ROMANIA Law and Practice Contributed by: Ileana Glodeanu, Andreea Cărare, George Ghitu and Delia Dumitrescu, Wolf Theiss
quite rare; most private equity transactions fall within the investment capacity of a single fund. On the other hand, joint ventures between two private equity funds have become relatively common, espe - cially when both funds have a similar strategy con - cerning the targeted industries (real estate, healthcare, pharmaceuticals, etc). Bringing two financial investors together with different return requirements and time - lines increases the financial resources available and also offers an alternative exit option, with one of the partners possibly acting as a captive buyer should the other want to cash out. Aside from diversifica - tion and risk-spreading considerations, partnership arrangements allow financial sponsors to pool sector or geographic expertise and jointly leverage financing relationships to obtain more attractive terms. 6. Terms of Acquisition Documentation 6.1 Types of Consideration Mechanism The Romanian M&A market is generally dominated by completion accounts transactions, which is the preferred approach of corporate buyers. However, the majority of M&A deals with private equity funds involve a locked-box mechanism. This is mostly due to the fact that, when on the sell-side, private equity funds wish to secure a consideration that is certain, being reluctant to accept any post-completion liabil - ity or adjustments. In contrast, corporate sellers may be more willing to accept completion accounts or other forms of deferred or contingent consideration, depending on their strategic objectives and relation - ship with the target. Even though it is not a general practice, the use of earn-outs and deferred consideration has increased in recent years, particularly in response to market uncertainty (such as that caused by the COVID-19 pandemic – and the numerous geopolitical tensions worldwide, which have had a lasting impact on the M&A market), including in sectors like technology, healthcare and energy. Private equity sellers are generally reluctant to accept post-completion price adjustments or contingent liabilities, and will negotiate robust protection(s) in
connection with locked-box consideration structures including: • covenants prohibiting leakage between the locked- box date and closing (except for permitted leak - age); • covenants requiring the target to operate in the ordinary course of business during the interim period; and • euro-for-euro compensation to the buyer or rel - evant target company for unauthorised leakage. Private equity buyers usually rely on the locked-box pricing mechanism, with minimal or no debate. Fur - thermore, when on the buy side, private equity funds use the locked-box mechanism as an effective tool to compete against corporate buyers on the basis of lighter negotiation and speed of execution of the transaction documents. Nevertheless, such transactions are heavily depend - ent on detailed legal, tax and financial due diligence, given the lack of any opportunity to adjust the price post-completion. In some cases, private equity buy - ers may accept completion accounts if the target’s business is volatile, or if there is uncertainty around the financial position at closing. Roll-over structures – where sellers, often manage - ment or key shareholders, reinvest a portion of their sale proceeds into the buyer or the new holding struc - ture – are an increasingly common feature of private equity in Romania. Roll-over equity typically repre - sents 10–40% of the total consideration, with the remainder paid in cash. 6.2 Locked-Box Consideration Structures There has been an increased trend towards the parties attempting to negotiate (but not necessarily to agree upon) interest being charged not only on the purchase price (the “ticker”), but also on locked-box leakage. The ticker interest is typically structured as a daily rate (or flat percentage) and may mirror either the cost of funds or a mutually agreed commercial rate. Many pri - vate equity buyers resist including a ticker, particularly where the deal timetable is short or where significant leakage protections are already built in.
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