The development of the Portuguese M&A market and the impact of Covid-19

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Manuel Santos Vitor

Abreu Advogados, Lisbon


Assunção Vassalo

Abreu Advogados, Lisbon


Portugal is a small open economy that is very dependent on foreign direct investment (FDI). Pursuant to the EY European Investment Monitor (EIM) 2020, FDI projects in Portugal more than tripled between 2015 and 2019. Portugal also achieved a record-breaking number of 158 FDI projects in 2019.[1]

The unexpected Covid-19 pandemic has caused, and is still causing, major repercussions in countries around the globe, and Portugal is no exception. Covid-19 is testing countries' economies, finances, and social and political stability, and the same applies to FDI in Portugal.

Like most countries, Portugal adopted restrictive measures to combat the pandemic and two of the main measures implemented, along with the lockdown, were the closure of borders and the adoption of several measures for businesses with a view to help them with the difficulties of lockdown, the dramatic reduction in business and the uncertain outlook.

These measures and this pandemic have not only had a visible impact on the Portuguese M&A landscape, but also on the manner in which several transactions have developed.

However, the takeaway is that M&A has continued and players have adjusted to this new reality.

Impact of Covid-19 on the Portuguese M&A market

According to the Transactional Track Record (TTR) quarterly report, Portugal's M&A market closed in the first semester of 2020 with a decrease in the number of transactions compared with the first semester of 2019. There is no doubt that this trend is imputable to the Covid-19 pandemic.[2]

In addition, due to Covid-19, during the second quarter of 2020, we witnessed the reversal of the growth trend that the M&A market had experienced for the last few years and that still prevailed during the first quarter of 2020, that is, the period of uncertainty that immediately preceded (most of it anyway) the effects of the Covid-19 pandemic. In the first quarter of 2020, the volume of transactions was higher than the first quarter of 2019.

It is public knowledge that as of March 2020, several transactions were either suspended or cancelled in Portugal because of Covid-19. According to TTR, 105 of the 162 transactions carried out during the first half of the year were completed in the first quarter, before the full impact of the new coronavirus outbreak.[3]

According to EY's EIM 2020, although Covid-19 will have a severe short-term impact on fresh FDI investments, Portugal's growing FDI attractiveness has mostly been powered by the continued trust in Portuguese assets and the improvement of the structural conditions of the country, namely quality of life, social and political stability, mild climate, lower prices, good infrastructure and a stable tax policy. These features or characteristics are expected to remain stable and attractive in the future.

Portugal must continue to leverage these conditions in order to achieve resilience in the short term and ensure continued FDI growth in the long term. In the short term, Portugal's success in containing the first wave of Covid-19 and the apparent resilience of ongoing FDI projects, even during that period, is clearly a positive and encouraging sign. In the longer term, Portugal shall have to continue the trend of strengthening its performance on most standard FDI attractiveness factors, while simultaneously preparing its positioning in a post-Covid era.

New due diligence considerations for M&A in Portugal

A new development in recent times regards compliance with Covid-19 laws. From the beginning of the emergence of Covid-19 in Portugal, we watched a tsunami of new legislation in response to Covid-19. For a period of two to three months, the government or Parliament adopted new legislative measures almost on a daily basis and, for instance, set up moratoria, furlough and other support mechanisms for businesses, the access to which is/was, however, associated with compliance with certain economic and financial ratios, and certain negative undertakings (eg, companies benefitting from support will, as a rule, be prevented from distributing dividends or other funds to shareholders; they must have a minimum material reduction of their turnover across a certain period; and cannot have access to such support if their ultimate beneficial owners (UBOs) are based in offshore or tax-friendly jurisdictions that follow – although in a much stricter way – the recommendations of the European Commission in this regard). Therefore, buyers must ensure that a target benefitting from such lifelines of support complies with these rules; review their implementation; and anticipate the costs and implications of possible non-compliance.

Furthermore, in the context of the Covid-19 pandemic, the Portuguese Government approved moratoria on certain financing agreements and repayment of other payments with a view to protect their liquidity.[4] Hence, buyers shall have to determine whether a target that obtained such financial aid or other assistance under these programmes in response to Covid-19 is compliant therewith or otherwise seek specific representations and warranties (R&W) and indemnities in this regard. They must implement controls and procedures to maintain ongoing compliance, and they should understand the target's obligations and other implications arising from those programmes, as well as any opportunities for the target to obtain additional financial aid, either before or after the closing of the transaction.

Another key issue to be considered in due diligence is the Covid-19 impact at the level of human resources. Many companies had access to furlough mechanisms whose regimes changed considerably in a matter of days, and were prevented from dismissing employees. In addition, there were, and still are, remote working undertakings that companies had to comply with. Therefore, the buyer shall have to assess if the target company complied with such new requirements correctly and will be in a position to avoid fines, penalties and reimbursement of unduly received amounts. Again, specific R&W and indemnities should be considered.

