Transactions Blog

In today’s world, regulatory and compliance demands on businesses are many and varied. The need for accurate accounting and tax records that comply with the multitude of rules and regulations applied in different jurisdictions by different authorities can place a great pressure on limited in-house resources.

Very often, companies are confronted with compliance issues (such as late or non-filing of statutory accounts or tax returns leading to penalties and additional taxes, etc.) during the due diligence phase or the post-deal integration.

If e.g. a purchaser carrying out a due diligence discovers that the target has fallen behind and regulatory returns are not fully up-to-date, then the entire deal can be at risk. The purchaser may want a discount on the purchase price to reflect the risk element of the uncertain tax position or require warranties, etc.

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On 19 November, we hosted the second session of our M&A Academy with a hot and present issue: How to keep the management of private equity backed companies motivated in and after the financial and economic downturn?
Luc Legon, Director Personal Tax at PricewaterhouseCoopers, presented the different solutions available according to the various expectations of management.

Download “Dealing with underwater management equity arrangements“.

More info about the M&A Academy season (programme, subscriptions, etc.).

Whilst credit markets have improved since the beginning of the year, borrowers continue to find raising or extending existing credit lines challenging. One of the big stories of the year has been the bond market.
Banks remain cautious and often reluctant to advance loans to new customers. However, during the third quarter, upward pricing pressure on bank lending has abated. Although we have yet to see significant falls in bank pricing, in the absence of further major economic shocks, the peak for pricing may now have passed.

Key findings of Q3-09 Debt Market Update:

Corporate Lending - a focus on existing customers but cautiously open for new business. 
Any new lending proposal will be heavily scrutinised and banks are reticent to refinance lending with others to avoid taking on their “problems”. A slight recovery in confidence could signal potential for a competitive tendering process for modestly-sized debt. We are seeing a strong strategic drive within some state-backed banks to increase their lending, albeit within more stringent credit quality parameters.

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The European Court of Justice (‘ECJ’) ECJ has ruled that the input VAT on the costs of selling shares in a subsidiary may be recoverable on the basis that they are residual, either because the sale is equivalent to a transfer of a going concern (TOGC) or because (if the sale is an exempt supply) the principle of neutrality requires it to be treated as if it were a TOGC.

Whilst the ECJ was unable to determine, on the facts before it, whether input VAT recovery would apply in the specific case, the principles set forward are highly significant because it casts doubt on many tax authorities’ longstanding policy that the input VAT on the costs incurred in disposing of a subsidiary is wholly irrecoverable because the costs are directly attributable to an exempt supply.

Hence, this decision has important implications for any business disposing of shares in a subsidiary to which it has supplied services, whether the disposal is forthcoming or whether it has happened in the past. It also impacts on how corporate groups should structure themselves in order to maximise their VAT recovery position.

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The current economic climate leaves a lot of companies exposed to lower trading volumes, pricing pressure, stretched client payments and cost structures that can not easily be aligned. Consequently cash flows come under a significant pressure and are sometimes insufficient to pay back debts or worse interest payments. Combining this with a banking sector that remains very prudent and needs to align their own risk and capital structure, and we have the perfect scenario for potential stand off between the two major pillars of our economy.

Can this be avoided?

The answer to this question can be positive but this requires immediate pro active action from the companies facing these difficulties.

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