frequent in Spain in the field of the purchase and sale of companies. The premiums increase, costs reduction or process simplification are some of the reasons for their growth.
The Share Purchase Agreement (SPA) is one of the most used contracts in Spain for the purposes of acquiring a mercantile company. Its basic content should include some clauses or contractual promises about the company (warranties) which will bind both parties for the transaction’s success.
The letter of intent is a written document that serves as a starting point for mergers and acquisitions. Among the most common main clauses are included the terms of the transaction, the exclusivity, the confidentiality and the legal audit.
The contract of the sale of shares or Share Purchase Agreement, is one of the most useful contracts in the practice of acquiring mercantile companies. It consists of four main phases: the contract of confidentiality, the letter of intent, the due diligence procedure and the signing of the contract of the sale of shares.
The purchase agreement of corporate shares or holdings is a document that establishes conditions that will govern the transfer of the company and it applies to all forms of non-listed companies.
Investment in Spain through acquiring shareholdings in a Spanish company requires a series of steps in order to ensure the successful conclusion of the transaction. These are, in brief: the letter of intent, the due diligence process, the signing of the purchase/sale agreement, the closure of the transaction and the closing operations, or post-closing of the transaction.
Although the sale of assets is generally subject to Value Added Tax (IVA) and Capital Transfer and Stamp Tax (ITPyAJD), the transfer of a complete branch of activity or business in Spain has flexible taxation.
After carrying out the corresponding due diligence process to analyse the accounting, fiscal and legal situation of a business, it is vital to formalize the purchase and sale through the most appropriate legal instrument according to the characteristics of the project.
The main instruments for acquiring companies are the purchase and sale of shares and participations and the purchase and sale of company assets. The choice of each of them has its advantages and disadvantages, and entails different legal consequences.