Conditions precedent, material adverse change (MAC) clauses and force majeure clauses in Portugal

There has been a surge, and growing importance and detail, of MAC and force majeure clauses in Portuguese M&A.

The principle of a MAC was actually foreseen in the Portuguese Civil Code (Article 437) and will apply to M&A transactions.

Currently, Portuguese law does not set out specific statutory provisions that define and govern force majeure in the context of commercial contract performance.

Nonetheless, force majeure is recognised as a principle of law in Portuguese law and force majeure provisions are not uncommon in Portuguese law-governed agreements. Under Portuguese law, a force majeure event is usually construed as an unexpected, uncontrollable event that, unpredictably, prevents the normal performance of contractual obligations. Decisions of the Portuguese Supreme Court of Justice have sustained that force majeure 'has underlying it the idea of inevitability: any natural event or human action which, although foreseeable or even pre-empted, could not be avoided, either the event itself or its consequences'.

Hence, in theory, Covid-19 may qualify as an event of force majeure, but not necessarily if the actual possibility of the discharge of contractual or legal undertakings is not prevented but instead materially affected, delayed or more expensive. In such a case, we are most likely not to face situations of force majeure but rather of MACs triggering the need for a rebalance of the contractual status, that is, a renegotiation. Thus, to conclude whether an event qualifies as force majeure or not will always depend on the assessment of the specific circumstances in place in relation to the contract in question.

To overcome the uncertainty of whether certain situations – Covid-19-derived – qualify as MACs or even force majeure events, we have seen that similar clauses have become (again) a standard feature of Portuguese M&A deals, and we have witnessed a growing level of detail in their stipulation and determination of their applicability.

The period between signing and closing

The usual undertakings limiting management during signing and closing have also changed.

During this period, and already considering the instability of the pandemic, the target's business may change substantially.

Hence, we have seen the following trends in recent M&A transactions in Portugal:

  • The parties have sought: (1) to reduce the period of time between signing and closing; and (2) to stipulate specific mechanisms reflecting this;

  • The parties have to expect a certain level of uncertainty and regulate it, allowing a certain level of flexibility; and

  • Purchase price adjustment mechanisms using measures such as working capital adjustments between the signing and closing of a deal are being tailored to specific situations. In addition, the parties to transactions have had to anticipate the impact of adverse effects to the target, such as supply shortages; furlough and dismissals affecting the workforce; decreased sales or plant closures, which may reduce cash positions; and increased financial debt and/or reduced current assets and net worth.

Uncertainty of bank financing

Another issue related to this pandemic and its impact on M&A transactions in Portugal is the aggravated uncertainty of bank financing.

Credit from Portuguese banks to businesses totalled €19,523m between January and June, that is, 30 per cent more than in the first six months of 2019.[5]

Despite this, banks are acting with a limited neutral to negative outlook as a result of the moratoria determined by the government regarding the repayment of certain financial and commercial debts.

At present, the moratoria is in force, some of which regarding bank debts will be in force until the end of the first quarter of 2021, but nobody really knows what will happen afterwards, including, without limitation, if the banks will be severely affected by defaults.

This has meant that banks have been much more cautious regarding the financing of new projects, hardening conditions of financing, due diligence and the collateral package needed. The outlook in this regard is not very positive, and it is likely that bank financing will be more and more difficult to access, and probably replaced by other forms of financing and reopening doors to private equity.

Distressed assets: an opportunity?

Distressed asset M&A has grown significantly in previous economic downturns, enabling a flow of acquisitions at significant discounts.

Thus, due to the pandemic, in Portugal we have seen a growing interest by investors in acquiring distressed assets and companies, or otherwise acquiring strategic positions in such companies.

The government is looking closely at the possible reform of the legal regime applicable to the recovery of companies in distress with a view to permit swifter recovery plans being approved by their creditors and then implemented. Thus far, the reality has been that these procedures tend to drag in Portuguese courts, and an unacceptable period of time is needed for their adoption.

Time is of the essence in these dire periods, and recovery and similar plans must be approved swiftly to save distressed companies.

This pandemic is likely to be an opportunity for distressed M&A in Portugal.

Virtual and digital M&A

As a result of Covid-19, technology is playing a crucial role in the activities of organisations by facilitating remote work and enhancing digital experiences.

It is worth mentioning how companies and their advisers have adjusted to this new technology-driven reality, and been able throughout this crisis to continue transactions, due diligence, negotiations, financing, signings, closings and so on.

Due diligence is now fully virtual, and the same goes for negotiation and drafting sessions. Thus, in Portugal, we have seen an increase in the number of virtual meetings, but they can also be more challenging than physical, face-to-face meetings.

On the other hand, in Portugal, as a rule, there is still a need for personal witnessing and certification of signatories, which means that all parties need to be physically present or represented at the signing and at closing, which may lead to delays. Moreover, quite a few acts associated with the sale of assets still require notarisation, and the same still needs to be carried out physically and in the presence of all parties.

This has been a challenge due to social distancing, and it is disappointing that the government has failed to overcome the matter by allowing virtual notarisation.


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