PORTUGAL Law and Practice Contributed by: Duarte Schmidt Lino, Raquel Azevedo, Alexander Ehlert and Leonor Melo Bento, PLMJ
4. Sale as a Liquidity Event (Sale of a Privately Held Venture Capital- Financed Company) 4.1 Liquidity Event: Sale Process Even though both the auction and the bilateral negotiation are usual sale processes, the auc- tion/competitive process is typically launched when the transaction has a significant/higher magnitude that justifies the underlying costs, and when the seller has specific timings in mind for the execution of the sale. Additionally, the auction process can be used by the sellers to increase competitive pressure for the potential buyers and to obtain better terms for the sale. 4.2 Liquidity Event: Transaction Structure A sale chosen as a liquidity event is normally a sale of the majority of the share capital of the start-up company or a sale of all founder stock. In this scenario, venture capital investors have all sorts of typical exit options – including right of first refusal, drag-along and tag-along – and the sale of the entire company or the maintenance of the venture capital investors as shareholders will depend on the venture capital’s and buyer’s will. 4.3 Liquidity Event: Form of Consideration Most transactions in Portugal are performed as sale of the entire company for cash. Stock-for- stock transactions are not very common in this jurisdiction. 4.4 Liquidity Event: Certain Transaction Terms Founders together with the start-up company are usually expected to stand behind repre- sentations, warranties and certain liabilities after closing. As a general rule, venture capital investors are only required to provide funda- mental warranties, such as title and capacity. In
Portugal, escrow/holdback or representations and warranties insurance is not customary for venture capital investment rounds. When deal- ing specifically with liquidity events (ie, sale of a majority or the entirety of the share capital of the company that entails the exit by venture capital investors), these mechanisms are more custom- ary and in line with general M&A market practice.
5. Spin-Offs 5.1 Trends: Spin-Offs
In general terms, spin-offs are a common mech- anism in Portugal for separating and ring-fencing a specific business unit. The key drivers for a spin-off are normally the separation and isolation of a specific business unit, with its subsequent development and specialisation through its own focused management and specialist employees. 5.2 Tax Consequences Portuguese tax law provides for a special tax neutrality scheme for certain operations per- formed as part of group reorganisations, includ- ing all types of demerger, merger and demerg- er-merger (and asset transfers). Consequently, spin-offs can generally be structured as a tax- free transaction both at the corporate and share- holder levels, provided that the applicable condi- tions, requirements and formalities are met. Among other conditions, this scheme applies only to operations performed for sound eco- nomic reasons – ie, not for tax reasons. In broad terms, more practical tax requirements require that the assets and liabilities transferred main - tain their tax value, while shareholders must also maintain (for tax purposes) the original acqui- sition value of the shareholdings, as well as the original acquisition dates. Tax neutrality in
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